<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25857
================================================================================
PERSISTENCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices, including zip code)
(650) 372-3600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
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 that 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 [ ]
As of November 10, 1999, there were 19,123,160 shares of the
registrant's Common Stock outstanding.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999
AND DECEMBER 31, 1998.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
-------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ---------------
(UNAUDITED) (EXTRACTED) [1]
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 21,899 $ 4,938
Short-term investments 12,660 --
Accounts receivable, net 3,819 1,759
Prepaids and other current assets 462 155
-------- --------
Total current assets 38,840 6,852
Property and equipment, net 1,027 723
Purchased technology, net 1,610 --
Deposits 50 29
-------- --------
Total assets $ 41,527 $ 7,604
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 2,452 $ 596
Accrued compensation and related benefits 855 512
Other accrued liabilities 573 154
Deferred revenues 1,316 1,798
Current portion of long-term obligations 177 408
-------- --------
Total current liabilities 5,373 3,468
Long-term obligations, net of current portion 628 650
Deferred rent -- 64
-------- --------
Total liabilities 6,001 4,182
-------- --------
Stockholders' equity:
Convertible preferred stock -- 15,717
Common stock 58,409 2,854
Unamortized deferred stock compensation (2,320) (2,222)
Notes receivable from stockholders (161) (161)
Accumulated deficit (20,402) (12,766)
-------- --------
Total stockholders' equity 35,526 3,422
-------- --------
Total liabilities and stockholders' equity $ 41,527 $ 7,604
======== ========
</TABLE>
[1] The condensed consolidated balance sheet as December 31, 1998 has been
extracted from the consolidated financial statements as of that date,
and does not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 1,747 $ 2,250 $ 7,326 $ 4,701
Service 878 643 2,409 1,953
-------- -------- -------- --------
Total revenues 2,625 2,893 9,735 6,654
-------- -------- -------- --------
Cost of revenues:
Licenses 19 93 117 212
Service 490 334 1,765 1,005
-------- -------- -------- --------
Total cost of revenues 509 427 1,882 1,217
-------- -------- -------- --------
Gross profit 2,116 2,466 7,853 5,437
-------- -------- -------- --------
Operating expenses:
Sales and marketing 4,057 1,885 9,028 5,021
Research and development 1,721 1,032 4,895 3,142
General and administrative 1,146 290 2,067 873
-------- -------- -------- --------
Total operating expenses 6,924 3,207 15,990 9,036
-------- -------- -------- --------
Loss from operations (4,808) (741) (8,137) (3,599)
Interest income (expense), net 410 (20) 500 (36)
-------- -------- -------- --------
Net loss $ (4,398) $ (761) $ (7,637) $ (3,635)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.24) $ (0.11) $ (0.68) $ (0.53)
======== ======== ======== ========
Shares used in calculating basic
and diluted net loss per share 18,449 6,865 11,171 6,798
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.24) $ (0.06) $ (0.48) $ (0.27)
======== ======== ======== ========
Shares used in calculating pro forma basic
and diluted net loss per share 18,449 13,355 15,962 13,289
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,637) $(3,635)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 638 409
Amortization of deferred stock compensation 890 182
Change in allowance for doubtful accounts 483 (45)
Changes in operating assets and liabilities:
Accounts receivable (2,543) (1,639)
Prepaids and other currents (307) (114)
Accounts payable 1,856 (244)
Accrued compensation and benefits 343 149
Other accrued liabilities 419 226
Deferred revenues (482) 730
Deferred rent (64) (72)
-------- -------
Net cash used in operating activities (6,404) (4,053)
-------- -------
Cash flows from investing activities:
Short-term investment additions (12,660) --
Property and equipment additions (692) (312)
Purchased technology additions (1,500) --
Deposits (21) (7)
-------- -------
Net cash used in investing activities (14,873) (319)
-------- -------
Cash flows from financing activities:
Sale of convertible preferred stock, net 4,142 5,107
Sale of common stock, net 34,349 --
Repayment of notes receivable from stockholders -- 19
Repayment of capital lease obligations (253) (147)
Borrowings under loan agreements -- 1,119
-------- -------
Net cash provided by financing activities 32,238 6,098
-------- -------
Net increase in cash and cash equivalents 16,961 1,726
Cash and cash equivalents - beginning of period 4,938 2,610
-------- -------
Cash and cash equivalents - end of period $ 21,899 $ 4,336
======== =======
Noncash investing and financing activities:
Acquisition of purchased technology through issuance of common stock $ 360 $ --
======== =======
Conversion of convertible preferred stock into common stock $ 19,859 $ --
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence Software, Inc. and subsidiary (the Company) develops and
markets transactional application server software products that comprise the
Internet software infrastructure for high-volume, high-performance electronic
commerce applications.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing
on Form 10-Q as of September 30, 1999 and for the three and nine month periods
ended September 30, 1999 and 1998 have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial statements. Certain information and footnote
disclosures normally included in complete financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The December 31, 1998 balance
sheet was extracted from audited financial statements as of and for the year
ended that date, but does not include all disclosures required by generally
accepted accounting principles for complete financial statements. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the annual consolidated financial statements and the notes
thereto included in the Company's S-1 Prospectus related to its initial public
offering of common stock as filed with, and declared effective on June 24, 1999
by, the Securities and Exchange Commission.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's condensed
consolidated financial position as of September 30, 1999, its condensed
consolidated results of operations for the three and nine month periods ended
September 30, 1999 and 1998, and its cash flows for the nine month periods ended
September 30, 1999 and 1998, have been made. The results of operations and cash
flows for any interim period are not necessarily indicative of the operating
results and cash flows for any future interim or annual periods.
3. INITIAL PUBLIC OFFERING OF STOCK
On June 25, 1999, the Company sold 3 million shares of common stock in
an underwritten initial public offering at a price of $11.00 per share for net
proceeds of approximately $29.7 million. Simultaneously, with the closing of the
initial public offering, all 7,697,885 shares of the Company's outstanding
convertible preferred stock were converted to common stock on a share for share
basis.
On July 14, 1999, the Company sold an additional 450,000 shares through
the exercise of the related underwriters' over allotment option at a price of
$11.00 per share for net proceeds of approximately $4.6 million.
4. NET LOSS PER SHARE
Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted net loss per
common share was the same as basic net loss per common share for all periods
presented since the effect of any potentially dilutive securities is excluded as
they are anti-dilutive because of the Company's net losses.
Upon the initial public offering, all outstanding shares of convertible
preferred stock were converted into an equal number of shares of common stock.
The pro forma basic and diluted net loss per share calculation includes the
weighted average number of shares of outstanding convertible preferred stock as
if they were outstanding shares of common stock.
