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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
_______________
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 000-25857
PERSISTENCE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3138935
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $4.0 million as of February 28, 2003 based upon the
closing sale price on the Nasdaq National Market reported for such date of $0.25
per share. Shares of Common Stock held by each officer and director and by each
person who owns 10% of more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 24,044,735 shares of the registrant's Common Stock issued and
outstanding as of February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 2003 Annual Meeting of Stockholders to be held on June 5,
2003.
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We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence."
"PowerTier," "EdgeXtend" and "The Engine for E-Commerce" are also trademarks of
ours. This annual report on Form 10-K also makes reference to trademarks and
trade names of other companies that belong to them.
Our website is www.persistence.com. We make our annual reports on Form 10-K,
quarterly reports on Form 10-Q current reports on Form 8-K, and amendments to
those reports available free of charge as soon as reasonably practicable as we
file these reports with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Persistence provides a suite of Data Services products that sit between
existing databases - such as Oracle and DB2 - and application servers - such as
BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure
these products, creating a "Data Services" layer that positions business
information for more efficient access for users, dramatically reduces network
traffic and data latency, and results in better application performance at a
much lower infrastructure cost. Persistence integrated Data Services include:
object-relational mapping, transactional caching, guaranteed synchronization,
"uninterruptible" application fail over and rule-based client notification.
Persistence's Data Services are also cross-platform, providing a "data bridge"
between J2EE, .Net, Java and C++ applications.
Persistence caching solutions help systems "remember" answers from each
processing step. When the system receives a request for which it has an answer,
it can respond immediately, without traveling to back-end databases to generate
an answer. Synchronization technology ensures that these cached answers are
always accurate, even as the source data changes. Customer profile management,
logistics, exchanges, trading desks, and supply chain management systems are
just a few examples of query-intensive online systems that can realize
significant increases in capacity and performance through online caching.
Customers are able to more effectively manage enterprise data through
re-architecting their IT infrastructure using Persistence Data Services
products. Persistence Data Services solutions result in real-time, highly
scalable, distributed applications without incurring the high costs of
additional hardware and replicated databases. Decision makers and customers
located at any location can now have an immediate "business visibility" into
their data, that is, an up-to-date view into the data that they need, when and
where they need it.
Enterprises are creating competitive advantage by achieving the goal of the
zero-latency enterprise through Data Services, the immediate distribution and
management of business information. Delivering real-time data enhances employee
productivity, improves operations, and enables improved relationships with
customers. Data Services also ensures business continuity by providing immediate
fail-over options preventing data center outages from interrupting business
processing.
Our EDGEXTEND data services software for Sun Microsystems' full Java 2
Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or
EJB) application servers, C++ and .NET application servers offers a data
architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft
..NET, plus C++ application servers to support highly distributed and
transaction-oriented applications both within data centers and in remote
locations. Our DIRECTALERT product is a proactive, personalized client caching
and notification reporting product for zero latency applications which extends
the reach of enterprise systems to small form-factor devices such as mobile
phones, wireless PDAs, and digital set-top boxes.
Major customers in 2002 consisted of Air France, Applied Biosystems,
Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola,
NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney.
2
INDUSTRY BACKGROUND
Today's Information Technology managers are faced with many challenges as
they attempt to scale their existing infrastructure to meet the ever increasing
demands of their users. They are asked to support more users with better
response times, but without a commensurate increase in resources, both people
and money, to meet these challenges. The solutions of past years - replicated
data centers - are no longer a cost-effective option for most IT professionals.
Consequently, they are looking for alternative technology strategies to meet the
performance demands of their corporate enterprise systems and reduce the
associated operating costs.
As systems scale to meet growing demands, companies are finding that many of
their systems are reaching their technological limitations. While network
bandwidth can be a problem, more frequently the absence of real-time data being
available to distributed users on the network is the real limitation on
application performance, resulting in:
o SLOW RESPONSE TIMES: Many enterprise applications were not designed to
scale to handle large numbers of concurrent users. Users accessing these
systems often experience lengthy delays as the number of concurrent
users increases.
o BUSINESS CONTINUITY: Disaster recovery and fail-over capability are
crucial for systems required to operate 24 hours a day, 7 days a week.
Users accessing these systems at peak volume can experience frequent
system crashes.
o LIMITED SCALABILITY: As applications are deployed to more and more
remote users in a system in order to improve the productivity of those
users, the customer needs a system that will scale easily without the
need and expense of additional data centers is essential.
In large part, the problems facing enterprises today are derived from the
continuing evolution and increasing sophistication of enterprise applications.
Simple applications supporting back office systems typically had few users
accessing limited amounts of data. As decision-making based on real-time,
frequently changing data was moved farther out to the edge of the enterprise,
the need for vital information to support these business-critical applications
became paramount. In addition, the need to keep the cost of these systems to a
minimum provided an additional challenge to the system architects. Traditional
system architectures and approaches cannot completely solve the problem. A new
distributed data services infrastructure is required.
The next generation of enterprise applications will require a fundamentally
new data management infrastructure, which will allow application servers to
scale in order to meet the demands of an ever increasing user base and to be
deployed without the need for an expensive back end IT infrastructure. These
platforms must provide:
o REAL-TIME SCALABILITY: accommodate up to thousands of end users with
consistent sub-second response times;
o HIGH AVAILABILITY: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;
o RAPID ADAPTABILITY: allow companies to continuously improve their
business processing through automated development and management of
differentiated business-critical applications; and
o EDGE COMPUTING: enable businesses to extend their processing across
organizational boundaries, support employees, remote users and even
partners and customers.
PERSISTENCE PRODUCTS
Our EdgeXtend family of products provides a data services software
infrastructure that is specifically designed to enable high volume, high
performance, distributed applications. Our products, EDGEXTEND for IBM
WebSphere, EDGEXTEND for BEA WebLogic, EDGEXTEND for C++ and EDGEXTEND for
Microsoft .NET, address the scalability, availability and adaptability demands
that typically occur when delivering business solutions for high demand,
globally distributed enterprise business applications. Our products offer the
following key benefits:
3
REAL-TIME RESPONSE FOR THOUSANDS OF CONCURRENT USERS. Our EDGEXTEND products
were designed specifically to accommodate high volume transaction processing and
the data integrity requirements of distributed applications. EDGEXTEND utilizes
caching technology. Caching is a process in which select data is copied out of
back-end systems and into the server cache, which allows the data to be shared
and manipulated by multiple users. Replication between EDGEXTEND server caches
using the POWERSYNC feature allows a cluster of application servers to provide
highly scalable performance as the number of users increases. This architecture
helps reduce the workload on back-end systems and accelerates application
performance. The effect of this architecture is to minimize unnecessary network
traffic and thereby enable high performance and reliability even with
significant transaction volumes and rapidly changing data. We believe that our
EDGEXTEND products offer superior performance and scalability to support the
deployment of large-scale distributed enterprise applications.
DRAMATIC REDUCTIONS IN TIME-TO-MARKET FOR ENTERPRISE APPLICATIONS. Our
EDGEXTEND products decrease time-to-market and development cycles for
sophisticated applications due to our proprietary and patented
object-to-relational mapping technology. This technology enables the automatic
generation of software code, which minimizes basic, low-level programming tasks,
such as security and database access. EDGEXTEND accelerates development by
giving developers access to data in a familiar way, as software components, and
provides application developers with a framework to rapidly build electronic
commerce applications.
PROTECTS AND LEVERAGES EXISTING INFORMATION TECHNOLOGY INVESTMENTS.
EDGEXTEND enables developers to build new enterprise applications while
simultaneously integrating existing back-end systems. EDGEXTEND'S flexible
architecture integrates with disparate database servers, web servers and
multiple clients, while supporting multiple programming languages and computing
platforms. EDGEXTEND provides enhanced flexibility and inter-operability to link
existing enterprise applications and systems, allowing businesses to leverage
their investments in information technology and extend them to the edge of their
enterprise and beyond.
