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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, 2003
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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 $7.9 million as of February 29, 2004 based upon the
closing sale price on the Nasdaq National Market reported for such date of $4.10
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 2,713,918 shares of the registrant's Common Stock issued and
outstanding as of February 29, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 2004 Annual Meeting of Stockholders to be held on June 2,
2004.
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PART I
The matters discussed in this Annual Report on Form 10-K, including, but not
limited to, the adequacy of our financial resources to meet our currently
anticipated cash flow requirements for the next 12 months 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.
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Persistence provides data access and caching infrastructure software
specifically designed to eliminate data access bottlenecks such as redundant or
inefficient database queries that cause poor application performance.
Persistence's technology may simplify and optimize access to complex enterprise
data for custom applications. Persistence's products provide a "data services"
layer that sits between relational databases such as Oracle and DB2 and
application servers. This data services layer provides integrated
object-to-relational mapping, caching, and cache synchronization with automated
cache management. Persistence products may support cross-platform deployment of
high-performance, custom applications written in Java, C++ or C#, including
those built for BEA WebLogic, IBM WebSphere or Microsoft .NET.
Persistence's EDGEXTEND products provide tools that generate application
programming interfaces ("APIs") for data access and caching. The caching feature
helps systems "remember" answers from each processing step. When the system
receives a request for which it already has an answer, it can respond
immediately, without traveling to back-end databases to generate an answer.
Customer profile management, global logistics, trading exchanges, financial
services trading desks, and supply chain management systems are just a few
examples of the kinds of computer systems, which can realize significant
increases in capacity and performance through online caching.
Persistence Software, Inc. was incorporated in May 1991 as Fulcrum
Innovations, Inc. 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.
INDUSTRY BACKGROUND
Information Technology ("IT") 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 solutions to meet the
performance demands of their users while maintaining or reducing the associated
operating costs.
Common business requirements that lead IT managers to look for new data
access and caching solutions include:
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.
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o INCREASED RISK TO 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 increase
the frequency of 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.
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 has been moved farther out to the edge of the
enterprise, the need for vital information to support these business-critical
applications has become 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 always solve
these problems. For applications with more real-time requirements, a new data
access and caching infrastructure may be required, called a Data Services layer.
The characteristics of a next-generation Data Services layer include:
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, and 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:
FASTER RESPONSE FOR CONCURRENT USERS. Our EDGEXTEND products were designed
specifically to accommodate high volume transaction processing and the data
integrity requirements of distributed applications using in-memory caching
technology. Caching is a process in which select data is copied out of back-end
systems, typically a database, and into the server cache, which allows the data
to be shared and manipulated by multiple users. 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 higher performance and reliability even with significant
transaction volumes and rapidly changing data. EDGEXTEND products may offer
superior performance and scalability to support the deployment of large-scale
distributed enterprise applications.
REDUCED 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 may accelerate 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.
3
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 may 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, Intelligent
Caching and Cache Synchronization. This integrated technology, called a Data
Services layer, allows for a data access and caching architecture that is highly
scalable, suitable for high volume transaction oriented applications, and
capable of supporting thousands of concurrent users.
PERSISTENCE STRATEGY
We intend to position Persistence as a technology leader for data access and
caching infrastructure software, based on numerous years of successful customer
deployments and a portfolio of patents. Our value proposition is that our
integrated data access and caching solutions can provide higher performance and
greater reliability than stand-alone data access or caching products.
The market for our products is Fortune 2000 corporations and software
vendors who are building custom applications to solve critical business
problems. Our target buyers are senior architects and project managers who
select data access and caching technology for projects with complex data and
fast response time requirements.
LEVERAGE INSTALLED CUSTOMER BASE. We believe there are significant
opportunities to expand the use of our products throughout our current customer
base. This ability is particularly true for customers who have successfully
adopted our technology for a particular part of their business and have not
selected an enterprise standard for data access and caching. We believe we have
an opportunity to leverage our existing success with those customers on a
broader basis by working with their architectural standards group to make our
products a standard for data services throughout their enterprise.
MAINTAIN OUR INTERNATIONAL PRESENCE. We believe there are significant
international opportunities for our products and services, in particular in
Europe and the United Kingdom. Currently, we have established direct sales
operations in the United Kingdom. In addition to our direct sales operations, we
also sell our products throughout central Europe through a distributor.
PRODUCTS
EDGEXTEND FOR JAVA
Our EDGEXTEND FOR JAVA products simplify and optimize Java access to
enterprise data by providing tightly integrated data mapping, intelligent
caching and guaranteed cache synchronization. These products can be used in
stand-along Java applications or integrated with J2EE application servers such
as IBM WebSphere, and BEA WebLogic.
EDGEXTEND FOR C++ (formerly POWERTIER for C++)
Our EDGEXTEND for C++ products simplify and optimize C++ access to
enterprise data by providing tightly integrated mapping, intelligent caching and
guaranteed cache synchronization.
DIRECT ALERT
DIRECTALERT is an add-on product for EDGEXTEND and POWERTIER that adds
rule-based client notification to our data services layer. This is particularly
valuable for trading and logistics systems, where changes in key data elements
are very important to end users. DIRECTALERT is designed to proactively notify
business applications, ranging from desktop applications and ordinary web
browsers to mobile phones and television set-top boxes.
4
POWERTIER
POWERTIER is a specialized J2EE application server for customers wanting
optimal data access and caching performance who do not already have a standard
J2EE container.
CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of data-intensive 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 our customers who have
purchased a significant amount of our products or services in 2003, 2002 and
2001 (defined as approximately 5% or more of our total revenues in such year.)
COMMUNICATIONS FINANCIAL SERVICES/EXCHANGES
CSC Holdings (Cablevision) Citigroup Global Markets
Lucent Technologies Citadel Investment Group
Motorola Fiducia AG
E-COMMERCE/INTERNET OTHER
i2 Technologies Adobe Systems
In 2003, sales of products and services to Citigroup Global Markets
accounted for 21% of our total revenues. In 2002, sales of products and services
to Cablevision accounted for 26% of our total revenues and sales to Citigroup
Global Markets accounted for 13% of our total revenues. In 2001, sales of
products and services to Citigroup Global Markets accounted for 15% of our total
revenues and sales to Cablevision accounted for 11% of our total revenues.