6
<PAGE> 7
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss (numerator), basic and diluted .......... $ (4,398) $ (761) $ (7,637) $(3,635)
======== ======= ======== =======
Shares (denominator):
Weighted average common shares outstanding ....... 18,984 7,636 11,730 7,644
Weighted average common shares
outstanding subject to repurchase ............ (535) (771) (559) (846)
-------- ------- -------- -------
Shares used in computation, basic and diluted .... 18,449 6,865 11,171 6,798
-------- ------- -------- -------
Net loss per share, basic and diluted ............ $ (0.24) $ (0.11) $ (0.68) $ (0.53)
======== ======= ======== =======
</TABLE>
As of September 30, 1999, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Shares of common stock subject to repurchase ................. 462
Outstanding options .......................................... 3,428
-----
Total .................................................... 3,890
=====
</TABLE>
5. BANK CREDIT FACILITIES
In November 1999, the Company renewed its credit facilities with a bank.
Under the renewed facilities, in addition to its outstanding $800,000
equipment term loan, the Company has available a new $5 million
revolving line of credit facility available through August 15, 2000 and
a new $1 million equipment financing facility under which drawdowns are
available through July 15, 2000. As of September 30, 1999, the Company
had no borrowings outstanding under its predecessor line of credit
facility with the bank.
Under the new $5 million revolving line of credit facility, any
outstanding borrowings will bear interest at either the bank's base rate
(8.25% as of September 30, 1999) or LIBOR plus 2.0 basis points for a
maximum of two LIBOR advances in $500,000 minimum increments having 30,
60, or 90 day maturities.
Under the new $1 million equipment financing facility, any borrowings
either outstanding on July 15, 2000 or reaching an aggregate of $500,000
outstanding or will automatically convert to a 36-month term loan having
equal monthly payments of principal and interest. Borrowings under the
equipment financing facility will bear interest at either the bank's
base rate plus 0.50% or the bank's LIBOR rate plus 2.25 basis points for
a maximum of two LIBOR advances in $500,000 minimum increments having
30, 60, or 90 day maturities.
The bank's credit facilities require the Company, among other things, to
maintain a minimum tangible net worth of $25 million and a minimum quick
ratio (current assets not including inventory less current liabilities)
of 2.0 to 1. Borrowings under the facilities are collateralized by
substantially all of the Company's assets.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company had no comprehensive income items,
7
<PAGE> 8
other than net loss, to report for any of the periods presented. The Company
currently operates in one reportable segment under SFAS No. 131.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on
its financial statements and related disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
year ending December 31, 2001. The Company is currently evaluating the impact of
SFAS No. 133 on its financial statements and related disclosures.
In December 1998, the AICPA issued SOP 98-9,"Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." This
amendment clarified the specification of what was considered vendor specific
objective evidence of fair value for the various elements in a multiple element
arrangement. Our adoption of this new standard has not to date had any material
effect on our revenue recognition. Further implementation guidelines relating to
this standard may result in unanticipated changes in our revenue recognition
practices, and these changes could affect our future revenues and earnings.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 1998 and 1997 and for each of the years
ended December 31, 1998, 1997, and 1996, included in our S-1 Registration
Statement filed with the Securities and Exchange Commission in conjunction with
our initial public offering of common stock. In addition, this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this Form 10-Q contain forward-looking statements that involve
risks and uncertainties. Words such as "anticipates," "believes, "plans,"
"expects," "future," "intends, 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 Form 10-Q. 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.
OVERVIEW
We are a leading provider of transactional application server software
products that comprise the Internet software infrastructure for high volume,
high performance electronic commerce applications. We were incorporated and
began operations in 1991. Our first products incorporated patented
object-to-relational mapping and caching technologies, which have since become
the foundation for our PowerTier product family. From 1992 to 1996, we
introduced a variety of enhancements to these products, including a patented
data transformation technology for mapping objects to database tables, and
caching capabilities.
In 1996, we developed our PowerTier transactional application server,
which integrates all of these previously released Persistence products with new
shared transactional caching technologies, which enables multiple users to
simultaneously access the same cached data. We first shipped our PowerTier for
C++ transactional application server in 1997. Sales of PowerTier for C++
accounted for the majority of our revenues in 1997 and 1998, during which years
we added a professional services staff to enable our customers to implement
PowerTier more rapidly. We were one of the first companies to adopt and
implement the EJB specification. In 1998, we introduced PowerTier for EJB, which
customers have frequently purchased together with PowerTier for C++. Our next
version of PowerTier for EJB is currently in use by several major customers and
is expected to be commercially released later in 1999. We currently plan to
continue to focus product development efforts on enhancements to both the
PowerTier for C++ and the PowerTier for EJB products.
Our revenues consist of software license revenues and service. License
revenues consist of licenses of our software products, which generally are
priced based on the number of users or servers. Service revenues consist of
professional services consulting, customer support and training. Because we only
commenced selling application servers in 1997, we have a limited operating
history in the application server market. We expect that, in the near term, the
majority of our revenues will be derived from PowerTier for C++ transactional
server and related services. In the longer term, we expect that PowerTier for
EJB will increase as a component of our total revenues.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom and Germany. Our future
success will depend, in part, on our successful development of international
markets for our products.
Historically, we have received a substantial portion of our revenues
from product sales to a limited number of customers. Sales of products to our
top five customers accounted for 46% of total revenues in the nine months ended
September 30, 1999, 55% of total revenues in 1998, and for 15% of total revenues
in 1997. In the future, we expect to have relatively few large customers
continue to account for a relatively large proportion of our revenues.
To date, we have sold our products primarily through our direct sales
force, and we will need to hire many more sales people within the next two years
in order to meet our sales goals. In addition, our ability to achieve
significant revenue growth will depend in large part on our success in
establishing and leveraging relationships with systems integrators and other
third parties.
For 1997 and prior years, we recognized revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Commencing in 1998, we began recognizing revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition," or SOP 97-2, as amended by Statements of
9
<PAGE> 10
Position 98-4 and 98-9. Our adoption of these new standards has not to date had
any material effect on our revenue recognition. Further implementation
guidelines relating to these standards may result in unanticipated changes in
our revenue recognition practices, and these changes could affect our future
revenues and earnings.
We recognize license revenues upon shipment of the software if
collection of the resulting receivable is probable, an executed agreement has
been signed, 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. We recognize
revenues from customer training, support and consulting 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 when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority.
Arrangements which require significant modification or customization of software
are recognized under the percentage of completion method.
Since inception, we have incurred substantial research and development
costs and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. As a result of investments in our infrastructure, we
have incurred net losses in each fiscal quarter since 1996 and, as of September
30, 1999, had an accumulated deficit of $20.4 million. We anticipate that our
operating expenses will increase substantially for the foreseeable future as we
expand our product development, sales and marketing and other staff. In
addition, we expect to incur substantial expenses associated with sales
personnel, referral fees, marketing programs and increased administrative
expenses associated with being a public company. Accordingly, we expect to incur
net losses for the foreseeable future.
We believe that period-to-period comparisons of our operating results
are not meaningful and should not be relied upon as indicative of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets.
Although we have experienced significant revenue growth recently, this trend may
not continue. We may not achieve or maintain profitability in the future. Our
success depends significantly upon broad market acceptance of our PowerTier for
EJB application server. Because Sun Microsystems controls the EJB standard, we
need to maintain a good working relationship with them to develop future
versions of PowerTier for EJB, as well as additional products using the EJB
standard. Our performance will also depend on the growth and widespread adoption
of the market for business-to-business electronic commerce over the Internet.