OPTIMIZED DISTRIBUTED DATA SERVICES ARCHITECTURE. All our products are built
on the core Persistence technologies of Object/Relational Mapping, Dynamic
Caching and Cache Synchronization. This technology, called Distributed Dynamic
Caching (DDC), allows for a distributed data services architecture that is
highly scalable, suitable for high volume transaction oriented applications, and
capable of supporting thousands of concurrent users. In addition, this
architecture is designed to be implemented in a globally distributed enterprise
environment without the need for an expensive back-end infrastructure. It
provides for data center type performance without the need for multiple data
centers.
PERSISTENCE STRATEGY
Our goal is to fundamentally restructure how companies extend and leverage
their vital business information by enabling a distributed data services
infrastructure.
INCREASE PARTNERSHIPS WITH INDEPENDENT SOFTWARE VENDORS (ISVS). We intend to
continue to develop and expand relationships with ISVs, in particular, IBM
WebSphere and BEA WebLogic. Through our EDGEXTEND product for WebSphere and
EDGEXTEND for WebLogic we now offer a complementary J2EE product, which
leverages the unique data management capability of Persistence's technologies.
As part of the IBM and BEA partner programs, we believe that these relationships
will provide additional marketing and sales channels for our products and
facilitate the successful deployment of customer applications.
CONTINUE TO EXPAND OUR GROWING OEM BUSINESS. We intend to become a market
leader in providing data services infrastructure software to enable
sophisticated enterprise applications. We have worked with several customers who
have successfully built their global enterprise applications on core Persistence
technologies and are deploying these applications to their customers. We will
continue to collaborate with our innovative and advanced customers to develop
and deliver product features that address their needs. We believe that this
collaboration focuses our overall product development effort and speeds our
time-to-market.
4
WORK WITH SYSTEM INTEGRATORS TO DELIVER COMPLETE SOLUTIONS. In addition to
extending our technology leadership, we will work with major System Integrators
(SI's) such as BearingPoint (formerly KPMG Consulting) and IBM Global Services
to provide our customers the most complete data services solutions for their
distributed applications. These system integrators will be an extension of, and
a complement to, our existing professional services organization. By working
with these SI's on joint customer engagements we can leverage their services
expertise and customer channel and they can leverage our products and technology
to provide unique, differentiated data services solutions.
EXPAND PRODUCT PLATFORM TO OFFER COMPLEMENTARY SOLUTIONS. In addition to
extending our technology leadership, we intend to broaden and enhance our
product platform to incorporate complementary solutions for developing and
deploying sophisticated enterprise applications. We will continue to make
investments in our research and development organization for many of these
product initiatives. We will also consider, from time to time, bolstering these
internal efforts with strategic acquisitions, and partnerships with software
vendors who have complementary product offerings. The addition of these
complementary technologies will enable us to offer a more complete platform for
our customers.
LEVERAGE INSTALLED CUSTOMER BASE. We believe there are significant
opportunities to expand the use of our products throughout our current customer
base. This is particularly true for customers who have adopted our technology
for a particular part of their business, but who have standardized on IBM's
WebSphere or BEA's WebLogic for their mainstream applications. We now have the
opportunity to re-engage with those customers on a broader basis as they deploy
their applications throughout their enterprise. Through Persistence's
distributed data services architecture we can enable our customers to scale and
deploy applications without the need for replicated data centers, in some cases,
saving them millions of dollars.
MAINTAIN OUR INTERNATIONAL PRESENCE. We believe there are significant
international opportunities for our products and services, in particular in
Europe and Asia. Currently, we have established direct sales operations in the
United Kingdom and Germany. In addition to our direct sales operations, we also
distribute our products throughout Europe and Asia through distributors and
systems integrators. We intend to extend these international third-party
distributor and systems integrator relationships.
PRODUCTS
EDGEXTEND
Our EDGEXTEND for WebSphere, EDGEXTEND for WebLogic, and EDGEXTEND for .NET
products are designed to make the performance and reliability of Persistence's
patented DDC technology available to applications running on IBM's WebSphere and
BEA's WebLogic application servers, as well as applications built on Microsoft
..NET. EDGEXTEND provides a new distributed data services architecture, which
complements J2EE compliant, and other, application servers. Through the J2EE
Connector Architecture the data access layer is replaced by EDGEXTEND, allowing
the application servers to have the benefits of DDC without changing their
existing business and presentation logic. In addition, with this distributed
data architecture, WebSphere and WebLogic application servers can operate
outside of a data center in a "virtual data center" without the requirement of
an expensive relational database infrastructure.
EDGEXTEND FOR C++ (formerly POWERTIER for C++)
Our EDGEXTEND for C++ product is a high-performance transactional
application server, which is based on our patented technologies and the Common
Object Request Broker Architecture, or CORBA, standard for communication between
distributed applications. The CORBA standard is managed by an industry group
called the Object Management Group. Our EDGEXTEND for C++ platform runs on the
Windows and Unix operating systems. We have licensed the J2EE platform and are a
contributor to the Java standard.
5
The following table describes the major features and benefits for EDGEXTEND
for IBM WebSphere, BEA WebLogic, and Microsoft .NET and EDGEXTEND FOR C++:
FEATURES BENEFITS
-------- --------
Shared transactional object cache Enables real-time scalability by reducing
database traffic
Object-relational mapping that Speeds application development by managing
provides abstraction to database database details for developer
representation
Optimized usage of native database Improves application capacity by
libraries efficiently using database resources
Application server cache Improves application capacity by caching
synchronization unpredictably changing data
Application server failover Delivers high availability by replicating
information across clusters of application
server cache
DIRECT ALERT
DIRECTALERT is an end-to-end solution for adding proactive notification
services to business applications, allowing information to be delivered to
decision makers and customers when and how they need it. DIRECTALERT is a J2EE
application server add-in designed to provide sophisticated data and event
monitoring as well as filtering. DIRECTALERT is designed to proactively notify
clients ranging from desktop applications and ordinary web browsers to mobile
phones and television set-top boxes.
The following table describes the major features and benefits for the
DIRECTALERT product:
FEATURES BENEFITS
-------- --------
Intelligent Server Engine Provides sophisticated and non-intrusive
data monitoring, selection and filtering
Flexible and powerful clients with Enables Java devices (mobile phones to
"zero footprints" desktop PCs) to receive proactive
notification resulting in business
decisions being made on updated data
Rapid development and Adds functionality to existing applications
implementation without modifications as it is built with
100% Java and XML. Server side required
only query definitions. No modification is
required to existing application logic.
POWERTIER
Persistence continues to sell current and earlier versions of POWERTIER for
J2EE application server to current customers. POWERTIER for J2EE incorporates
our patented technologies into a J2EE-based transactional server. The J2EE
standard, as defined by the Java Software division of Sun Microsystems, has
gained rapid acceptance as a programming language for complex enterprise
applications because it provides a consistent way to program and integrate
services for companies building distributed business-to-business applications
with the Java programming license. POWERTIER for J2EE delivers scalability, high
availability, and rapid adaptability for high volume, high performance, and
distributed enterprise applications.
We believe that research and product development will be a key to our
success as a leader in providing data services software. Our research and
development expenditures totaled $4.1 million for 2002, $5.6 million for 2001
and $8.1 million for 2000.
6
CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of enterprise and electronic commerce applications, including real-time
electronic trading, supply chain management, network management, application
outsourcing and logistics management. Our services consist of professional
consulting services, technical support and training. The following table lists a
selection of customers who have purchased a significant amount of our products
or services in 2002, 2001 or 2000 (defined as approximately 1% or more of our
total revenues in any year.)