See also "Note 9. Segment Information, Operations by Geographic Area and
Significant Customers" in the Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K.
SALES AND MARKETING
We sell our products through both a direct sales force and a third party
distributor. As of December 31, 2003, we had 13 people in our sales and
marketing organization, of which eight were in the United States and five were
in Europe. Our overall 2004 sales and marketing expense compared to 2003 is
expected to decrease due to our reduction of headcount in the third and fourth
quarters of 2003.
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.
COMPETITION
The markets for our products are 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 markets are:
o performance, including scalability, integrity and availability;
o ability to provide a competitive return on investment to the customer;
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;
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o quality of support and service;
o security;
o company reputation and perception of viability; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Oracle, Versant, Gemstone, Progress Software and
Tangasol 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.
Competitors for POWERTIER include BEA Systems (WebLogic), IBM (WebSphere),
Oracle (OAS) 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.
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If our intellectual property
is 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 29, 2004, we had five issued United States patents
and three pending United States patent applications with allowable subject
matter. These patents expire beginning in 2013. 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.
6
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.
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.
EMPLOYEES
As of December 31, 2003, we had 39 full-time employees, including 13 in
sales and marketing, 17 in research and development and technical services, and
nine 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth specific information regarding our executive
officers as of February 29, 2004:
NAME AGE POSITION
---- --- --------
Christopher T. Keene......................43 Chief Executive Officer and Secretary
Derek Henninger...........................41 Vice President of Worldwide Field Operations
Vivek Singhal.............................35 Vice President of Engineering
Brian Tobin...............................44 Acting Chief Financial Officer
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.
DEREK HENNINGER co-founded Persistence and since January 2003 has served as
Vice President of Worldwide Field Operations. From January 2002 until January
2003, Mr. Henninger served as Vice President of Customer Care. From June 1991
until January 2002, he served as Vice President of Engineering. 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.
VIVEK SINGHAL has served as Vice President, Engineering since January 2002.
Mr. Singhal joined Persistence in April 1995 as a software engineer. 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.
BRIAN TOBIN has served as Acting Chief Financial Officer since October 2003.
From October 2002 to October 2003, Mr. Tobin served as Corporate Controller and
from November 2000 to October 2002, he served as Director of Accounting. From
April 1998 to November 2000, Mr. Tobin was a Manager and Director of Finance at
The Charles Schwab Corporation, a broker-dealer. He holds a B.A. degree in
Accounting from the University of Washington.
7
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.
In the fourth quarter of 2003, we vacated approximately 7,500 square feet of
this facility and are actively seeking a sub-tenant. 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 the United Kingdom. We believe that our existing facilities are
adequate to meet our current and foreseeable requirements or that suitable
substitute space will be available as needed.
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.
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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. In addition, we effected a 1 for
10 reverse stock split of our common stock on June 12, 2003, and the prices of
our shares shown below for periods prior to June 12, 2003 have been adjusted to
reflect what the price of our shares would have been had the reverse split been
in effect at that time.
HIGH LOW
---- ---
For The Year Ended December 31, 2002:
First Quarter.......................................... $ 18.50 $ 8.70
Second Quarter......................................... $ 10.00 $ 5.30
Third Quarter.......................................... $ 8.20 $ 4.20
Fourth Quarter......................................... $ 7.20 $ 3.00
For The Year Ended December 31, 2003:
First Quarter.......................................... $ 6.70 $ 1.50
Second Quarter......................................... $ 6.10 $ 2.00
Third Quarter.......................................... $ 6.24 $ 3.05
Fourth Quarter......................................... $ 6.45 $ 3.54
We had 146 stockholders of record as of February 29, 2004, including several
holders who are nominees for an undetermined number of beneficial owners. The
closing sale price of our common stock as reported on the Nasdaq SmallCap Market
on March 15, 2004 was $3.79.
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 December 1, 2003, we issued
300,000 shares of our common stock at a price of $3.73 per share for an
aggregate sale price of $1,119,000, and warrants to purchase up to 60,000 shares
of our common stock at an exercise price of $4.48 per share to certain
purchasers. Security Research Associates, Inc. served as placement agent for the
transaction, and received a placement fee of 5% of the gross proceeds of the
private placement and a warrant to purchase up to 30,000 shares of our common
stock at an exercise price of $4.48 per share. The warrants expire on the
earlier of December 1, 2008 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.
9
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,
2003, 2002 and 2001 and the consolidated balance sheet data at December 31, 2003
and 2002, 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, 2000 and 1999, and the
consolidated balance sheet data as of December 31, 2001, 2000 and 1999 are
derived from audited consolidated financial statements not included in this
annual report on Form 10-K.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License............................................ $ 4,560 $ 9,061 $ 10,561 $ 17,684 $ 10,890
Service............................................ 4,738 5,525 8,810 7,593 3,553
---------- ---------- --------- ---------- ---------
Total revenues............................. 9,298 14,586 19,371 25,277 14,443
Loss from operations................................. (2,694) (5,451) (15,391) (17,857) (12,165)
Net loss............................................. $ (2,706) $ (5,440) $(15,132) $ (16,726) $(11,306)
========== ========== ========= ========== =========
Basic and diluted net loss per share(1).............. $ (1.11) $ (2.65) $ (7.60) $ (8.65) $ (8.64)
========== ========== ========= ========== =========
Shares used in basic and diluted net loss per share
calculation.......................................... 2,432 2,053 1,992 1,933 1,309
========== ========== ========= ========== =========
AS OF DECEMBER 31,
--------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 5,680 $ 8,903 $ 7,411 $ 19,490 $ 29,652
Working capital......................................... 2,946 4,942 6,783 17,289 29,582
Total assets............................................ 7,627 11,100 13,755 33,641 39,092
Long-term obligations................................... 102 784 421 932 354
Total stockholders' equity.............................. 3,035 4,711 7,944 22,556 32,018
- ----------
(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 our net losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Persistence provides data access and caching infrastructure software
specifically designed to eliminate data access bottlenecks such as redundant or
inefficient database queries that cause poor application performance.