RESULTS OF OPERATIONS
POTENTIAL QUARTERLY VARIABILITY
Our quarterly operating results have fluctuated significantly in the
past, and may continue to fluctuate in the future, as a result of a number of
factors, many of which are outside our control. These factors include:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier for C++ and
PowerTier for EJB products;
- the possible loss of sales people;
- introduction of new products or services by us or our
competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application
server market;
10
<PAGE> 11
- our lengthy sales cycle;
- our success in expanding our direct sales force and indirect
distribution channels;
- the mix of direct sales versus indirect distribution channel
sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general
economic conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and
is affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter in order to gain price concessions. Because a substantial portion
of our costs are relatively fixed and based on anticipated revenues, a failure
to recognize an expected order in a given quarter would not be offset by a
corresponding reduction in costs and could adversely affect our operating
results.
Our license revenues in the first quarter of 1999 were lower than those
in the fourth quarter of 1998, and our license revenues in the first quarter of
1998 were lower than those in the fourth quarter of 1997. In the future, we
expect this trend to continue, with the fourth quarter of each year accounting
for the greatest percentage of total revenues for the year and with an absolute
decline in revenues from the fourth quarter to the first quarter of the next
year.
The results of operations and cash flows for any interim period are not
necessarily indicative of the operating results and cash flows for any future
interim or annual periods.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Our revenues were $2.6 million for the three months ended September 30,
1999 and $2.9 million for the three months ended September 30, 1998,
representing a decrease of 9%. International revenues were $712,000 for the
three months ended September 30, 1999 and $448,000 for the three months ended
September 30, 1998. For the three months ended September 30, 1999, sales of
products and services to Cisco accounted for 20% of our total revenues, and
sales of products and services to our top five customers accounted for 47% of
total revenues. For the three months ended September 30, 1998, sales of products
and services to Cisco accounted for 26% of our total revenues, sales of products
and services to Supervalu accounted for 25% of our total revenues, sales of
products and services to Caldwell Spartin accounted for 17% of our total
revenues, and sales of products and services to our top five customers accounted
for 76% of total revenues.
License Revenues. License revenues were $1.7 million for the three
months ended September 30, 1999 and $2.3 million for the three months ended
September 30, 1998, representing a decrease of 22%. License revenues represented
67% of total revenues for the three months ended September 30, 1999 and 78% of
total revenues for the three months ended September 30, 1998. The decrease in
software license revenues was primarily due to a decrease in per customer
average selling price, offset by an increase in the number of customers.
Service Revenues. Our service revenues were $878,000 for the three
months ended September 30, 1999 and $643,000 for the three months ended
September 30, 1998, representing an increase of 37%. The dollar increase in
service revenues was primarily due to an increase in customer support fees
related to increased sales of our PowerTier platform. Service revenues
represented 33% of total revenues for the three months ended September 30, 1999
and 22% of total revenues for the three months ended September 30, 1998.
11
<PAGE> 12
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of
packaging, documentation and associated shipping costs. Our cost of license
revenues was $19,000 for the three months ended September 30, 1999 and $93,000
for the three months ended September 30, 1998. As a percentage of license
revenues, cost of license revenues were 1% for the three months ended September
30, 1999 and 4% for the three months ended September 30, 1998. This decrease was
primarily attributable to lower packaging and document distribution costs as a
result of a change to electronic distribution of these materials.
Cost of Service Revenues. Cost of service revenues consists of personnel
and other costs related to professional services, technical support and
training. Our cost of service revenues was $490,000 for the three months ended
September 30, 1999 and $334,000 for the three months ended September 30, 1998,
representing an increase of 47%. This increase was primarily due to increased
employee staffing in our professional services organization, as well as outside
consultants, to support a greater installed base of customers. As a percentage
of service revenues, cost of service revenues were 55% for the three months
ended September 30, 1999 and 51% for the three months ended September 30, 1999.
In particular, cost of service revenues as a percentage of service revenues may
vary between periods due to our use of third party professional services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $4.1 million for the three months ended September 30, 1999 and
$1.9 million for the three months ended September 30, 1998, representing an
increase of 115%. This increase was primarily due to our investment in our sales
and marketing infrastructure, which included significant personnel-related costs
to recruit and hire sales people and sales engineers, trade show expenses and
advertisements. Sales and marketing expenses represented 155% of total revenues
for the three months ended September 30, 1999 and 65% of total revenues for the
three months ended September 30, 1998. We believe that a significant increase in
our sales and marketing efforts is essential for us to maintain our market
position and further increase acceptance of our products. Accordingly, we
anticipate we will continue to invest significantly in sales and marketing for
the foreseeable future, and sales and marketing expenses will increase in future
periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside software developers. Our
research and development expenses were $1.7 million for the three months ended
September 30, 1999 and $1.0 million for the three months ended September 30,
1998, representing an increase of 67%. This increase was primarily related to an
increase in employee and consultant software developers and program management
and documentation personnel hired to support product development. Research and
development expenses represented 66% of total revenues for the three months
ended September 30, 1999 and 36% of total revenues for the three months ended
September 30, 1998. We believe that a significant increase in our research and
development investment is essential for us to maintain our market position, to
continue to expand our product line and to enhance our technology. Accordingly,
we anticipate that we will continue to invest significantly in product research
and development for the foreseeable future, and research and development
expenses are likely to increase in future periods.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. In addition, such expenses
consist of legal, accounting and other general and administrative professional
services. Our general and administrative expenses were $1.1 million for the
three months ended September 30, 1999, including a $440,000 bad debt charge
related to an old accounts receivable, and $290,000 for the three months ended
September 30, 1998, representing an increase of 295% (143% not including the bad
debt charge). This remaining increase was primarily the result of the hiring of
additional general management, finance and other administrative personnel, and
increased legal, accounting and insurance costs related to being a public
company. General and administrative expenses represented 44% of total revenues
for the three months ended September 30, 1999 and 10% of total revenues for the
three months ended September 30, 1998. We believe that our general and
administrative expenses will continue to increase as a result of the expenses
associated with being a public company, including annual and other public
reporting costs, directors' and officers' liability insurance, investor
relations programs and accounting and legal expenses.
Net Interest Income (Expense). Net interest income was $410,000 for the
three months ended September 30, 1999, and net interest expense was $20,000 for
the three months ended September 30, 1998, representing an change of $430,000.
Net interest income consists primarily of earnings on our cash and cash
equivalent balances funded primarily from our initial public offering proceeds,
whereas net interest expense consisted primarily of interest related to
borrowings.