E-COMMERCE/INTERNET FINANCIAL SERVICES/EXCHANGES
Cisco Systems Chase/JP Morgan
i2 CNP Assurances
Intershop Citadel Investment Group
Credit Suisse First Boston
Fiducia AG
Kinetech Services
Reuters Financial Software
Salomon Smith Barney
Wells Fargo
COMMUNICATIONS Zurich Arippina Gruppe
4T Solutions
AT&T
CSC Holdings (Cablevision)
Lucent Technologies
Motorola TRANSPORTATION & LOGISTICS
Nokia Air France
Spirent Communications Eurocontrol
Sprint Federal Express
NetJets
Sabre Group Holdings (American Airlines)
MANUFACTURING & DISTRIBUTION
Hewlett Packard
Nippon Steel
Delco
OTHER
Applied Biosystems
Bundesanstalt fur Arbeit
Convergys Information
Infron Technologies
Refco Group
In 2002, sales of products and services to Cablevision accounted for 26% of
our total revenues and sales to Salomon Smith Barney accounted for 13% of our
total revenues. In 2001, sales of products and services to Salomon Smith Barney
accounted for 15% of our total revenues and sales to Cablevision accounted for
11% of our total revenues. In 2000, sales of products and services to Salomon
Smith Barney accounted for 16% of our total revenues.
SALES AND MARKETING
We sell our products through both a direct sales force and third party
distributors. As of December 31, 2002, we had 30 people in our sales and
marketing organization, of which 21 were in the United States, and 9 were in
European offices. We intend to increase the size of our direct sales force as
well as focusing on indirect distribution channels. While our overall 2003 sales
and marketing expense compared to 2002 is expected to decrease, reductions in
non-personnel related programs are expected to offset expenses for new hirings.
7
Our sales cycle is relatively long, generally between three and nine months.
A successful sales cycle typically includes presentations to both business and
technical decision makers, as well as a limited pilot program, a proof of
concept, to establish a technical fit.
We have engaged in, and may continue to engage in, a variety of targeted
marketing activities, including public relations, seminars, trade shows, lead
generation programs and customer-oriented web site management. We have also made
substantial marketing investments in education and training for the J2EE and C++
markets. We hold periodic seminars in order to train developers.
We intend to continue to develop and expand relationships with OEMs,
consultants, system integrators and independent software vendors (ISVs). We
believe these third parties can effectively market our products, particularly
EDGEXTEND, through their existing relationships with our target market
customers. We believe that these relationships will provide additional marketing
and sales channels for our products and facilitate the successful deployment of
customer applications. We are currently working with multiple consultants,
system integrators such as BearingPoint and ISV partners, including IBM and BEA,
with whom we announced partner agreements in 2001.
In international markets, we plan to expand our sales through indirect
channels, such as distributors agents and OEMs. As of December 31, 2002, we were
represented by one international distributor, who sells our products in Asia.
COMPETITION
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
o performance, including scalability, integrity and availability;
o ability to provide a complete software platform;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone and Excelon are middleware
vendors that offer alternative data management solutions that directly target
EdgeXtend's market. In addition, many prospective customers may build their own
custom solutions.
In the DIRECTALERT market, alternative approaches are provided by a variety
of sources, including the potential for internal development. Companies such as
SpiritSoft, TIBCO, and IBM provide message-oriented middleware software that may
evolve into competitive products. Vendors such as webMethods and Business
Objects provide alternative architectures for business intelligence information.
DIRECTALERT is based on licensed technology, which the Company is licensed to
distribute on a non-exclusive basis.
8
We continue to sell current and earlier versions of POWERTIER for J2EE
application server to current customers. Our competitors for POWERTIER include
both publicly and privately-held enterprises, including BEA Systems (WebLogic),
IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE
Application Server). Many customers may not be willing to purchase our POWERTIER
products because they have already invested heavily in databases and other
enterprise software components offered by these competing companies. Many of
these competitors have pre-existing customer relationships, longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and larger installed bases of customers than we do.
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which would harm our business.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights, but these legal means afford only limited protection. As
of February 28, 2003, we had five issued United States patents and two pending
United States patent applications with allowable subject matter. Despite any
measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries may not
protect our intellectual property rights as fully as do the laws of the United
States. Thus, the measures we are taking to protect our intellectual property
rights in the United States and abroad may not be adequate. Finally, our
competitors may independently develop similar technologies.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.
In January 2001, we entered into a license agreement with both webGain and
Secant to manufacture and sell products under three of our patents. Under this
agreement, both webGain and Secant made a one-time payment to us.
EMPLOYEES
As of December 31, 2002, we had 68 full-time employees, including 30 in
sales and marketing, 26 in research and development and technical services, and
12 in general and administrative functions. Our relationships with our employees
are generally good. From time to time, we also employ independent contractors to
support our sales and marketing, research and development, professional services
and administrative organizations.
9
EXECUTIVE OFFICERS
The following table sets forth specific information regarding our executive
officers as of February 28, 2003:
NAME AGE POSITION
---- --- --------
Christopher T. Keene..........42 Chief Executive Officer
Christine Russell.............53 Chief Financial Officer and Secretary
Derek Henninger...............40 Vice President of Worldwide Field
Operations
Ed Murrer.....................53 Vice President of Marketing
Vivek Singhal.................34 Vice President of Engineering
Each executive officer serves at the sole discretion of the Board of
Directors.
CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene worked at McKinsey & Company,
Ashton-Tate and Hewlett-Packard. Mr. Keene holds a B.S. degree in Mathematical
Sciences with honors from Stanford University and an M.B.A. degree from The
Wharton School at the University of Pennsylvania.
CHRISTINE RUSSELL joined Persistence in October 1997 and has served as Chief
Financial Officer and Secretary since December 1997. From October 1995 to
October 1997, she served as Chief Financial Officer for Cygnus Solutions, an
open source platform software company. Previously, Mrs. Russell was CFO of
Valence Technology and served in various senior financial positions with Shugart
Corporation, a subsidiary of Xerox. She holds a B.A. degree and an M.B.A. degree
from Santa Clara University and serves on the Board of Directors of Peak Ltd.
International.
DEREK HENNINGER co-founded Persistence and served as Vice President of
Engineering from June 1991 until January 2002 when he became Vice President of
Customer Care and in January 2003 he became Vice President of Worldwide Field
Operations which includes all field sales and technical resources. Previously,
Mr. Henninger worked in the Data Interpretation Division of Metaphor
Corporation, a software and hardware company, from September 1990 to June 1991.
Mr. Henninger holds a B.A. degree in Economics and a B.S. degree in computer
Science and Mathematics from the University of California at Davis.
ED MURRER joined Persistence in July 2001 as Vice President of Marketing.
Mr. Murrer was the Senior Vice President of Sales and Marketing at Xcert
International, an enterprise security software company, from March 2000 to March
2001 when Xcert was sold to RSA Security. From July 1997 to March 2000, Mr.
Murrer was Vice President, Business Development at Veridicom, a biometrics
security software company. He holds a B.S. degree in Mechanical Engineering,
with highest honors, and a M.S. degree in Mechanical Engineering from Purdue
University.
VIVEK SINGHAL joined Persistence in April 1995 as a Software Engineer. In
January 2002, he was promoted to Vice President, Engineering. He holds a B.S.
degree in Computer Science from the Massachusetts Institute of Technology and a
Ph.D. in Computer Science from the University of Texas at Austin.
ITEM 2. PROPERTIES.
We are headquartered in San Mateo, California, where we lease approximately
17,000 square feet of office space under a lease expiring on December 31, 2004.
We have an engineering staff facility in San Diego, where we lease approximately
6,000 square feet of office space under a lease expiring on August 31, 2004. We
also maintain sales offices in other U.S. states, the United Kingdom and
Germany. We believe that our existing facilities are adequate to meet our
current and foreseeable requirements or that suitable additional or substitute
space will be available as needed.