Persistence's technology may simplify and optimize access to complex enterprise
data for custom applications. Persistence's products provide a "data services"
layer that sits between relational databases such as Oracle and DB2 and
application servers. This data services layer provides integrated
object-to-relational mapping, caching, and cache synchronization with automated
cache management. Persistence products may support cross-platform deployment of
high-performance, custom applications written in Java, C++ or C#, including
those built for BEA WebLogic, IBM WebSphere or Microsoft .NET.
10
THE CURRENT ECONOMIC ENVIRONMENT
The economic climate in which we operate has been difficult over the last
three years, and capital spending has decreased dramatically. This has had a
pronounced effect on our ability to generate new license fees, as IT budgets
have been frozen and large capital expenditures like those required to purchase
some of our products have been quite limited. Additionally, competition for
these more limited sales opportunities has increased, and we have seen intense
price competition both for new licenses and for support services. While we
believe our installed base continues to represent a solid recurring revenue
opportunity, we cannot provide any assurance that these pressures on IT spending
will ease, or that the general economic climate will improve. Continued
competitive pressure and a weak economy could have a continuing pronounced
effect on our operating results. We have undertaken a variety of cost reduction
measures designed to bring our operating expenses in line with our perceptions
of the business climate. Some of the measures taken include workforce
reductions.
SIGNIFICANT FINANCIAL EVENTS IN 2003
In 2003, our revenues declined to $9.3 million from $14.6 million in 2002,
largely due to the continued downturn in IT spending combined with the fact that
our target customers are those data- and transaction-intensive companies that
are either building a new project or rearchitecting their current system in
order to improve their data management performance. We believe that deferrals of
these large IT projects affected our license revenues in 2003. In 2003, our
operating expenses (G&A, sales and marketing and research and development)
declined to $10.3 million from $17.0 million in 2002, largely through reductions
in force and turnover (39 employees at December 31, 2003 vs. 68 employees at
December 31, 2002) and more focused engineering and sales and marketing efforts.
In June 2003 we implemented a 1 for 10 reverse stock split in order to come into
compliance with Nasdaq listing requirements. In December 2003 we completed a
private placement of shares and warrants in which we raised an aggregate of $1.1
million.
REVENUES
Our revenues, which consist of software license revenues and service
revenues, totaled $9.3 million in 2003, $14.6 million in 2002 and, $19.4 million
in 2001. 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. Service revenues consist of professional services
consulting, customer support and training. Our two major products, POWERTIER and
EDGEXTEND, are based on a common technology platform for application data
management. They differ mainly in that POWERTIER contains a proprietary, bundled
application server, whereas EDGEXTEND is optimized to integrate with third party
application servers, such as IBM's WebSphere and BEA's WebLogic application
servers. We currently expect that sales of our older POWERTIER application
server 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. Because a substantial
portion of our revenues result from software license revenue from a limited
number of customers, the identity of which change from quarter to quarter, in
any given quarter the percentage contribution of POWERTIER, EDGEXTEND and
DIRECTALERT to total license revenues varies, sometimes dramatically.
REVENUES FROM SALES OF PRODUCTS OUTSIDE THE UNITED STATES
We market our software and services primarily through our direct sales
organizations in the United States and the United Kingdom.
Revenues from licenses and services to customers outside the United States
were:
YEAR ENDED DECEMBER 31, REVENUES % OF TOTAL REVENUES
----------------------- -------- -------------------
2003 $3.8 million 40%
2002 4.8 million 33
2001 7.4 million 38
Sales of our products to customers in Europe declined by 21% in 2003, from
$4.6 million in 2002 to $3.6 million in 2003. Our future success will depend, in
part, on our successful development of international markets for our products.
11
LIMITED NUMBER OF CUSTOMERS
Historically, we have received a substantial portion of our revenues from a
limited number of customers.
Sales of products to our top five customers accounted for:
YEAR ENDED DECEMBER 31, % OF TOTAL REVENUES
----------------------- -------------------
2003 46%
2002 55
2001 45
In addition, the identity of our top five customers has changed from year to
year. 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.
We have made staff reductions across all functional areas of our business in
order to manage operating expenses and conserve cash in response to continued
uncertainty in IT spending, which has affected our license revenue. We had 68
total employees as of December 31, 2002 and 39 as of December 31, 2003,
representing a decrease of 43%. This decrease was due primarily to a workforce
reduction during the third and fourth quarters to cut costs. We have incurred
net losses in each year since 1996 and as of December 31, 2003, had an
accumulated deficit of $64.1 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our 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 liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing 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. We recognize revenues in accordance with the American
Institute of Certified Public Accounts' Statement of Position 97-2, "Software
Revenue Recognition," as amended. 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.
Our revenue recognition policy is significant because our revenue is the 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 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.
12
ALLOWANCE FOR DOUBTFUL ACCOUNTS. A significant portion of our receivables
are concentrated with a small number of customers. 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 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 our
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, 2003.
PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets. The determination of the
recoverability of such intangible assets requires management to make estimates
and assumptions about fair value 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 Statement of Financial Accounting Standards ("SFAS")
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, is included in Note 1 of the
"Notes to Condensed Consolidated Financial Statements," included elsewhere in
this report.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data for the three years
ended December 31, 2003 expressed as a percentage of total revenues:
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues:
License.................................................................... 49% 62% 55%
Service.................................................................... 51 38 45
----------- ----------- -----------
Total revenues......................................................... 100% 100% 100%
----------- ----------- -----------
Cost of revenues:
License.................................................................... 1% 2% 0%
Service.................................................................... 17 19 21
----------- ----------- -----------
Total cost of revenues................................................. 18% 21% 21%
----------- ----------- -----------
Gross profit................................................................. 82% 79% 79%
Operating expenses:
Sales and marketing........................................................ 55% 59% 74%
Research and development................................................... 32 28 29
General and administrative................................................. 26 24 28
Purchased intangibles...................................................... (2) 5 19
Restructuring costs........................................................ -- -- 9
----------- ----------- -----------
Total operating expenses............................................... 111% 116% 159%
----------- ----------- -----------
Loss from operations......................................................... (29) (37) (80)
Interest income.............................................................. 1 1 2
Interest and other expense................................................... (1) (1) (0)
----------- ----------- -----------
Loss before income taxes..................................................... (29) (37) (78)
Income taxes................................................................. (0) (0) (0)
----------- ----------- -----------
Net loss..................................................................... (29)% (37)% (78)%
13
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
REVENUES
($ IN THOUSANDS)
% CHANGE % CHANGE
-------- --------
2003 2002 - 2003 2002 2001 - 2002 2001
------------ ----------- ------------ ------------ -----------
Revenues:
License......................................... $4,560 (50)% $ 9,061 (14)% $10,561
Service......................................... 4,738 (14) 5,525 (37) 8,810
------- ----------- ----------
Total Revenues................................ 9,298 (36) 14,586 (25) 19,371
------- ----------- ----------
License revenues comprised 49% of total revenues in 2003, and service
revenues comprised 51% of total revenues for 2003. Our total revenues declined
by 36% in 2003 as compared to 2002 and by 25% in 2002 as compared to 2001. For
2003, sales to Citigroup Global Markets accounted for 21% of total revenues, and
sales to our top five customers accounted for 46% of total revenues. For 2002,
sales to Cablevision accounted for 26% of total revenues, sales to Citigroup
Global Markets accounted for 13% of total revenues, and sales to our top five
customers accounted for 55% of total revenues. For 2001, sales to Citigroup
Global Markets 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 generally are priced based on the number
of users or central processing units deploying our software. License revenues
declined by 50% to $4.6 million in 2003 as compared to $9.1 million in 2002 and
by 14% in 2002 from $10.6 million in 2001. License revenues represented 49% of
total revenues for 2003, 62% of total revenues for 2002 and 55% of total
revenues in 2001. The decrease in software license revenues was primarily due
the fact that our target customers are those data- and transaction-intensive
companies that are either building a new project or contemplating a
rearchitecture of their current system in order improve their data management
performance. We believe that continued industry-wide downturn in spending on IT
infrastructure products has caused many of these target customers to delay these
large IT projects, which affected our license revenues in 2003. Given the
continuing spending starting to pick up, reduced level of information technology
spending, license revenues may continue to decline over the next several
quarters.
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues declined by 14%
to $4.7 million in 2003, $5.5 million in 2002 and by 37% in 2002 from $8.8
million in 2001. The decrease in service revenues was primarily due to lower
revenues from technical support contracts and a reduced level of consulting
services performed. Service revenues represented 51% of total revenues for 2003,
38% of total revenues for 2002 and 45% for 2001.
INTERNATIONAL REVENUES. International revenues were $3.8 million for 2003
and $4.8 million for 2002, representing a decrease of 21%. The decrease in
international revenues from 2002 to 2003 was primarily attributable to
unfavorable global economic conditions. International revenues declined by 35%
in 2002 from $7.4 million in 2001. The decrease in international revenues from
2001 to 2002 was primarily attributable to a general downturn in local economic
conditions in Asia, which in turn contributed to our decision to close our sales
office in Asia.
COST OF REVENUES
% CHANGE % CHANGE
-------- --------
2003 2002 - 2003 2002 2001 - 2002 2001
------------ ----------- ------------ ------------ ------------
License............................................ $ 90 (69) $ 286 1,943 $ 14
Service............................................ 1,625 (41) 2,740 (31) 3,973
--------- --------- ---------
Total cost of revenues........................... 1,715 (43) 3,026 (24) 3,987
--------- --------- ---------
Gross profit....................................... $ 7,583 (34)% $ 11,560 (25)% $ 15,384
14
COST OF LICENSE REVENUES. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs and the amortization of
third party software embedded in our software for 2003. Our cost of license
revenues was $90,000 for 2003, $286,000 for 2002 and $14,000 for 2001. Cost of
license revenues was higher in 2002 due to payment of an aggregate of $274,000
in royalties to Isocra, Ltd. and Sun Microsystems 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 declined by 41% to
$1.6 million for 2003 from $2.7 million in 2002 and by 31% in 2002 from $4.0
million in 2001. This decrease in 2003 from 2002 was primarily due to a $941,000
reduction in staffing and personnel related costs and a $119,000 reduction in
costs associated with our use of external consultants. The decrease in 2002 from
2001 was primarily due to a $1.1 million 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 was 34% for 2003, 50% for 2002 and 45% for 2001. Cost of
service revenues as a percentage of service revenues may vary between periods
due to our use of consultants.
OPERATING EXPENSES
% CHANGE % CHANGE
-------- --------
2003 2002 - 2003 2002 2001 - 2002 2001
------------ ----------- ------------ ------------ -----------
Sales and marketing.............................. $ 5,124 (41)% $ 8,676 (40)% $ 14,371
Research and development......................... 2,959 (28) 4,108 (26) 5,578
General and administrative....................... 2,419 (30) 3,459 (37) 5,519
Purchased intangibles............................ (225) (129) 768 (79) 3,634
Restructuring costs.............................. -- -- -- (100) 1,673
---------- ------- ---------- ----------
Total operating expenses....................... $ 10,277 (40) $ 17,011 (45) $ 30,775
---------- ------- ---------- ----------
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
benefits, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses declined by 41% to $5.1 million for 2003 as compared to $8.7 million in
2002 and by 40% in 2002 from $14.4 million in 2001. The decrease in 2003 from
2002 was primarily due to a $2.4 million reduction in staffing and personnel
related costs, a decrease of $714,000 in commissions expensed due to lower
revenues as compared to 2002, and a $396,000 reduction in marketing and
promotional expenses. The decrease in 2002 from 2001 was primarily due to a
reduction in staffing and personnel related costs of $3.0 million, a $1.8
million reduction in commissions expensed based on lower sales revenues and a
reduction in office space and rent which lowered expenses by $256,000. Sales and
marketing expenses represented 55% of total revenues for 2003, 59% of total
revenues for 2002 and 74% of total revenues for 2001. We are presently targeting
that 2004 sales and marketing expense levels will be lower than comparable 2003
expense levels because as of December 2003 we had 13 sales and marketing
employees as compared to an average of 22 such employees during 2003.