12
<PAGE> 13
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1997 and 1998 and during the first three
months ended March 31, 1999 have been considered to be compensatory, as the
estimated fair value for accounting purposes was greater than the stock price as
determined by the board of directors on the date of grant or issuance. Total
deferred stock compensation associated with equity transactions as of September
30, 1999 amounted to $2.3 million, net of amortization. Deferred stock
compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense was $195,000 in the three months ended
September 30, 1999 and $107,000 in the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Our revenues were $9.7 million for the nine months ended September 30,
1999 and $6.7 million for the nine months ended September 30, 1998, representing
an increase of 46%. International revenues were $2.1 million for the nine months
ended September 30, 1999 and $1.1 million for the nine months ended September
30, 1998. For the nine months ended September 30, 1999, sales of products and
services to Cisco accounted for 17% of our total revenues, sales of products and
services to Lucent accounted for 10% of our total revenues, and sales of
products and services to our top five customers accounted for 46% of total
revenues. For the nine months ended September 30, 1998, sales of products and
services to Cisco accounted for 27% of our total revenues, sales of products and
services to Unisys accounted for 16% of our total revenues, sales of products
and services to Supervalu accounted for 11% of our total revenues and sales of
products and services to our top five customers accounted for 72% of total
revenues.
License Revenues. License revenues were $7.3 million for the nine months
ended September 30, 1999 and $4.7 million for the nine months ended September
30, 1998, representing an increase of 56%. License revenues represented 75% of
total revenues for the nine months ended September 30, 1999 and 71% of total
revenues for the nine months ended September 30, 1998. The increase in software
license revenues was primarily due to sales of our new PowerTier for EJB
application server and the increased size of our sales team.
Service Revenues. Our service revenues were $2.4 million for the nine
months ended September 30, 1999 and $2.0 million for the nine months ended
September 30, 1998, representing an increase of 23%. The dollar increase in
service revenues was primarily due to an increase in customer support fees
related to increased sales of our PowerTier platform. Service revenues
represented 25% of total revenues for the nine months ended September 30, 1999
and 29% of total revenues for the nine months ended September 30, 1998. This
decrease as a proportion of total revenues was primarily attributed to an
increase in sales of our new PowerTier for EJB platform.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of
packaging, documentation and associated shipping costs. Our cost of license
revenues was $117,000 for the nine months ended September 30, 1999 and $212,000
for the nine months ended September 30, 1998. As a percentage of license
revenues, cost of license revenues were 2% for the nine months ended September
30, 1999 and 5% for the nine months ended September 30, 1998. This decrease was
primarily attributable to lower packaging and document distribution costs as a
result of a change to electronic distribution of these materials.
Cost of Service Revenues. Cost of service revenues consists of personnel
and other costs related to professional services, technical support and
training. Our cost of service revenues was $1.8 million for the nine months
ended September 30, 1999 and $1.0 million for the nine months ended September
30, 1998, representing an increase of 76%. This increase was primarily due to
increased employee staffing in our professional services organization, as well
as outside consultants, to support a greater installed base of customers. As a
percentage of service revenues, cost of service revenues were 73% for the nine
months ended September 30, 1999 and 51% for the nine months ended September 30,
1999. In particular, cost of service revenues as a percentage of service
revenues may vary between periods due to our use of third party professional
services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $9.0 million for the nine months ended September 30, 1999 and $5.0
million for the nine months ended September 30, 1998, representing an increase
of 80%. This increase was primarily due to our investment in our sales and
marketing infrastructure, which included significant personnel-related costs to
recruit and hire sales people and sales engineers, sales commissions, trade show
expenses and
13
<PAGE> 14
advertisements. Sales and marketing expenses represented 93% of total revenues
for the nine months ended September 30, 1999 and 75% of total revenues for the
nine months ended September 30, 1998. We believe that a significant increase in
our sales and marketing efforts is essential for us to maintain our market
position and further increase acceptance of our products. Accordingly, we
anticipate we will continue to invest significantly in sales and marketing for
the foreseeable future, and sales and marketing expenses will increase in future
periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside software developers. Our
research and development expenses were $4.9 million for the nine months ended
September 30, 1999 and $3.1 million for the nine months ended September 30,
1998, representing an increase of 56%. This increase was primarily related to an
increase in employee and consultant software developers and program management
and documentation personnel hired to support product development. We also
recognized a one-time $303,000 compensation charge during the nine months ended
September 30, 1999 associated with the issuance of common stock to an investor
at a price which was less than the deemed fair value for accounting purposes.
Research and development expenses represented 50% of total revenues for the nine
months ended September 30, 1999 and 47% of total revenues for the nine months
ended September 30, 1998. We believe that a significant increase in our research
and development investment is essential for us to maintain our market position,
to continue to expand our product line and to enhance our technology.
Accordingly, we anticipate that we will continue to invest significantly in
product research and development for the foreseeable future, and research and
development expenses are likely to increase in future periods.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $2.1 million for the nine months ended September 30, 1999,
including a $440,000 bad debt charge related to an old accounts receivable, and
$873,000 for the nine months ended September 30, 1998. This represents an
increase of 137% (86% without the bad debt charge). This remaining increase was
primarily the result of the hiring of additional general management, finance and
other administrative personnel, as well as increased legal, accounting and
insurance costs associated with being a public company. General and
administrative expenses represented 21% of total revenues for the nine months
ended September 30, 1999 and 13% of total revenues for the nine months ended
September 30, 1998. We believe that our general and administrative expenses will
continue to increase as a result of the expenses associated with being a public
company, including annual and other public reporting costs, directors' and
officers' liability insurance, investor relations programs and accounting and
legal expenses.
Net Interest Income (Expense). Net interest income was $500,000 for the
nine months ended September 30, 1999, and net interest expense was $36,000 for
the nine months ended September 30, 1998, representing a change of $536,000. Net
interest income consists primarily of earnings on our cash and cash equivalent
balances which includes funding from our initial public offering proceeds,
whereas net interest expense consisted primarily of interest related to
borrowings.
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1997 and 1998 and during the first nine
months ended September 30, 1999 have been considered to be compensatory, as the
estimated fair value for accounting purposes was greater than the stock price as
determined by the board of directors on the date of grant or issuance. Total
deferred stock compensation associated with equity transactions as of September
30, 1999 amounted to $2.3 million, net of amortization. Deferred stock
compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense was $889,000 in the nine months ended September
30, 1999 (including the $303,000 included above in "Research and Development"
and $182,000 in the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our
initial public offering of common stock, which totaled net proceeds of $34.3
million through September 30, 1999, and private sales of convertible preferred
stock, which totaled $19.9 million in aggregate net proceeds through September
30, 1999. We have also financed our business through a loan in the principal
amount of $800,000 and capitalized leases. As of September 30, 1999, we had
$34.6 million of cash, cash equivalents and short-term investments and $33.5
million of working capital.
Net cash used for operating activities was $6.4 million for the nine
months ended September 30, 1999 and $4.1 million for the nine months ended
September 30, 1998. For both nine month periods, cash used for operating
activities was attributable primarily to net losses, reduced by non-cash
expenses related to depreciation and amortization, deferred stock compensation,
and allowances for
14
<PAGE> 15
doubtful accounts; plus increases in accounts receivable; offset primarily by
increases in accounts payable, accrued compensation and benefits, and other
accrued liabilities.