10
ITEM 3. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. We may,
however, from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK. Our common stock was traded on the Nasdaq
National Market under the symbol PRSW from the effective date of our initial
public offering on June 24, 1999 until September 12, 2002 at which time we moved
our stock listing to the Nasdaq SmallCap Market. Prior to the initial public
offering, no public market existed for our common stock. The price per share
reflected in the table below represents the range of low and high closing sale
prices for our common stock as reported in the Nasdaq National Market (before
September 12, 2002) or the Nasdaq SmallCap Market (both on and after September
12, 2002) for the periods indicated.
HIGH LOW
-------- --------
For The Year Ended December 31, 2001:
First Quarter......................................... $ 4.50 $ 1.00
Second Quarter........................................ $ 1.25 $ 0.48
Third Quarter......................................... $ 0.99 $ 0.15
Fourth Quarter........................................ $ 1.35 $ 0.19
For The Year Ended December 31, 2002:
First Quarter......................................... $ 1.85 $ 0.87
Second Quarter........................................ $ 1.00 $ 0.53
Third Quarter......................................... $ 0.82 $ 0.42
Fourth Quarter........................................ $ 0.72 $ 0.30
We had 159 stockholders of record as of February 28, 2003, including several
holders who are nominees for an undetermined number of beneficial owners.
DIVIDEND POLICY. We have never paid dividends on our common stock or
preferred stock. We currently intend to retain any future earnings to fund the
development of our business. Therefore, we do not currently anticipate declaring
or paying dividends in the foreseeable future. In addition, our line of credit
agreement prohibits us from paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES. On November 26, 2002 we issued
3,758,692 shares of our common stock at a price of $0.5321 per share, and
warrants to purchase up to 1,205,130 shares of our common stock at an exercise
price of $0.75 per share to certain purchasers affiliated with Needham Capital
Partners. The warrants expire on the earlier of November 26, 2007 or the closing
of a merger, acquisition or sale of substantially all of the assets of
Persistence. In issuing these securities we relied upon Section 4(2) of the
Securities Act on the basis that the transaction did not involve a public
offering.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this annual report on Form 10-K.
The consolidated statements of operations data for the years ended December 31,
2002, 2001 and 2000 and the consolidated balance sheet data at December 31, 2002
and 2001, are derived from audited consolidated financial statements included
elsewhere in this annual report on Form 10-K. The consolidated statement of
operations data for the years ended December 31, 1999 and 1998, and the
consolidated balance sheet data as of December 31, 2000, 1999 and 1998 are
derived from audited financial statements not included in this annual report on
Form 10-K.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License ......................................... $ 9,061 $ 10,561 $ 17,684 $ 10,890 $ 7,478
Service ......................................... 5,525 8,810 7,593 3,553 2,682
--------- --------- --------- --------- ---------
Total revenues .......................... 14,586 19,371 25,277 14,443 10,160
Loss from operations .............................. (5,451) (15,391) (17,857) (12,165) (4,090)
--------- --------- --------- --------- ---------
Net loss .......................................... $ (5,440) $(15,132) $(16,726) $(11,306) $ (4,089)
========= ========= ========= ========= =========
Basic and diluted net loss per share(1) ........... $ (0.26) $ (0.76) $ (0.87) $ (0.86) $ (0.59)
========= ========= ========= ========= =========
Shares used in basic and diluted net loss per
share calculation ............................... 20,529 19,919 19,330 13,091 6,879
========= ========= ========= ========= =========
AS OF DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.. $ 8,903 $ 7,411 $ 19,490 $ 29,652 $ 4,938
Working capital.................................... 4,942 6,783 17,289 29,582 3,384
Total assets....................................... 11,100 13,755 33,641 39,092 7,064
Long-term obligations.............................. 784 421 932 354 714
Total stockholders' equity......................... 4,711 7,944 22,556 32,018 3,422
__________
(1) Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period
(excluding shares subject to repurchase). Diluted net loss per common share
was the same as basic net loss per common share for all periods presented,
since the effect of any potentially dilutive securities is excluded as they
are anti-dilutive because of the company's net losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2002 and 2001 and for each of the years
ended December 31, 2002, 2001 and 2000, included elsewhere in this annual report
on Form 10-K. In addition, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this annual
report on Form 10-K contain forward-looking statements that involve risks and
uncertainties. Words such as "anticipates," "believes," "plans," "expects,"
"future," "intends," "targeting," and similar expressions identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Additional Factors That May Affect Future
Results" and those appearing elsewhere in this annual report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
13
OVERVIEW
Persistence provides a suite of Data Services products that sit between
existing databases - such as Oracle and DB2 - and application servers - such as
BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure
these products, creating a "Data Services" layer that positions business
information for more efficient access for users, dramatically reduces network
traffic and data latency, and results in better application performance at a
much lower infrastructure cost. Persistence integrated Data Services include:
object-relational mapping, transactional caching, guaranteed synchronization,
"uninterruptible" application fail over and rule-based client notification.
Persistence's Data Services are also cross-platform, providing a "data bridge"
between J2EE, .Net, Java and C++ applications.
Persistence caching solutions help systems "remember" answers from each
processing step. When the system receives a request for which it has an answer,
it can respond immediately, without traveling to back-end databases to generate
an answer. Synchronization technology ensures that these cached answers are
always accurate, even as the source data changes. Customer profile management,
logistics, exchanges, trading desks, and supply chain management systems are
just a few examples of query-intensive online systems that can realize
significant increases in capacity and performance through online caching.
Customers are able to more effectively manage enterprise data through
re-architecting their IT infrastructure using Persistence Data Services
products. Persistence Data Services solutions result in real-time, highly
scalable, distributed applications without incurring the high costs of
additional hardware and replicated databases. Decision makers and customers
located at any location can now have an immediate "business visibility" into
their data, that is, an up-to-date view into the data that they need, when and
where they need it.
Enterprises are creating competitive advantage by achieving the goal of the
zero-latency enterprise through Data Services, the immediate distribution and
management of business information. Delivering real-time data enhances employee
productivity, improves operations, and enables improved relationships with
customers. Data Services also ensures business continuity by providing immediate
fail-over options preventing data center outages from interrupting business
processing.
Our EDGEXTEND data services software for Sun Microsystems' full Java 2
Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or
EJB) application servers, C++ and .NET application servers offers a data
architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft
..NET, plus C++ application servers to support highly distributed and
transaction-oriented applications both within data centers and in remote
locations. Our DIRECTALERT product is a proactive, personalized client caching
and notification reporting product for zero latency applications which extends
the reach of enterprise systems to small form-factor devices such as mobile
phones, wireless PDAs, and digital set-top boxes.
Major customers in 2002 consisted of Air France, Applied Biosystems,
Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola,
NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney.
Our revenues, which consist of software license revenues and service
revenues, totaled $14.6 million in 2002, $19.4 million in 2001, and $25.3
million in 2000. License revenues consist of licenses of our software products,
which generally are priced based on the number of users or servers. Service
revenues consist of professional services consulting, customer support and
training. Because we only commenced selling EDGEXTEND and DIRECTALERT in 2002,
we have a limited operating history in the data services markets. We currently
expect that sales of our older POWERTIER products will continue to contribute to
our revenues, but that sales of our newer EDGEXTEND and DIRECTALERT products
will contribute a growing percentage of our revenues over the next several
quarters.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom and Germany. Revenues
from licenses and services to customers outside the United States were $4.8
million in 2002, $7.4 million in 2001, and $7.2 million in 2000 which
represented approximately 33% of total revenues for 2002, 38% of total revenues
for 2001, and 28% of total revenues for 2000. Our future success will depend, in
part, on our successful development of international markets for our products.