RESEARCH AND DEVELOPMENT. Research and development expenses consist 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 declined by 28% to $3.0 million in 2003 as
compared to $4.1 million in 2002 and by 26% in 2002 from $5.6 million in 2001.
The decrease in 2003 from 2002 was primarily due to a $1.0 million reduction in
staffing and personnel related costs. The decrease in 2002 from 2001 was
primarily related to a reduction in both employees and external contract staff,
which resulted in a $1.3 million reduction in expenses. Research and development
expenses represented 32% of total revenues for 2003, 28% of total revenues for
2002 and 29% of total revenues in 2001. We are presently targeting that 2004
research and development expense levels will be lower than comparable 2003
expense levels because as of December 2003 we had 17 research and development
employees as compared to an average of 22 such employees during 2003.
15
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist 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 declined by 30% in 2003 to $2.4 million from
$3.5 million in 2002, and by 37% in 2002 from $5.5 million in 2001. The decrease
in 2003 from 2002 was primarily due to $398,000 reduction in bad debt expenses
and a $243,000 reduction in staffing and personnel related costs. The decrease
in 2002 from 2001 was primarily due to $625,000 reduction in legal fees and
$598,000 reduction in bad debt expenses. General and administrative expenses
represented 26% of total revenues for 2003, 24% of total revenues for 2002 and
28% of total revenues for 2001. We are presently targeting that 2004 general and
administrative expense levels will be lower than comparable 2003 expense levels
because as of December 2003 we had 9 general and administrative employees as
compared to an average of 11 such employees during 2003.
PURCHASED INTANGIBLES. Purchased intangibles expenses were ($225,000) for
2003, $768,000 for 2002 and $3.6 million for 2001. In December 2003, we
determined that we would not need to pay a previously accrued expense of
$225,000 related to purchased technology and accordingly it was reversed. There
was no amortization of purchased intangibles for 2003 as such costs, which were
$64,000, are now classified as a cost of license revenues. In 2002, write-offs
of purchased intangibles were $160,000. In 2001, write-offs of intangibles and
goodwill were $2.0 million. The write-offs pertained to both software purchased
from third parties and goodwill from companies that had been acquired. These
assets were deemed to have become impaired due to various factors including the
availability of alternative software solutions and the product transition from
our older POWERTIER application server product to our newer EDGEXTEND data
services product.
RESTRUCTURING COSTS. Restructuring costs consist of expenses associated with
a reduction in employee headcount and the closure of field offices. In 2003 and
2002, no restructuring costs were incurred. We restructured several functions
during 2001, which 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 of earnings on our cash, cash equivalents, offset by interest expense
related to obligations under capital leases and other equipment related
borrowings and other expenses. Interest and other income (expense) was $5,000
for 2003, $45,000 for 2002 and $325,000 for 2001. The decrease in income was
primarily due to a reduction in interest income yielded from our lower cash
balances.
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. We had no deferred stock compensation associated with equity
transactions as of December 31, 2003 and $31,000 as of December 31, 2002, net of
amortization. Deferred stock compensation was amortized ratably over the vesting
periods of these securities. Amortization expense, which is included in
operating expenses, was $31,000 in 2003, $88,000 in 2002 and $245,000 in 2001.
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, 2003, we had $60.0 million of federal and $13.1 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 2013. 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.
16
As of December 31, 2003, the Company also had research and development tax
credit carryforwards of $1.8 million and $1.4 million available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2023, while the state credit carryforward has no expiration. As of
December 31, 2002, we 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. 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.
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, 2003. 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.
17
QUARTER ENDED
---------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2002 2002 2002 2002 2003 2003 2003 2003
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED, IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License................ $ 833 $ 4,104 $ 2,825 $ 1,299 $ 1,294 $ 1,656 $ 722 $ 888
Service................ 1,328 1,626 1,319 1,252 1,229 1,220 1,084 1,205
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... 2,161 5,730 4,144 2,551 2,523 2,876 1,806 2,093
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License................ 27 75 75 109 39 22 25 4
Service................ 768 759 691 522 477 459 395 294
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 795 834 766 631 516 481 420 298
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 1,366 4,896 3,378 1,920 2,007 2,395 1,386 1,795
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 2,434 2,586 1,848 1,807 1,531 1,545 1,228 820
Research and development 1,118 1,038 1,040 912 849 803 732 575
General and
administrative........ 927 919 798 815 643 657 631 488
Purchased intangibles.. 212 142 126 289 -- -- -- (225)
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ 4,691 4,685 3,812 3,823 3,023 3,005 2,591 1,658
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. (3,325) 211 (434) (1,903) (1,016) (610) (1,205) 137
Interest income......... 35 21 20 18 19 16 8 7
Interest and other expense (12) (14) (27) 4 (11) (11) (12) (11)
-------- -------- -------- -------- -------- -------- -------- --------
Income/(Loss) before
income taxes............ (3,302) 218 (441) (1,881) (1,008) (605) (1,209) 133
Income taxes............ (7) (3) (8) (16) -- (19) (4) 6
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $(3,309) $ 215 $ (449) $(1,897) $(1,008) $ (624) $(1,213) $ 139
======== ======== ======== ======== ======== ======== ======== ========
Shares used in calculating
basic net income (loss)
per share 2,009 2,015 2,020 2,168 2,403 2,406 2,409 2,507
======== ======== ======== ======== ======== ======== ======== ========
Shares used in
calculating diluted
net income (loss) per
share.................. 2,009 2,049 2,020 2,168 2,403 2,406 2,409 2,533
======== ======== ======== ======== ======== ======== ======== ========
Basic net income (loss)
per share $ (1.65) $ 0.11 $ (0.22) $ (0.88) $ (0.42) $ (0.26) $ (0.50) $ 0.06
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income (loss)
per share............... $ (1.65) $ 0.10 $ (0.22) $ (0.88) $ (0.42) $ (0.26) $ (0.50) $ 0.05
======== ======== ======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License................ 38.5% 71.6% 68.2% 50.9% 51.3% 57.6% 40.0% 42.4%
Service................ 61.5 28.4 31.8 49.1 48.7 42.4 60.0 57.6