Net cash used for investing activities was $14.9 million for the nine
months ended September 30, 1999 and $319,000 for the nine months ended September
30, 1998. Cash used in investing activities for the nine months ended September
30, 1999 primarily reflected investments in short term investments, purchased
technology, and property and equipment, while cash used in investing activities
for the nine months ended September 30, 1998 primarily reflected investments in
property and equipment.
Net cash provided by financing activities was $32.2 million for the nine
months ended September 30, 1999 and $6.1 million for the nine months ended
September 30, 1998. Net cash provided by financing activities during the nine
months ended September 30, 1999 was primarily attributable to proceeds from the
issuance of common stock in our initial public offering and convertible
preferred stock, and net cash provided by financing activities during the nine
months ended September 30, 1998 was primarily attributable to proceeds from the
issuance convertible preferred stock and borrowings under loan agreements.
In November 1999, the Company renewed its credit facilities with a bank.
Under the renewed facilities, in addition to its outstanding $800,000 equipment
term loan, the Company has available a new $5 million revolving line of credit
facility available through August 15, 2000 and a new $1 million equipment
financing facility under which drawdowns are available through July 15, 2000. As
of September 30, 1999, the Company had no borrowings outstanding under its
predecessor line of credit facility with the bank.
Under the new $5 million revolving line of credit facility, any
outstanding borrowings will bear interest at either the bank's base rate (8.25%
as of September 30, 1999) or LIBOR plus 2.0 basis points for a maximum of two
LIBOR advances in $500,000 minimum increments having 30, 60, or 90 day
maturities.
Under the new $1 million equipment financing facility, any borrowings
either outstanding on July 15, 2000 or reaching an aggregate of $500,000
outstanding or will automatically convert to a 36-month term loan having equal
monthly payments of principal and interest. Borrowings under the equipment
financing facility will bear interest at either the bank's base rate plus 0.50%
or the bank's LIBOR rate plus 2.25 basis points for a maximum of two LIBOR
advances in $500,000 minimum increments having 30, 60, or 90 day maturities.
The bank's credit facilities require the Company, among other things, to
maintain a minimum tangible net worth of $25 million and a minimum quick ratio
(current assets not including inventory less current liabilities) of 2.0 to 1.
Borrowings under the facilities are collateralized by substantially all of the
Company's assets.
As of September 30, 1999, we had outstanding borrowings of $667,000
under our existing equipment term loan with the bank. We are required to make
principal payments of $22,222 per month plus interest of 7.75% per annum on the
unpaid principal balance, payable in 36 monthly installments, which began April
1, 1999.
Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. We also may increase our capital expenditures as we expand into
additional international markets.
We believe that current cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. 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, we may be required to
reduce the scope of our planned product development and marketing efforts, which
could harm our business.
YEAR 2000 COMPLIANCE
15
<PAGE> 16
Many currently installed computer systems are unable to distinguish
between twentieth century dates and twenty-first century dates. These systems
were developed using two digits rather than four to determine the applicable
year. This error could result in software failures or the creation of erroneous
results.
We have conducted the first phases of a year 2000 readiness review for
the current versions of our products. The review includes assessment,
implementation, including remediation, upgrading and replacement of product
versions, validation testing and contingency planning.
We have largely completed all phases of this plan, except for
contingency planning, for the current versions of our products. As a result, we
believe all current versions of our products to be "year 2000 compliant," as
defined below, when configured and used in accordance with the related
documentation, and provided that the underlying operating system of the host
machine and any other software used with or in the host machine or with our
products are also year 2000 compliant. We have not tested our products on all
platforms or all versions of operating systems that we currently support.
We have defined "year 2000 compliant" as the ability to:
- correctly handle date information needed for the December 31,
1999 to January 1, 2000 date change;
- function according to the product documentation provided for
this date change, without changes in operation resulting from
the advent of a new century, assuming correct configuration;
- if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways
that are unambiguous as to century; and
- recognize the year 2000 as a leap year.
We have tested software obtained from third parties, including licensed
software, shareware and freeware, that is incorporated into our products, and we
are seeking assurances from our vendors that licensed software is year 2000
compliant. We plan to continue to test our current and future products by
applying our year 2000 compliance criteria and to include any necessary
modifications the compliance process reveals. Despite testing and assurances,
our products may contain undetected errors or defects associated with year 2000
date functions. Any errors or defects in our products could result in the delay
or loss of revenue, increased service costs and damage to our reputation. We are
aware of lawsuits against software vendors involving year 2000 claims, and,
despite testing our products, we may be sued by a customer on a year 2000 claim.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have reviewed our material internal IT systems, including
both our custom software and third-party software and hardware technology, but
we have not performed an assessment of our non-IT systems. To the extent that we
cannot test the technology provided by third party vendors, we are seeking
assurances from vendors that their systems are year 2000 compliant. We are not
currently aware of any material operational issues or costs associated with
preparing our internal IT and non-IT systems for the year 2000. However, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal IT and non-IT systems.
We do not currently have any information concerning the year 2000
compliance status of our customers. If our current or future customers fail to
achieve year 2000 compliance or if they delay or divert technology expenditures,
especially technology expenditures that were reserved for enterprise software
systems, to address year 2000 compliance problems, our business could suffer.
Through September 30, 1999, we have incurred nominal expenses relating
to our year 2000 compliance activities and estimate that any additional costs
will be nominal. However, we may experience material problems and costs that are
not currently identified in our year 2000 plan.
We have not yet fully developed a contingency plan to address situations
that may result if we cannot achieve year 2000 readiness of our critical
operations. The cost of developing and implementing a contingency plan may
itself be material. We intend to develop a contingency plan by the fourth
quarter of 1999. Finally, we are also subject to external forces that might
generally affect businesses, such as utility or transportation company year 2000
failures.
16
<PAGE> 17
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company had no comprehensive income items, other than net loss, to report
for any of the periods presented. The Company currently operates in one
reportable segment under SFAS No. 131.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on
its financial statements and related disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
year ending December 31, 2001. The Company is currently evaluating the impact of
SFAS No. 133 on its financial statements and related disclosures.
In December 1998, the AICPA issued SOP 98-9,"Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." This
amendment clarified the specification of what was considered vendor specific
objective evidence of fair value for the various elements in a multiple element
arrangement. Our adoption of this new standard has not to date had any material
effect on our revenue recognition. Further implementation guidelines relating to
this standard may result in unanticipated changes in our revenue recognition
practices, and these changes could affect our future revenues and earnings.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the
other sections of this Form 10-Q before purchasing our common stock. The risks
and uncertainties described below are intended to be the ones that are specific
to our company and are not the only ones that we face. Additional risks and
uncertainties that generally apply to businesses in our industry or to companies
that have just gone public may also impair our business.
We Have A Limited Operating History In The Application Server Market.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. You should consider
our prospectus in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in the rapidly changing software industry. These risks include:
- our substantial dependence for revenue from our PowerTier for
C++ product, which was first introduced in 1997 and has achieved
only limited market acceptance;
- our need to successfully sell our PowerTier for EJB product,
which was first introduced in 1998 and has achieved only limited
market acceptance;
- our need to expand our distribution capability through both a
direct sales organization and third party distributors and
systems integrators;
- our unproven ability to anticipate and respond to technological
and competitive developments in the rapidly changing market for
application servers;
- our unproven ability to compete in a highly competitive market;
17
<PAGE> 18
- uncertainty as to the growth rate in the electronic commerce
market and, in particular, the business-to-business electronic
commerce market;
- our dependence on Enterprise JavaBeans, commonly known as EJB,
becoming a widely accepted standard in the transactional
application server market; and
- our dependence upon key personnel.