Historically, we have received a substantial portion of our revenues from
sales to a limited number of customers. Sales of products to our top five
customers accounted for 55% of total revenues in 2002, 45% of total revenues in
2001, and 40% of total revenues in 2000. In the future, it is likely that a
relatively few large customers could continue to account for a relatively large
proportion of our revenues and these customers are likely to differ year to
year.
14
To date, we have sold our products primarily through our direct sales force,
and we will need to continue to hire sales people, including those with
expertise in channel sales, in order to meet our sales goals. In addition, our
ability to achieve significant revenue growth will depend in large part on our
success in establishing and leveraging relationships with independent software
vendors, systems integrators, OEM partners and other resellers.
We recognize revenues in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue Recognition,"
as amended by Statements of Position 98-4 and 98-9. Future implementation
guidance relating to these standards or any future standards may result in
unanticipated changes in our revenue recognition practices, and these changes
could affect our future revenues and earnings. In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulleting ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on
the recognition, presentation and disclosure of revenue in the financial
statements. SAB No. 101 outlines basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies.
Since inception, we have incurred substantial research and development costs
and have invested heavily in our sales, marketing and professional services
organizations to build an infrastructure to support our long-term growth
strategy. The total number of our full-time employees decreased from 81 as of
December 31, 2001 to 68 as of December 31, 2002, representing a decrease of 16%
as a result of periodic assessments during the year of efficient staffing
requirements. We have incurred net losses in each quarter since 1996 and, as of
December 31, 2002, had an accumulated deficit of $61.4 million. We are currently
targeting that sales and marketing expenses, research and development expenses,
and general and administrative expenses for 2003 will be below 2002 spending
levels.
We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. While
we are targeting to begin achieving profitability on a quarterly basis in the
second half of 2003, we may not achieve it. Our success depends significantly
upon broad market acceptance of our recently introduced EDGEXTEND and, to a
lesser degree, the DIRECTALERT products. Our performance will also depend on the
level of capital spending in our target market of customers and on the growth
and widespread adoption of the market for data services and data integration.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition, bad
debts, intangible assets, income taxes, restructuring costs, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
- - REVENUE RECOGNITION. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In addition, our
revenue recognition determines the timing of certain expenses, such as
commissions. We follow specific and detailed guidelines in measuring and
recognizing revenue. We recognize license revenues upon shipment of the software
if collection of the resulting receivable is probable, an agreement has been
executed, the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate a portion of the total fee to any undelivered
elements of the arrangement. Undelivered elements in these arrangements
typically consist of services. For sales made through distributors, revenue is
recognized upon shipment. Distributors have no right of return. Royalty revenues
are recognized when the software or services has been delivered, collection is
15
reasonably assured and the fees are determinable. We recognize revenues from
customer training, support and professional services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price at which such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority to
make such decision. While more infrequent, arrangements that require significant
modification or customization of software are recognized under the completion of
contract method.
- - BAD DEBTS. Our bad debt policy requires that we maintain a specific allowance
for certain doubtful accounts and a general allowance for the majority of the
non-specifically reserved accounts. These allowances provide for estimated
losses resulting from the inability or refusal of our customers to make required
payments. We analyze such factors as historical bad debt experience, customer
payment patterns and current economic trends. This analysis requires significant
judgment. If the financial condition of the company's customers were to
deteriorate further, additional allowances would generally be required resulting
in future losses that are not included in our allowances for doubtful accounts
at December 31, 2002.
- - PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible impairment expense that we will
incur. The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect our consolidated
financial statements and operating results. Accordingly in 2002, we took an
impairment charge of $160,000. In 2001, we took an impairment charge of $2.0
million.
- - STOCK COMPENSATION. We account for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no accounting
recognition is given to employee stock options granted with an exercise price
equal to fair market value of the underlying stock on the grant date. Upon
exercise, the net proceeds and any related tax benefit are credited to
stockholders' equity. Our operating results would be affected if other
alternatives were used. Information about the impact on our operating results of
using the alternative of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is included in Note 1 of the "Notes to Consolidated Financial Statements,"
included elsewhere in this report.
- - INCOME TAXES. Our income tax policy records the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carry-forwards. We follow specific and detailed
guidelines regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Our revenues were $14.6 million for 2002 and $19.4 million for 2001
representing a decrease of 25%. International revenues were $4.8 million for
2002 and $7.4 million for 2001 representing a decrease of 35%. For 2002, sales
to Cablevision accounted for 26% of total revenues, sales to Salomon Smith
Barney accounted for 13% of total revenues, and sales to our top five customers
accounted for 55% of total revenues. For 2001, sales to Salomon Smith Barney
accounted for 15% of total revenues, sales to Cablevision accounted for 11% of
total revenues, and sales to our top five customers accounted for 45% of total
revenues.
LICENSE REVENUES. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or central
processing units deploying our software. License revenues were $9.1 million for
2002 and $10.6 million for 2001 representing a decrease of 14%. License revenues
represented 62% of total revenues for 2002 and 55% of total revenues for 2001.
The decrease in software license revenues was primarily due to decreased
spending on IT infrastructure products by our target customers. Given the
continuing dramatically reduced level of information technology spending,
license revenues may fluctuate substantially over the next several quarters. In
addition, for the same reason, our revenues may be flat to down for 2003
compared to 2002.
16
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $5.5
million for 2002 and $8.8 million for 2001, representing a decrease of 37%. The
decrease in service revenues was primarily due to a decline in consulting
service contracts in 2002. Service revenues represented 38% of total revenues
for 2002 and 45% of total revenues for 2001.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs. Our cost of license
revenues was $286,000 for 2002 and $14,000 for 2001. This increase was largely
due to increased royalty charges by a third party software vendor because we
sold more software that required payment of royalties. Cost of license revenues
as a percentage of license revenues may vary between periods due to royalty
charges from third party software vendors.
COST OF SERVICE REVENUES. Cost of service revenues consists of personnel,
contractors and other costs related to the provision of professional services,
technical support and training. Our cost of service revenues was $2.7 million
for 2002 and $4.0 million for 2001, representing a decrease of 31%. This
decrease was primarily due to a reduction in our use of external consultants in
2002 as a result of the decline in both our technical support and consulting
service contracts. As a percentage of service revenues, cost of service revenues
were 50% for 2002 and 45% for 2001. Because a large portion of our cost of
service revenues is fixed, the percentage increase was due in part to the
decrease in our service revenues. Cost of service revenues as a percentage of
service revenues may vary between periods due to our use of consultants.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, benefits, commissions and bonuses earned by sales and marketing
personnel, travel and entertainment, and promotional expenses. Our sales and
marketing expenses were $8.7 million for 2002 and $14.4 million for 2001,
representing a decrease of 40%. This decrease was primarily due to a reduction
in staffing and personnel related costs, reduced office space and lower
commissions based on lower sales revenues. Sales and marketing expenses
represented 59% of total revenues for 2002 and 74% of total revenues for 2001.
We are presently targeting that 2003 sales and marketing expense levels will be
lower than comparable 2002 expense levels.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for software developers, technical managers
and quality assurance personnel as well as payments to external software
consultants. Our research and development expenses were $4.1 million for 2002
and $5.6 million for 2001, representing a decrease of 26%. This decrease was
primarily related to a reduction in both employees and external contract staff.
Research and development expenses represented 28% of total revenues for 2002 and
29% of total revenues for 2001. We are presently targeting that 2003 research
and development expense levels will be lower than comparable 2002 expense
levels.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and executive management personnel, legal costs, accounting
costs, bad debt write-offs and various costs associated with our status as a
public company. Our general and administrative expenses were $3.5 million for
2002 and $5.5 million for 2001, representing a decrease of 37%. This decrease
was primarily related to the termination of patent litigation and related legal
fees and settlements, and a reduction in bad debt expense. General and
administrative expenses represented 24% of total revenues for 2002 and 29% of
total revenues for 2001. We are presently targeting that 2003 general and
administrative expense levels will be lower than comparable 2002 expense levels.
AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of
purchased intangibles was $768,000 for 2002 and $3.6 million for 2001
representing a decrease of 79%. In December 2002, write-off of purchased
intangibles amounted to $160,000. In June 2001, write-off of intangibles and
goodwill amounted to $2.0 million.
17
RESTRUCTURING COSTS. Restructuring costs consist primarily of expenses
associated in a reduction in employee headcount and the closure of excess field
offices. In 2002, no restructuring costs were incurred. We restructured several
functions during 2001. This resulted in a one-time charge of $1.7 million. The
majority of this charge was related to severance and other employee related
benefit costs.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and various miscellaneous state and foreign
taxes, and other expenses. Net interest and other income was $11,000 for 2002
and $259,000 for 2001, representing a decrease of 96%. This decrease was
primarily due to a reduction in our cash balances until November 2002 when we
completed a $2 million common stock sale to purchasers affiliated with Needham
Capital Partners, and a reduction in market interest rates.
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. Total deferred stock compensation associated with equity transactions
as of December 31, 2002 was $31,000, net of amortization. Deferred stock
compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense, which is included in operating expenses, was
$88,000 in 2002 and $245,000 in 2001. We expect to record amortization expense
related to these securities of approximately $31,000 in 2003.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
As of December 31, 2002, we had $55.9 million of federal and $8.6 million of
state net operating loss carryforwards available to offset future taxable
income. The federal net operating loss carryforwards expire through 2022, while
the state net operating loss carryforwards expire through 2012. The net
operating loss carryforwards for state tax purposes are substantially less than
for federal tax purposes, primarily because only 50% of state net operating loss
carryforwards can be utilized to offset future state taxable income and because
state net operating loss carryforwards generated in earlier years have already
expired. The Tax Reform Act of 1986 limits the use of net operating loss
carryforwards in situations where changes occur in the stock ownership of a
company. If we should be acquired or otherwise have an ownership change, as
defined in the Tax Reform Act of 1986, our utilization of these carryforwards
could be restricted.
As of December 31, 2002, the Company also had research and development tax
credit carryforwards of $1.7 million and $1.6 million available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2022, while the state credit carryforward has no expiration.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Our revenues were $19.4 million for 2001 and $25.3 million for 2000
representing a decrease of 23%. International revenues were $7.4 million for
2001 and $7.2 million for 2000, representing an increase of 3%. For 2001, sales
to Salomon Smith Barney accounted for 15% of total revenues, sales to
Cablevision accounted for 11% of total revenues, and sales to our top five
customers accounted for 45% of total revenues. For 2000, sales to Salomon Smith
Barney accounted for 16% of total revenues and sales to our top five customers
accounted for 40% of total revenues.
18
LICENSE REVENUES. License revenues were $10.6 million for 2001 and $17.7
million for 2000, representing a decrease of 40%. License revenues represented
55% of total revenues for 2001 and 70% of total revenues for 2000. The decrease
in software license revenues was primarily due to a general reduction in
information technology spending for 2001, as compared to the more buoyant levels
experienced in 2000. This was particularly noticeable within our domestic
markets.
SERVICE REVENUES. Our service revenues were $8.8 million for 2001 and $7.6
million for 2000, representing an increase of 16%. The increase in service
revenues was primarily due to our focus upon significant consulting engagements
with Salomon Smith Barney and other key customers. Service revenues represented
45% of total revenues for 2001 and 30% of total revenues for 2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Our cost of license revenues was $14,000 for 2001
and $304,000 for 2000. The cost of license revenues for 2000 included
significant royalties that did not continue in 2001.
COST OF SERVICE REVENUES. Our cost of service revenues was $4.0 million for
2001 and $3.6 million for 2000, representing an increase of 11%. This increase
was primarily due to the higher technical support revenues experienced in 2001.
As a percentage of service revenues, cost of service revenues were 45% for 2001
and 47% for 2000. Cost of service revenues as a percentage of service revenues
may vary between periods due to our use of third party professional services.
OPERATING EXPENSES
SALES AND MARKETING. Our sales and marketing expenses were $14.4 million for
2001 and $22.8 million for 2000, representing a decrease of 37%. This decrease
was primarily due to a general reduction in marketing programs, a reduction in
staff and lower commissions based on lower sales revenues. Sales and marketing
expenses represented 74% of total revenues for 2001 and 90% of total revenues
for 2000.
RESEARCH AND DEVELOPMENT. Our research and development expenses were $5.6
million for 2001 and $8.1 million for 2000, representing a decrease of 31%. This
decrease was primarily related to a reduction in staff and a reduction in the
use of external consultants. Research and development expenses represented 29%
of total revenues for 2001 and 32% of total revenues for 2000.
GENERAL AND ADMINISTRATIVE. general and administrative expenses were $5.5
million for 2001 and $5.4 million for 2000, representing an increase of 2%. This
increase was primarily the result of patent litigation and settlement costs,
offset by a reduction in personnel expenses. General and administrative expenses
represented 29% of total revenues for 2001 and 21% of total revenues for 2000.
AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of
purchased intangibles was $3.6 million for 2001 and $2.9 million for 2000
representing an increase of 24%. The increase in amortization was primarily due
to write-off of intangibles and goodwill of $2.0 million in June 2001.
RESTRUCTURING COSTS. We restructured several operational functions during
2001. This resulted in a one-time charge of $1.7 million. The majority of this
charge related to severance and other employee related benefit costs.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and various miscellaneous state and foreign
taxes, and other expenses. Interest and other income (expense) was $259,000 for
2001 and $1.1 million for 2000, representing a decrease of 76%. This decrease
was primarily due to a reduction in our short-term investment balances and a
general reduction in market interest rates.