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License................ 1.2 1.3 1.8 4.3 1.5 0.8 1.4 0.2
Service................ 35.5 13.2 16.7 20.5 18.9 16.0 21.9 14.0
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 36.7 14.5 18.5 24.8 20.4 16.8 23.3 14.2
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin............ 63.3 85.5 81.5 75.2 79.6 83.2 76.7 85.8
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 112.6 45.1 44.6 70.8 60.7 53.7 68.0 39.2
Research and development 51.7 18.1 25.1 35.8 33.7 27.9 40.5 27.5
General and
administrative........ 42.9 16.0 19.3 31.9 25.5 22.8 34.9 23.3
Purchased intangibles.. 9.8 2.5 3.0 11.3 -- -- -- (10.8)
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ 217.0 81.7 92.0 149.8 119.9 104.4 143.4 79.2
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. (153.7) 3.8 (10.5) (74.6) (40.3) (21.2) (66.7) 6.6
Interest income......... 1.6 0.4 0.5 0.7 0.8 0.6 0.4 0.3
Interest and other expense (0.6) (0.2) (0.7) 0.2 (0.4) (0.4) (0.7) (0.5)
-------- -------- -------- -------- -------- -------- -------- --------
Income/(loss) before
income taxes............ (152.7) 4.0 (10.7) (73.7) (39.9) (21.0) (67.0) 6.4
Income taxes............ (0.3) (0.1) (0.2) (0.6) -- (0.7) (0.2) 0.3
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... (153.0)% 3.9% (10.9)% (74.3)% (39.9)% (21.7)% (67.2)% 6.7%
========= ======== ========= ========= ========= ========= ========= ========
18
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had $5.7 million of cash and cash equivalents as
compared to $8.9 million as of December 31, 2002.
Net cash used in operating activities was $3.9 million in 2003, as compared
to a net cash provided from operating activities of $113,000 in 2002. The main
reasons for the increase in net cash used in operating activities in 2003 was
our continued net operating losses during 2003.
Net cash used in investing activities was not significant in 2003.
Net cash provided by financing activities was $660,000 in 2003, which
consisted of $1.0 million in proceeds primarily from our private placement of
stock and warrants, offset by $345,000 in loan and capital lease repayments.
Net cash provided by operating activities was $113,000 in 2002, while net
cash used in operating activities was $11.6 million in 2001. This increase in
provision of net cash from operating activities was mainly driven by an
improvement in our net loss position.
Net cash used in investing activities was $325,000 in 2002, mainly as the
result of the purchase of property and equipment and acquisitions of technology,
while net cash provided by investing activities was $5.4 million in 2001, mainly
from the sale of short-term investments.
Net cash provided by financing activities was $1.7 million in 2002, which
consisted of $2.0 million in proceeds primarily from our private placement of
stock and warrants offset by $329,000 in loan repayments. This compares to net
cash provided by financing activities of $500,000 in 2001.
We have a revolving credit facility with Comerica Bank of up to $1.5 million
which is available through April 30, 2004 under which no borrowings were
outstanding as of December 31, 2003. We also have a $149,000 equipment term
loan, under which $59,000 was outstanding as of December 31, 2003. This facility
is an 18 month term loan with principal payments of $8,229 per month beginning
on February 1, 2003 plus interest at the bank's base rate plus 1% per annum. As
of December 31, 2003 we were not in compliance with our debt covenants, and the
bank waived this non-compliance for the fourth quarter of 2003. On February 18,
2004 we revised our covenant structure with the bank. The new covenants require
us, among other things, to maintain certain working capital and profitability
covenants. We expect to meet these covenants if we are able to achieve our
target revenues. Borrowings under the facility 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,
2004, provided that we meet our targets with respect to revenues and accounts
receivable collections.
If we experience difficulties in achieving our targets with respect to
revenues and accounts receivable collections, 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 an additional
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.
19
CONTRACTUAL OBLIGATIONS
Payments Due by Period
----------------------
Less than 1
Contractual Obligations Total Year 1-3 Years
- ---------------------------------- ----- -------------- ---------
(in thousands)
Lines of Credit $ -- $ -- $ --
Equipment term loan 59 59 --
Long term debt 279 270 9
Capital leases 19 8 11
Operating leases 726 664 62
------- --------- -------
Total contractual obligations $ 1,083 $ 1,001 $ 82
======= ========= =======
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued 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. We 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 we did not carry any goodwill or intangible assets.
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 ("EITF") Issue No. 94-3. 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 market value. The adoption of SFAS No. 146 on
January 1, 2003 did not have a material effect on our consolidated 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. The adoption of this standard did not have
an impact on our consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21, REVENUE
ARRANGEMENTS WITH MULTIPLE DELIVERABLES, or EITF 00-21. EITF 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
material impact on our financial position or results of operations.
In 2003 the FASB issued FIN 46, Consolidation of Variable Interest Entities,
and several revisions (collectively FIN 46). These statements address
consolidation of variable interest entities and we do not expect the adoption to
have an effect on our consolidated financial statements. In December 2003 the
SEC issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. The
adoption of SAB No. 104 did not have an effect on our consolidated financial
statements.
20
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves significant risks. You should
carefully consider the risks and uncertainties described below and the other
information in or incorporated by reference into this prospectus including our
financial statements before deciding whether to buy shares of our common stock.
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. The trading price of our common stock could decline
due to any of these and other risks and uncertainties, and you could lose part
or all of your investment.
WE MAY NOT ACHIEVE OUR SALES TARGETS.
Our target customers are those data- and transaction-intensive companies
that are either building a new project or re-architecting their current system
in order improve their data management performance. Thus, anything that would
cause these target customers to defer these projects, such as constrained
budgets, will negatively affect our product sales. In addition, our ability to
achieve our sales targets are affected by:
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 EDGEXTEND and DIRECTALERT;
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 upon key personnel.
IF WE ARE NOT ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO FUND OUR
BUSINESS AND FAIL TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, OUR OPERATING PLANS
COULD BE RESTRICTED.