Because We Have A History Of Losses And Negative Cash Flow, We May Never Become
Or Remain Profitable.
Our revenues may not continue to grow and we may not be able to achieve
or maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $3.3 million in 1996, $4.7
million in 1997, $4.1 million in 1998 and $7.6 million in the nine months ended
September 30, 1999. As of September 30, 1999, we had an accumulated deficit of
approximately $20.4 million. In addition, while we are unable to predict
accurately our future operating expenses, we currently expect these expenses to
increase substantially, as we expand our product development and sales and
marketing efforts and assume the increased administrative duties associated with
our public company status. Thus, we will need to increase our revenues to become
profitable. Because our product market is new and evolving, we cannot accurately
predict either the future growth rate, if any, or the ultimate size of the
market for our products.
We Have Financed Our Business Through The Sale Of Stock And Not Through Cash
Generated By Our Operations.
Since inception, we have generally had negative cash flow from
operations. To date, we have financed our business primarily through private
sales of common stock and convertible preferred stock and not through cash
generated by our operations. We expect to continue to have negative cash flow
from operations for the next several quarters.
We May Need To Raise Additional Capital In The Future.
Although we believe that our current cash, cash equivalents and
short-term investment balances will be sufficient to meet our anticipated
operating cash needs for the next 12 months, we may need to raise additional
funds prior to that time. We face several risks in connection with this possible
need to raise additional capital:
- the issuance of additional securities could result in:
- debt securities with rights senior to the common stock;
- dilution to existing stockholders as a result of issuing
additional equity or convertible debt securities;
- debt securities with restrictive covenants that could restrict
our ability to run our business as desired; or
- securities issued on disadvantageous financial terms.
- the failure to procure needed funding could result in:
- a reduction in scope in our planned product development or
marketing efforts; or
- an inability to respond to competitive pressures or take
advantage of market opportunities, which could adversely affect
our ability to achieve profitability or positive cash flow.
The Unpredictability Of Our Quarterly Results May Adversely Affect The Price Of
Our Common Stock.
Our operating results have fluctuated significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. In particular, the fourth quarter of each year
has in the past tended to account for the greatest percentage of total revenues
for the year, and we have often experienced an absolute decline in revenues from
the fourth
18
<PAGE> 19
quarter to the first quarter of the next year. If our future quarterly operating
results are below the expectations of securities analysts or investors, the
price of our common stock would likely decline. The factors that may cause
fluctuations of our operating results include the following:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier for C++ and
PowerTier for EJB products;
- the possible loss of sales people;
- introduction of new products or services by us or our
competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application
server market;
- our lengthy sales cycle;
- our success in expanding our direct sales force and indirect
distribution channels;
- the mix of direct sales versus indirect distribution channel
sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general
economic conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. 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.
Our Sales Cycle Is Long, Unpredictable And Subject To Seasonal Fluctuations, So
It Is Difficult To Forecast Our Revenues.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential 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 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. Due to the relative importance of many of our
product sales, a lost or delayed sale could adversely affect our quarterly
operating results. Our sales cycle is affected by seasonal fluctuations as a
result of our customers' fiscal year budgeting cycles and slow summer purchasing
patterns in Europe.
19
<PAGE> 20
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. For the nine months ended
September 30, 1999, sales of products and services to Cisco accounted for 17% of
our total revenues, sales of products and services to Lucent accounted for 10%
of our total revenues, and sales of products and services to our top five
customers accounted for 46% of total revenues. In 1998, sales of products and
services to Cisco accounted for 14% of our total revenues, sales of products and
services to Instinet accounted for 17% of our total revenues, and sales of
products and services to our top five customers accounted for 55% of total
revenues. In 1997, sales of products and services to Lucent accounted for 11% of
our total revenues, and sales of products and services to our top five customers
accounted for 15% of our total revenues. In addition, the identity of our top
five customers has changed from year to year. If we lose a significant customer,
or fail to increase product sales to an existing customer as planned, we may not
be able to replace the lost revenues with sales to other customers. In addition,
because our marketing strategy is to concentrate on selling products to industry
leaders, any loss of a customer could harm our reputation within the industry
and make it harder for us to sell our products to other companies in that
industry. The loss of, or a reduction in sales to, one or more significant
customers would likely result in a decrease in our revenues.
We Depend On The Java Programming Language, The Enterprise Javabeans Standard
And The Emerging Market For Distributed Object Computing, And If These
Technologies Fail To Gain Acceptance, Our Business Could Suffer.
We are focusing significant marketing efforts on our PowerTier for EJB
application server, which is based on three relatively new technologies, none of
which have been widely adopted by companies. These three technologies are a
distributed object computing architecture, Sun Microsystems' Java programming
language and Enterprise JavaBeans, or EJB. Distributed object computing combines
the use of software modules, or objects, communicating across a computer network
to software applications, such as our PowerTier application server. EJB is the
Java programming standard for use in an application server. In 1998, we launched
our PowerTier for EJB product, which is a transactional application server that
uses Java and conforms to the EJB standard. Sun Microsystems released the EJB
standard in 1998, and thus far EJB has had limited market acceptance. Since our
PowerTier for EJB product depends upon the specialized EJB standard, we face a
limited market compared to competitors who may offer application servers based
on more widely accepted standards, including the Java programming language. We
expect a substantial portion of our future revenues will come from sales of
products based on the EJB standard. Thus, our success depends significantly upon
broad market acceptance of distributed object computing in general, and Java
application servers in particular. If EJB does not become a widespread
programming standard for application servers, our revenues and business could
suffer.
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 need to increase our research and
development investment 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 EJB specifications, we will need to introduce
new versions of PowerTier for EJB designed to support these new specifications
to remain competitive. 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.
Because Our Direct Sales Team Is Currently Our Most Critical Sales Channel, Any
Failure To Build And Train This Team May Result In Lower Revenues.
We must expand our direct sales team to generate increased revenue. In
1998, we hired several new salespeople, replacing most of our preexisting sales
force. In 1999, we have continued to hire new salespeople. In order to meet our
future sales goals, we will need to hire many more salespeople within the next
two years for both our domestic and international sales efforts. In the past,
newly hired employees have required training and approximately six to nine
months experience to achieve full productivity. Because our entire
20
<PAGE> 21
sales team is relatively new, we cannot be certain that they will meet our sales
goals. In addition, our recently hired employees may not become productive, and
we may not be able to hire enough qualified individuals in the future.
Because Our Future Revenue Goals Are Based On Our Development Of A Strong Sales
Channel Through Systems Integrators And Other Third Parties, Any Failure To
Develop This Channel May Result In Lower Revenues.