19
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. Total deferred stock compensation associated with equity transactions
as of December 31, 2001 was $119,000, net of amortization. Deferred stock
compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense, which is included in operating expenses, was
$245,000 in 2001 and $416,000 in 2000.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statement of
operations data for each of the twelve quarters in the three-year period ended
December 31, 2002. This financial data is also expressed as a percentage of our
total revenues for the periods indicated. This data has been derived from our
unaudited consolidated financial statements, which have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto. Our
quarterly results have been in the past, and may be in the future, subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
20
QUARTER ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
2000 2000 2000 2000 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License ............................. $ 2,881 $ 4,402 $ 5,356 $ 5,045 $ 2,131 $ 2,538
Service ............................. 1,329 1,556 1,728 2,980 2,735 2,213
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 4,210 5,958 7,084 8,025 4,866 4,751
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 50 16 207 31 5 1
Service ............................. 715 902 857 1,118 1,173 1,189
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 765 918 1,064 1,149 1,178 1,190
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ......................... 3,445 5,040 6,020 6,876 3,688 3,561
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 5,998 5,255 5,234 6,268 4,349 3,819
Research and development ............ 2,013 2,213 2,042 1,859 1,748 1,583
General and administrative .......... 867 1,492 1,649 1,423 1,374 1,394
Amortization of purchased
intangibles ....................... 496 771 799 859 718 2,458
Restructuring costs ................. -- -- -- -- 785 688
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 9,374 9,731 9,724 10,409 8,974 9,942
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (5,929) (4,691) (3,704) (3,533) (5,286) (6,381)
Interest income (expense), net ....... 367 290 299 175 177 97
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... $ (5,562) $ (4,401) $ (3,405) $ (3,358) $ (5,109) $ (6,284)
=========== =========== =========== =========== =========== ===========
Shares used in calculating
basic net income (loss)
per share ........................... 18,968 19,148 19,418 19,667 19,791 19,916
=========== =========== =========== =========== =========== ===========
Shares used in calculating
diluted net income (loss)
per share ........................... 18,968 19,148 19,418 19,667 19,791 19,916
=========== =========== =========== =========== =========== ===========
Basic net income (loss) per share .... $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32)
=========== =========== =========== =========== =========== ===========
Diluted net income (loss) per share .. $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32)
=========== =========== =========== =========== =========== ===========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License ............................. 68.4% 73.9% 75.6% 62.9% 43.8% 53.4%
Service ............................. 31.6 26.1 24.4 37.1 56.2 46.6
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 100.0 100.0 100.0 100.0 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 1.2 0.3 2.9 0.4 0.1 0.0
Service ............................. 17.0 15.1 12.1 13.9 24.1 25.0
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 18.2 15.4 15.0 14.3 24.2 25.0
----------- ----------- ----------- ----------- ----------- -----------
Gross margin ......................... 81.8 84.6 85.0 85.7 75.8 75.0
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 142.5 88.2 73.9 78.1 89.4 80.4
Research and development ............ 47.8 37.1 28.8 23.2 35.9 33.3
General and administrative .......... 20.6 25.0 23.3 17.7 28.2 29.3
Amortization of purchased
intangibles ....................... 11.8 12.9 11.3 10.7 14.8 51.7
Restructuring costs ................. -- -- -- -- 16.1 14.5
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 222.7 163.3 137.3 129.7 184.4 209.3
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (140.8) (78.7) (52.3) (44.0) (108.6) (134.3)
Interest income (expense) net ........ 8.7 4.9 4.2 2.2 3.6 2.0
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... (132.4)% (73.9)% (48.1)% (41.8)% (105.0)% (132.3)%
=========== =========== =========== =========== =========== ===========
Table continued on next page
21a
table continued from above page
QUARTER ENDED
--------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2001 2001 2002 2002 2002 2002
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License ............................. $ 3,114 $ 2,778 $ 833 $ 4,104 $ 2,825 $ 1,299
Service ............................. 2,056 1,806 1,328 1,626 1,319 1,252
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 5,170 4,584 2,161 5,730 4,144 2,551
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 1 7 27 75 75 109
Service ............................. 975 636 768 759 691 522
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 976 643 795 834 766 631
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ......................... 4,194 3,941 1,366 4,896 3,378 1,920
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 3,739 2,464 2,434 2,586 1,848 1,807
Research and development ............ 1,229 1,018 1,118 1,038 1,040 912
General and administrative .......... 1,464 1,287 927 919 798 815
Amortization of purchased
intangibles ....................... 245 213 212 142 126 289
Restructuring costs ................. 200 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 6,877 4,982 4,691 4,685 3,812 3,823
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (2,683) (1,041) (3,325) 211 (434) (1,903)
Interest income (expense), net ....... 14 (29) 16 4 (15) 6
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... $ (2,669) $ (1,070) $ (3,309) $ 215 $ (449) $ (1,897)
=========== =========== =========== =========== =========== ===========
Shares used in calculating
basic net income (loss)
per share ........................... 19,971 20,012 20,089 20,153 20,201 21,677
=========== =========== =========== =========== =========== ===========
Shares used in calculating
diluted net income (loss)
per share ........................... 19,971 20,012 20,089 20,486 20,201 21,677
=========== =========== =========== =========== =========== ===========
Basic net income (loss) per share .... $ (0.13) $ (0.05) $ (0.16) $ 0.01 $ (0.02) $ (0.09)
=========== =========== =========== =========== =========== ===========
Diluted net income (loss) per share .. $ (0.13) $ (0.05) $ (0.16) $ 0.01 $ (0.02) $ (0.09)
=========== =========== =========== =========== =========== ===========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License ............................. 60.2% 60.6% 38.5% 71.6% 68.2% 50.9%
Service ............................. 39.8 39.4 61.5 28.4 31.8 49.1
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 0.0 0.1 1.2 1.3 1.8 4.3
Service ............................. 18.9 13.9 35.5 13.2 16.7 20.5
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 18.9 14.0 36.7 14.5 18.5 24.8
----------- ----------- ----------- ----------- ----------- -----------
Gross margin ......................... 81.1 86.0 63.3 85.5 81.5 75.2
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 72.3 53.8 112.6 45.1 44.6 70.8
Research and development ............ 23.8 22.2 51.7 18.1 25.1 35.8
General and administrative .......... 28.3 28.1 42.9 16.0 19.3 31.9
Amortization of purchased
intangibles ....................... 4.7 4.6 9.8 2.5 3.0 11.3
Restructuring costs ................. 3.9 0.0 0.0 0.0 0.0 0.0
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 133.0 108.7 217.0 81.7 92.0 149.8
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (51.9) (22.7) (153.7) 3.8 (10.5) (74.6)
Interest income (expense) net ........ 0.2 (0.6) 0.7 0.1 (0.4) 0.2
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... (51.7)% (23.3)% (153.0)% 3.9% (10.9)% (74.4)%
=========== =========== =========== =========== =========== ===========
21b
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate significantly in the future, as a result of a
number of factors, many of which are outside our control. These factors include:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o shifts in demand for and market acceptance among our various products,
including our newer products, EDGEXTEND and DIRECTALERT, and our older
POWERTIER product;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers or prospective
customers;
o the level of product and price competition in the application server and
data management markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the possible loss of sales people;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through the sale of
unregistered common stock in the amount of $2.0 million in November 2002, our
initial public offering of common stock in June 1999, which totaled $34.1
million in aggregate net proceeds and private sales of convertible preferred
stock, which totaled $19.9 million in aggregate net proceeds. We have also
financed our business through an equipment related loan in the maximum principal
amount of $800,000 which has been repaid in full, a second equipment related
loan in the amount of $655,000 and a third equipment related loan in the amount
of $149,000, and capitalized leases. As of December 31, 2002, we had $8.9
million of cash and cash equivalents and $4.9 million of working capital.
Net cash provided by operating activities was $113,000 for 2002. In 2001 and
2000, cash used in operating activities was $11.6 million and $11.7 million
respectively. For 2002, cash provided by operating activities was primarily
attributable to a decrease in accounts receivable and increases in deferred
revenues and other accrued liabilities. This provision of operating cash was
offset primarily by net losses and a decrease in accounts payable. For each of
2001 and 2000, cash used for operating activities was attributable primarily to
net operating losses. These losses were offset in part by depreciation and
amortization expenses.
22
Net cash used in investing activities was $325,000 for 2002. Net cash
provided by investing activities was $5.4 million for 2001, and net cash used in
investing activities was $108,000 for 2000. For 2002, cash used in investing
activities was primarily attributable to the purchase of property and equipment
and the acquisition of purchased intangibles. For 2001, cash provided by
investing activities consisted primarily of the sale of short-term investments.
For 2000, cash used in investing activities consisted of purchases of property
and equipment and purchased intangibles, offset by the sale of short-term
investments.
Net cash provided by financing activities was $1.7 million for 2002. Net
cash used in financing activities was $500,000 for 2001. Net cash provided by
financing activities was $3.6 million for 2000. Net cash provided by financing
activities during 2002 consisted primarily of the sale of unregistered common
stock and stock warrants to an investor offset by repayments under loan
agreements. Net cash used in financing activities during 2001 consisted
primarily of repayments of capital leases and loan agreements offset by the sale
of common stock. Net cash provided by financing activities during 2000 was
primarily attributable to the sale of common stock. For 2001 and 2000, net cash
was also provided from borrowings under an equipment financing facility, offset
by repayments of loan agreements.