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 are currently targeting that our current cash and cash
equivalents will be sufficient to meet our anticipated cash needs through at
least December 31, 2004 provided that we meet our targets with respect to
revenues and accounts receivable collections.
If we experience difficulties in achieving our revenue and accounts
receivable targets, or 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.
21
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY DEPRESS 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. The timing of our
sales is governed in part by our customers' capital spending budgets and thus we
may experience an absolute decline in revenues from quarter to quarter. If our
future quarterly operating results are below the expectations of securities
analysts or investors, the price of our common stock would likely decline. In
addition to the other risk factors described in this prospectus, additional
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.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, SO IT IS DIFFICULT TO FORECAST OUR
REVENUES.
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. 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. 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.
22
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
several of our top five customers has changed from period to period, including
year to year.
% OF TOTAL REVENUES IDENTITY AND % OF TOTAL REVENUES
PERIOD OF TOP 2 CUSTOMERS OF TOP 5 CUSTOMERS
------ ------------------ ------------------
Year ended December 31, 2003 46% Citigroup Global Markets............21%
Adobe Systems.........................9
Year ended December 31, 2002 55 Cablevision..........................26
Citigroup Global Markets.............13
Year ended December 31, 2001 45 Citigroup Global Markets.............15
Cablevision..........................11
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. In addition, because a substantial portion of our revenues result
from product sales to a limited number of customers, the identity of which
change from quarter to quarter, in any given quarter the percentage contribution
of POWERTIER, EDGEXTEND and DIRECTALERT to total license revenues varies,
sometimes dramatically.
DECLINES IN SALES REVENUE MAY RESTRICT OUR GROWTH AND HARM OUR BUSINESS AND OUR
ABILITY TO ACHIEVE OUR FINANCIAL OBJECTIVES.
We have experienced substantial sales declines beginning in 2001. In 2001
our revenues declined from the previous year by 23%, in 2002 our revenues
declined by 25% and in 2003 our revenues declined by 36%. We believe a
substantial portion of the decline in sales of our products is due to the
general downturn in information technology spending by our prospective
customers. Our target customers are those data- and transaction-intensive
companies that are either building a new project or re-architecting their
current system in order improve their data management performance. Thus,
anything that would cause these target customers to defer these projects, such
as constrained budgets, will negatively affect our product sales. Our declining
sales may also negatively affect our reputation with the investment community,
which may lead to a decline in our stock price and may also discourage investors
from purchasing our stock.
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. Because we are
focusing our marketing and sales efforts on our newer EDGEXTEND data services
product, any failure in market adoption of this product could result in our
failure to meet our revenue goals.
23
BECAUSE OUR PRODUCTS PROVIDE ADDITIONAL FEATURES TO SUCCESSFUL APPLICATION
SERVER PRODUCTS FROM IBM AND BEA, THEY MAY ADD THESE FEATURES TO A FUTURE
VERSION OF THEIR PRODUCT, REDUCING THE NEED FOR OUR PRODUCTS.
Because IBM and BEA control the development schedule and feature set of
their products, we need to maintain a good working relationship with IBM and BEA
if we decide to develop future versions of EDGEXTEND for those new versions of
WebSphere and WebLogic. Failure to develop future versions compatible with the
latest versions from IBM and BEA could greatly reduce market acceptance for our
products. IBM or BEA could add features to their products, which would reduce or
eliminate the need for our products, which could harm our business. They could
develop their products in a more proprietary way to favor their own products, or
as those offered by a third party, which could make it much harder for us to
compete in the J2EE software market.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment over our current targeted spending levels to maintain
our technological leadership. Our future success depends on our ability to
continue to enhance our current products and to continue to develop and
introduce new products that keep pace with competitive product introductions and
technological developments. For example, as Sun Microsystems introduces new J2EE
specifications, we may need to introduce new versions of EDGEXTEND designed to
support these new specifications to remain competitive. If IBM or BEA introduce
new versions of WebSphere and WebLogic, we may need to introduce new versions of
EDGEXTEND designed to support these new versions. If we do not bring
enhancements and new versions of our products to market in a timely manner, our
market share and revenues could decrease and our reputation could suffer. If we
fail to anticipate or respond adequately to changes in technology and customer
needs, or if there are any significant delays in product development or
introduction, our revenues and business could suffer.
Our EDGEXTEND for WebSphere product was released in March 2002, our
EDGEXTEND for WebLogic product was released in August 2002, our EDGEXTEND for
..NET product was released in October 2002 and our EDGEXTEND for Linux was
released in March 2003. Any delays in releasing future enhancements to these
products or new products on a generally available basis may materially effect
our future revenues.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must maintain a strong direct sales team to generate revenues. In the
last several years, we have experienced significant turnover in our sales team.
Typically, newly hired employees have required training and approximately six to
nine months experience to achieve full productivity. Like many companies in the
software industry, we are likely to continue to experience turnover in our sales
force and we may not be able to hire enough qualified individuals in the future.
In addition, in connection with our workforce reductions in the third and fourth
quarters of 2003, we reduced our sales and marketing staff from 22 employees at
the beginning of 2003 to 13 employees as of December 31, 2003. As a result of
our employee turnover and headcount reductions, we may not meet our sales goals.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
large projects to fully deploy our products and achieve our revenue goals. These
enterprise projects often take many years to complete and can be delayed by a
variety of factors, including general or industry-specific economic downturns,
our customers' budget constraints, other customer-specific delays, problems with
other system components or delays caused by the OEM, independent software
vendors, system integrators or other third-party partners who may be managing
the system deployment. If our customers cannot successfully implement
large-scale deployments, or they determine for any reason that our products
cannot accommodate large-scale deployments or that our products are not
appropriate for widespread use, our business could suffer. In addition, if an
OEM, independent software vendors, system integrator or other third-party
partner fails to complete a project utilizing our product for a customer in a
timely manner, our revenues or business reputation could suffer.