To date, we have sold our products primarily through our direct sales
force, but our ability to achieve significant revenue growth in the future will
depend in large part on our success in establishing and leveraging relationships
with systems integrators and other third parties. It may be difficult for us to
establish these relationships, and, even if we establish these relationships, we
will then depend on the systems integrators' and other third parties' sales
efforts. In addition, because these relationships are nonexclusive, systems
integrators may choose to use application servers or other alternative solutions
offered by our competitors, and not our products. If we fail to successfully
build our third-party distribution channels or if our systems integrator and
other third party partners do not perform as expected, our business could be
harmed.
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
enormous 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, year 2000 problems or other
customer-specific delays, problems with other system components or delays caused
by the systems integrators 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 a systems integrator fails to complete a
project utilizing our product for a customer in a timely manner, our revenues or
business reputation could suffer.
Because We Compete With Sun Microsystems, Who Controls The EJB Application
Server Standard, We Face The Risk That They May Develop This Standard To Favor
Their Own Products.
Our success depends on achieving widespread market acceptance of our
PowerTier for EJB application server. Because Sun Microsystems controls the EJB
standard, we need to maintain a good working relationship with Sun Microsystems
to develop future versions of PowerTier for EJB, as well as additional products
using EJB, 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 EJB standard, it could develop the EJB standard in a
more proprietary way to favor a product offered by one of its subsidiaries,
NetDynamics or KIVA Software, or a third party, which could make it much harder
for us to compete in the EJB application server market.
Microsoft Has Established A Competing Application Server Standard, Which Could
Diminish The Market Potential For Our Products If It Gains Widespread
Acceptance.
Microsoft has established a competing standard for distributed
computing, COM, which includes an application server product. If this standard
gains widespread market acceptance over the EJB or CORBA standards, on which our
products are based, our business would suffer. Because of Microsoft's resources
and commanding position with respect to other markets and technologies,
Microsoft's entry into the application server market may cause our potential
customers to delay purchasing decisions. We expect that Microsoft's presence in
the application server market will increase competitive pressure in this market.
We Face Significant Competition From Companies With Greater Resources Than We
Have And May Face Additional Competition In The Future.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
21
<PAGE> 22
- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- quality of support and service;
- security;
- company reputation; and
- price.
Our competitors include both publicly and privately-held enterprises,
including BEA Systems (WebLogic), Gemstone Systems, IBM (WebSphere), Inprise,
Iona Technologies, Oracle (OAS) and i-Planet (Sun Microsystems). Many customers
may not be willing to purchase our PowerTier platform because they have already
invested heavily in databases and other enterprise software components offered
by these competing companies. Many of these competitors have preexisting
customer relationships, longer operating histories, greater financial,
technical, marketing and other resources, greater name recognition and larger
installed bases of customers than we do. Moreover, there are other very large
and established companies, including Microsoft and Netscape, who offer
alternative solutions and are thus indirect competitors. Further, dozens of
companies have announced their intention to support EJB and may compete against
us in the future. These competitors and potential competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. In addition, in the PowerTier for C++
market, many potential customers build their own custom application servers, so
we effectively compete against our potential customers' internal information
technology departments.
If The Market For Business-To-Business Electronic Commerce Over The Internet
Does Not Develop As We Currently Envision, Our Business Model Could Fail And Our
Revenues Could Decline.
Our performance and future success will depend on the growth and
widespread adoption of the market for business-to-business electronic commerce
over the Internet. If business-to-business electronic commerce does not develop
in the manner currently envisioned, our business could be materially and
adversely affected. 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 business-to-business 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 and taxation of Internet commerce.
Our Failure To Manage Growth Could Impair Our Business.
Achieving our planned revenue growth and other financial objectives will
place significant demands on our management and other resources. We anticipate
increasing our headcount significantly over the next two years. Our ability to
manage this growth effectively will require us to continue to develop and
improve our operational, financial and other internal systems and controls, as
well as our business development capabilities, and to train, motivate and manage
our employees. If we are unable to manage our growth effectively, we may not be
able to retain key personnel and the quality of our services and products may
suffer.
Our Business 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 and Chairman of the Board. We
do not have a key person life insurance policy covering Mr. Keene or any other
22
<PAGE> 23
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. There is significant competition for skilled employees,
especially for people who have experience in both the software and Internet
industries. 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.
A 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 19% of our revenues
came from sales of products and services outside the United States during the
nine months ended September 30, 1999. Approximately 29% of our revenues came
from sales of products and services outside the United States in the year ended
December 31, 1998. 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:
- difficulties of staffing and managing foreign operations;
- our dependence on the sales efforts of our third party
distributors;
- longer payment cycles typically associated with international
sales;
- tariffs and other trade barriers;
- failure to comply with a wide variety of complex foreign laws
and changing regulations;
- exposure to political instability and economic downturns;
- failure to localize our products for foreign markets;
- restrictions on the export of technologies;
- potentially adverse tax consequences;
23
<PAGE> 24
- reduced protection of intellectual property rights in some
countries; and
- currency fluctuations.
We sell products outside the United States 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 may depend 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, which could harm our business. We rely on patent
protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual restrictions 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. Further, litigation may be necessary
to enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
We May Be Sued For Violating The Intellectual Property Rights Of Others.
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 competitors in the application server market grows and the
functionality of products in different market segments overlaps, the possibility
of an intellectual property claim against us increases. For example, we may
inadvertently infringe 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 is issued in the future. To address these patent infringement
or other intellectual property 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 against us, and our
failure to license the infringed or similar technology, would harm our business.
In addition, any infringement or other intellectual property claims, with or
without merit, which are brought against us could be time consuming and
expensive to litigate or settle and could divert management attention from
administering our core business.
We Face Risks Associated With The Year 2000 Issue, Including The Risk That Our
Products Or Internal Systems May Not Be Year 2000 Compliant And The Risk That
Our Customers May Delay The Purchase Of Our Powertier Platform As A Result Of
Their Own Year 2000 Concerns.
We have designed and tested the most current versions of our products to
be year 2000 compliant. However, we have not tested our products on all
platforms or all versions of operating systems that we currently support.
Despite this testing, our products may contain undetected errors or defects
associated with year 2000 date functions that may be expensive for us to remedy.
Because our products are generally incorporated into a large enterprise-wide
system enhancement, we may face claims based on year 2000 issues arising from
the integration of multiple products, including ours, within an overall system.
Some commentators have stated that a significant amount of litigation will arise
out of year 2000 issues, and we are aware of a growing number of lawsuits
against other software vendors. We may experience serious unanticipated problems
and material costs caused by undetected errors or defects in the technology used
in our internal systems relating to the year 2000 transition. These systems
include the hardware and third-party software products that our research and
development staff use in their daily activities, as well as our management
information systems. The most likely worst case scenarios include:
- hardware or software failures that would prevent our research
and development staff from effectively performing their duties;
- corruption of data contained in our internal information
systems; and
24
<PAGE> 25
- the failure of infrastructure services provided by government
agencies and other third parties, including public utilities and
Internet service providers.