We have credit facilities with Comerica Bank. Under those credit facilities,
we had a $5.0 million revolving line of credit facility at December 31, 2002
that was renegotiated in the amount of $2.5 million in March 2003 and is
available until April 30, 2004 (refer to Note 11 of the "Notes to Consolidated
Financial Statements" included elsewhere in this report). We also have a
$655,000 equipment term loan, and a $149,000 equipment term loan. As of December
31, 2002 we had no borrowings outstanding under the revolving line of credit
facility. As of December 31, 2002 we had $240,000 outstanding under the $655,000
equipment term loan. We are required to make principal payments of $21,843 per
month, plus interest at the bank's base rate plus 0.5% per annum payable in 30
monthly installments. As of December 31, 2002 we had $149,000 outstanding under
an equipment facility. Under this facility, borrowings outstanding of $149,000
as of January 3, 2003 converted to an 18 month term loan with principal payments
of $8,284 per month beginning on February 1, 2003 plus interest at the bank's
base rate plus 1% per annum. The bank's credit facilities required that as of
December 31, 2002 we, among other things, maintain a minimum tangible net worth
of $5.5 million and a minimum quick ratio (current assets not including
inventory less current liabilities) of 2 to 1. As of December 31, 2002, our
tangible net worth fell below the minimum tangible net worth ratio then in
effect, and the bank waived the event. In March 2003, we renegotiated our
revolving credit facility and a new covenant structure is in place. The bank's
renewed credit facilities require that Company, among other things, to maintain
certain working capital, tangible net worth and profitability covenants. We
expect to meet these covenants. Borrowings under the facilities are
collateralized by substantially all of our assets.
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments.
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least December 31,
2003, provided that we meet our targets with respect to revenues and accounts
receivable collections.
If we experience difficulties in achieving our revenue targets, our cash and
cash equivalents may not be sufficient to meet our anticipated cash needs.
Accordingly, our operating plans could be restricted and our business could be
harmed. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt securities
or to obtain a credit facility. If additional funds are raised through the
issuance of debt securities, these securities could have rights, preferences and
privileges senior to holders of common stock, and the term of this debt could
impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we may not be able to obtain additional financing on
acceptable terms, if at all. If we are unable to obtain this additional
financing, our business could be jeopardized.
23
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, BUSINESS
COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. The
Company adopted SFAS No. 142 for the fiscal year beginning January 1, 2002. The
impact of adopting this standard was not material to our financial statements as
the Company did not carry any goodwill or intangible assets.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale whether previously
held and used or newly acquired, and broadened the presentation of discontinued
operations to include more disposal transactions. The Company adopted the
provisions of SFAS No. 144 as of January 1, 2002. Adoption of SFAS No. 144 did
not have a material effect on the Company's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of our
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. This statement is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 is expected to impact the timing of
recognition and the amount of future restructuring activities.
In December 2002, the FASB issued SFAS No. 148 ACCOUNTING FOR STOCK-BASED
COMPENSATION, TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123.
SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this statement amends APB Opinion No. 28, INTERIM
FINANCIAL REPORTING, to require disclosure about those effects in interim
financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. Management
does not intend to adopt the fair value accounting provisions of SFAS No. 123
and currently believes that the adoption of SFAS No. 148 will not have a
material impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34, DISCLOSURE OF
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation also incorporates
without reconsideration the guidance in FASB Interpretation No. 34, which is
being superseded. The adoption of FIN 45 will not have a material effect on our
consolidated financial statements and will be applied prospectively.
24
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this annual report on Form 10-K. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE DATA SERVICES MARKETS.
Because we only commenced selling EDGEXTEND and DIRECTALERT in 2002, we have
a limited operating history in the data services markets. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:
o the timing and magnitude of capital expenditures by our customers and
prospective customers;
o our need to achieve market acceptance for our new product introductions,
including, DIRECTALERT and EDGEXTEND;
o our dependence for revenue from our POWERTIER product, which was first
introduced in 1997 and has achieved only limited market acceptance;
o our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors, independent software vendors
and systems integrators;
o our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for dynamic data
management;
o our unproven ability to compete in a highly competitive market;
o the decline in spending levels in the software infrastructure market;
o our dependence on the Java programming language, commonly known as J2EE,
becoming a widely accepted standard in the transactional application
server market; and
o our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NOT BECOME OR
REMAIN PROFITABLE.
We may not achieve our targeted revenues, and we may not be able to achieve
or maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $5.4 million in 2002, $15.1
million in 2001 and $16.7 million in 2000. As of December 31, 2002, we had an
accumulated deficit of $61.4 million. While we are currently targeting decreases
in sales and marketing, research and development, and general and administrative
expenses for 2003, as compared to the levels of those expenses in 2002, we will
still need to achieve our revenue targets in order to preserve cash. Because our
product markets are new and evolving, we cannot accurately predict either the
future growth rate, if any, or the ultimate size of the markets for our
products.
WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations. We expect to have negative cash flow from operations for the year
ending December 31, 2003.
25
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least December 31,
2003 provided that we meet our targets with respect to revenues and accounts
receivable collections.
If we experience difficulties in achieving our revenue targets, our cash and
cash equivalents may not be sufficient to meet our anticipated cash needs.
Accordingly, our operating plans could be restricted and our business could be
harmed. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt securities
or to obtain a credit facility. If additional funds are raised through the
issuance of debt securities, these securities could have rights, preferences and
privileges senior to holders of common stock, and the term of this debt could
impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we may not be able to obtain additional financing on
acceptable terms, if at all. If we are unable to obtain this additional
financing, our business could be jeopardized.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate significantly in the future as a result of a
number of factors, many of which are outside our control. In prior years, we
have often experienced an absolute decline in revenues from the fourth quarter
to the first quarter of the next year. If our future quarterly operating results
are below the expectations of securities analysts or investors, the price of our
common stock would likely decline. The factors that may cause fluctuations of
our operating results include the following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o shifts in demand for and market acceptance among our various products,
including our newer products, EDGEXTEND and DIRECTALERT, and our older
POWERTIER product;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers or prospective
customers;
o the level of product and price competition in the application server and
data management markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the possible loss of sales people;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Also, we tend to
experience slower sales patterns in Europe in the third quarter. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
26
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of prospective customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish a technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale could adversely affect our
quarterly operating results. Our sales cycle is affected by seasonal
fluctuations as a result of our customers' fiscal year budgeting cycles and slow
summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In addition, the identity of our
top five customers has changed from year to year. In the year ended December 31,
2002, sales to our top five customers accounted for 55% of total revenues. Sales
to Cablevision accounted for 26% of total revenues and sales to Salomon Smith
Barney accounted for 13% of total revenues. In the year ended December 31, 2001,
sales to our top five customers accounted for 45% of total revenues. Sales to
Salomon Smith Barney accounted for 15% of total revenues and sales to
Cablevision accounted for 11% of total revenues. In year ended December 31,
2000, sales to Salomon Smith Barney accounted for 16% of total revenues and
sales to our top five customers accounted for 40% of total revenues. If we lose
a significant customer, or fail to increase product sales to an existing
customer as planned, we may not be able to replace the lost revenues with sales
to other customers. In addition, because our marketing strategy is to
concentrate on selling products to industry leaders, any loss of a customer
could harm our reputation within the industry and make it harder for us to sell
our products to other companies in that industry. The loss of, or a reduction in
sales to, one or more significant customers would likely result in a decrease in
our revenues.
WE ARE CURRENTLY TARGETING THAT A MATERIAL PORTION OF OUR REVENUES WILL BE
DERIVED FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND, HOWEVER THERE ARE TECHNICAL
AND MARKET RISKS ASSOCIATED WITH NEW PRODUCTS.
Sales of our EDGEXTEND products currently represent a material percentage of
our revenues. New products, like EdgeXtend, often contain errors or defects,
particularly when first introduced. Any errors or defects could be serious or
difficult to correct and could result in a delay of product release or adoption
resulting in lost revenues or a delay in gaining market share, which could harm
our revenues and reputation. In addition, market adoption is often slower for
newer products, like EDGEXTEND, than for existing products. Becaus