24
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Because Sun Microsystems controls the J2EE standard, we need to maintain a
good working relationship with Sun Microsystems as we decide to develop future
versions of EDGEXTEND, as well as additional products using J2EE, that will gain
market acceptance. 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 some
competing products that would, in the absence of this license agreement,
infringe our patents. Because Sun Microsystems controls the J2EE standard, it
could develop the J2EE standard in a more proprietary way to favor a product
offered by its own products, or a third party, which could make it much harder
for us to compete in the J2EE software market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The markets for our products are 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 markets are:
o performance, including scalability, integrity and availability;
o ability to provide a competitive return on investment to the customer;
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 perception of viability; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone and Progress Software 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. Company vendors
such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software
which 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.
25
In the POWERTIER market, our competitors include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere),
Oracle (OAS) 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.
IF THE MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS
AND SERVICES DO NOT DEVELOP AS WE CURRENTLY ENVISION, WE MAY NOT BE ABLE TO
ACHIEVE OUR PLANNED REVENUE TARGETS.
Our performance and future success will depend on the growth and widespread
adoption of the markets for infrastructure software for networks and web-based
products and services. If these markets do not develop in the manner we
currently envision, our business could be harmed. Moreover, critical issues
concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
various forms of electronic commerce. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased activity or due to increased government
regulation.
OUR FAILURE TO MANAGE OUR RESOURCES COULD RESULT IN OUR FAILURE TO ACHIEVE OUR
FINANCIAL OBJECTIVES.
Achieving our planned revenue targets and other financial objectives will
place significant demands on our management and other resources, in particularly
because we must achieve our revenue and product development goals using both
fewer people and less money. Our ability to manage our resources effectively
will require us to continue to improve our sales process and to train, motivate
and manage our employees. If we are unable to manage our business effectively
within our current budget, we may not be able to retain key personnel and the
quality of our services and products may suffer.
OUR SALES AND DEVELOPMENT EFFORTS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN
THE SERVICES OF KEY EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer. We do not have a key person
life insurance policy covering Mr. Keene or any other officer or key employee.
Our success will depend in large part upon our ability to attract and retain
highly-skilled employees, particularly sales personnel and software engineers.
If we are not successful in attracting and retaining these skilled employees,
our sales and product development efforts would suffer. In addition, if one or
more of our key employees resigns to join a competitor or to form a competing
company, the loss of that employee and any resulting loss of existing or
potential customers to a competitor could harm our business. If we lose any key
personnel, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly when
first introduced or when new versions or enhancements are released. Our products
have in the past contained and may in the future contain errors and defects,
which may be serious or difficult to correct and which may cause delays in
subsequent product releases. Delays in shipment of scheduled software releases
or serious defects or errors could result in lost revenues or a delay in market
acceptance, which could have a material adverse effect on our revenues and
reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
26
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 40% of our total revenues
came from sales of products and services outside of the United States for the
three months ended December 31, 2003. Approximately 33% of our total revenues
came from sales of products and services outside of the United States for the
year ended December 31, 2002 and approximately 38% of our total revenues came
from sales of products and services outside of the United States for the year
ended December 31, 2001. We expect international revenues to continue to
represent a significant portion of our total revenues. To date, almost all of
our international revenues have resulted from our direct sales efforts. In
international markets, however, we expect that we will depend more heavily on
third party distributors to sell our products in the future. The success of our
international strategy will depend on our ability to develop and maintain
productive relationships with these third parties. The failure to develop key
international markets for our products could cause a reduction in our revenues.
Additional risks related to our international expansion and operation include:
o difficulties of staffing, funding and managing foreign operations;
o future dependence on the sales efforts of our third party distributors
to expand business;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
o exposure to political instability, acts of war, terrorism and economic
downturns;
o failure to localize our products for foreign markets;
o restrictions under U.S. law on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o currency fluctuations.
The majority of our product sales outside the United States are denominated
in U.S. dollars. We do not currently engage in any hedging transactions to
reduce our exposure to currency fluctuations as a result of our foreign
operations. We are not currently ISO 9000 compliant, nor are we attempting to
meet all foreign technical standards that may apply to our products. Our failure
to develop our international sales channel as planned could cause a decline in
our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and services, which could 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 technology, but these legal means afford only limited protection.
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 to the same
extent as do the laws of the United States. Litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
27
WE MAY BE SUED FOR PATENT INFRINGEMENT, WHICH COULD BE TIME CONSUMING AND
EXPENSIVE, AND, IF SUCCESSFUL, COULD REQUIRE US TO CEASE SELLING OR MATERIALLY
CHANGE OUR PRODUCTS.
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.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
and unregistered shares to be registered in the future, the market price of our
common stock could fall. As of February 29, 2004, we had approximately 2,713,918
shares of common stock outstanding. Virtually all of our shares, other than
shares held by affiliates, are freely tradable. Shares held by affiliates are
tradable, subject to volume and other restrictions of Rule 144. These sales of
common stock could impede our ability to raise funds at an advantageous price,
or at all, through the sale of securities.
IF OUR STOCKHOLDERS' EQUITY FALLS BELOW $2.5 MILLION, OUR STOCK COULD BE
DELISTED FROM NASDAQ SMALLCAP MARKET.
Our stockholders' equity as of December 31, 2003 was $3.0 million, which is
in excess of the $2.5 million minimum stockholders' equity requirement for
listing on the Nasdaq SmallCap Market. However, if we do not achieve our target
revenues, we may incur additional net losses, which would result in a decrease
in our stockholders' equity. If our stockholders' equity falls below $2.5
million, our stock could be subject to delisting by Nasdaq, in which case our
stock would trade on the OTC "bulletin board." Delisting of our stock from the
Nasdaq SmallCap Market could reduce the liquidity in the market for our stock
and negatively impact our reputation and consequently our business.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock price has been and may continue to be highly volatile, and
we expect that the market price of our common stock will continue to be subject
to significant fluctuations, as a result of variations in our quarterly
operating results and the overall volatility of the Nasdaq SmallCap Market.
These fluctuations have been, and may continue to be, exaggerated because an
active trading market has not developed for our stock. Thus, investors may have
difficulty selling shares of our common stock at a desirable price, or at all.
In addition, the market price of our common stock may rise or fall in the
future as a result of many factors, such as:
o variations in our quarterly results;
o announcements of technology innovations by us