Finally, our potential customers may cease or delay the purchase and
installation of new complex systems, such as systems incorporating our PowerTier
application server, or may defer an enterprise-wide deployment of our PowerTier
platform, as a result of, and during, their own internal year 2000 testing. Any
resulting delay or decrease in orders for our products could cause our revenues
to decline, either on a quarterly or absolute basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
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,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock could impede our ability to raise funds at
an advantageous price through the sale of securities. After the our initial
public offering of common stock, including shares issued pursuant to the related
exercise of the underwriters' overallotment option, we had outstanding 19.0
million shares of common stock. Beginning 90 days after the June 24, 1999
effective date of our initial public offering prospectus, approximately 150,000
shares will be eligible for sale. Beginning 180 days after the June 24, 1999
effective date of our initial public offering prospectus, approximately 14.4
million shares will be eligible for sale, approximately 7.0 million of which
will be subject to volume and other restrictions under Rule 144. In addition,
approximately 900,000 shares will be eligible for sale upon the expiration of
various one-year holding periods during the six months following 180 days after
the June 24, 1999 effective date of our initial public offering prospectus,
subject to volume and other restrictions under Rule 144.
Our Stock Price May Be Volatile.
The Company's common stock has only been available in the public market
since June 25, 1999. An active public market for our common stock may not
completely develop or be sustained in the future. To date, the market price of
our common stock has been highly volatile and may rise or fall in the future as
a result of many factors, such as:
- variations in our quarterly results;
- announcements of technological innovations by us or our
competitors;
- introductions of new products by us or our competitors;
- acquisitions or strategic alliances by us or our competitors;
- hiring or departure of key personnel;
- the gain or loss of a significant customer or order;
- changes in estimates of our financial performance or changes in
recommendations by securities analysts;
- market conditions in the software industry and in our customers'
industries; and
- adoption of new accounting standards affecting the software
industry.
The stock market in general has experienced extreme price and volume
fluctuations, which could adversely affect the market price of our stock. In
particular, the market prices of the common stock of many companies in the
software and Internet industries have experienced this volatility, which has
often been unrelated to these companies' operating performance. In the past,
securities class action litigation has often been brought against a company
after a period of volatility in the market price of its stock. We may in the
future be a target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
harm our business.
25
<PAGE> 26
Our Executive Officers And Directors Own A Large Percentage Of Our Voting Stock
And Could Exert Significant Influence Over Matters Requiring Stockholder
Approval After This Offering.
Our executive officers and directors, and entities affiliated with them,
own a majority of our outstanding common stock. Accordingly, these stockholders
may, as a practical matter, continue to control the election of a majority of
the directors and the determination of all corporate actions after this
offering. This concentration of voting control could have the effect of delaying
or preventing a merger or other change in control, even if it would benefit our
other stockholders.
26
<PAGE> 27
The Antitakeover Provisions In Our Charter Documents And Under Delaware Law
Could Discourage A Takeover.
Provisions in our certificate of incorporation, bylaws and Delaware law
may discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
- establishing a classified board in which only a portion of the
total board members will be elected at each annual meeting;
- authorizing the board to issue preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of
stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for
election of the board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings.
We May Engage In Future Acquisitions That Could Disrupt Our Business And Dilute
Our Stockholders.
As part of our business strategy, we expect to review acquisition
prospects that we believe would be advantageous to the development of our
business. For example, we have recently acquired object request broker
technology, which provides the communications between the transactional
application server and the client. While we have no current agreements or
negotiations underway with respect to any major acquisitions, we may make
acquisitions of businesses, products or technologies in the future. If we make
any acquisitions, we could take any or all of the following actions, any of
which could materially and adversely affect our financial results and the price
of our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- incur substantial debt;
- assume contingent liabilities; or
- take substantial charges in connection with the amortization of
goodwill and other intangible assets.
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations, products and
personnel with our pre-existing business;
- unanticipated costs;
- diversion of management's attention from other business
concerns;
- adverse effects on existing business relationships with
suppliers and customers;
- risks of entering markets in which we have limited or no prior
experience; and
- potential loss of key employees from either our preexisting
business or the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
27
<PAGE> 28
We Have Not Designated Any Specific Use For The Net Proceeds Of The Company's
Initial Public Offering Of Common Stock, And Thus May Use The Proceeds To Fund
Operating Losses, For Acquisitions Or For Other Corporate Purposes.
We have not designated any specific use for the net proceeds of the
Company's initial public offering of common stock. As a result, our management
and board of directors will have broad discretion in spending the proceeds of
this offering. We currently expect to use the net proceeds primarily for working
capital and general corporate purposes, funding product development and
expanding our sales and marketing organization. In addition, we may use a
portion of the net proceeds for further development of our product lines through
acquisitions of products, technologies and businesses.
28
<PAGE> 29
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Our operating results are sensitive to
changes in the general level of U.S. interest rates, particularly because most
of our cash equivalents and short-term investments are invested in short-term
debt instruments. If market interest rates were to change immediately and
uniformly by ten percent from levels at September 30, 1999, the fair value of
our cash equivalents and short-term investments would change by approximately
$200,000.
Foreign Currency Fluctuations. We have not had any significant
transactions in foreign currencies, nor do we have any significant balances that
are due or payable in foreign currencies at September 30, 1999. Therefore, a
hypothetical ten percent change in foreign currency rates would have an
insignificant impact on our financial position or results of operations. We do
not hedge any of our foreign currency exposure.
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Sales of Unregistered Securities
The Company made the following unregistered sales of Common Stock in the
quarter ended September 30, 1999:
<TABLE>
<CAPTION>
Persons or Class
of Persons to
Name of Whom the
Amount of Underwriter or Consideration Securities Were
Transaction Date Securities Sold Placement Agent Received Sold
- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
9/22/99 19,452 Shares None (1) Orbisys, Inc.
</TABLE>
(1) On September 22, 1999, the Company issued 19,4528 shares of Common Stock
to Orbisys, Inc. in exchange for substantially all of the assets of
Orbisys, Inc. This issuance was deemed to be exempt from the
registration requirements the Securities Act of 1933, as amended, in
reliance on Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering. These securities have not been
registered for resale.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
None.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTINE RUSSELL
-------------------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: November 15, 1999
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS INCLUDED IN THE COMPANY'S FORM 10-Q AS OF AND FOR THE THREE PERIOD
ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,899
<SECURITIES> 12,661
<RECEIVABLES> 4,320
<ALLOWANCES> 501
<INVENTORY> 0
<CURRENT-ASSETS> 38,840
<PP&E> 3,045
<DEPRECIATION> 2,018
<TOTAL-ASSETS> 41,527
<CURRENT-LIABILITIES> 5,373
<BONDS> 628
0
0
<COMMON> 58,409
<OTHER-SE> (2,481)
<TOTAL-LIABILITY-AND-EQUITY> 41,527
<SALES> 1,747
<TOTAL-REVENUES> 2,625
<CGS> 19
<TOTAL-COSTS> 509
<OTHER-EXPENSES> 6,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 410
<INCOME-PRETAX> (4,398)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,398)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
