<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, 2000
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)
<TABLE>
<S> <C>
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
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 October 31, 2000, there were 19,872,874 shares of the registrant's
Common Stock outstanding.
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INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000
AND DECEMBER 31, 1999.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
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
</TABLE>
2
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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,
2000 1999
------------- ------------
(UNAUDITED) (1)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents ........................... $ 18,810 $ 22,300
Short-term investments .............................. 2,316 7,352
Accounts receivable, net ............................ 7,036 5,685
Prepaids and other current assets ................... 795 965
-------- --------
Total current assets ........................... 28,957 36,302
Property and equipment, net ......................... 1,603 1,051
Purchased intangibles, net .......................... 4,546 1,669
Deposits ............................................ 134 70
-------- --------
Total assets ................................... $ 35,240 $ 39,092
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable .................................... $ 978 $ 1,370
Accrued compensation and related benefits ........... 3,924 1,804
Other accrued liabilities ........................... 1,961 1,194
Deferred revenues ................................... 2,454 2,015
Current portion of long-term obligations ............ 718 337
-------- --------
Total current liabilities ...................... 10,035 6,720
Long-term obligations, net of current portion ............ 590 354
-------- --------
Total liabilities .............................. 10,625 7,074
-------- --------
Stockholders' equity:
Common stock ........................................ 62,953 57,467
Unamortized deferred stock compensation ............. (763) (1,206)
Notes receivable from stockholders .................. (135) (161)
Accumulated deficit ................................. (37,440) (24,072)
Accumulated other comprehensive loss ................ -- (10)
-------- --------
Total stockholders' equity ..................... 24,615 32,018
-------- --------
Total liabilities and stockholders' equity ..... $ 35,240 $ 39,092
======== ========
</TABLE>
(1) The condensed consolidated balance sheet as of December 31, 1999 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
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PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Licenses ................................. $ 5,356 $ 1,747 $ 12,639 $ 7,326
Service .................................. 1,728 878 4,613 2,409
-------- -------- -------- --------
Total revenues ......................... 7,084 2,625 17,252 9,735
-------- -------- -------- --------
Cost of revenues:
Licenses ................................. 207 19 273 117
Service .................................. 857 490 2,474 1,765
-------- -------- -------- --------
Total cost of revenues ................. 1,064 509 2,747 1,882
-------- -------- -------- --------
Gross profit ............................... 6,020 2,116 14,505 7,833
-------- -------- -------- --------
Operating expenses:
Sales and marketing ...................... 5,234 4,057 16,487 9,028
Research and development, excluding
amortization of purchased intangibles 2,042 1,533 6,268 4,644
General and administrative ............... 1,649 1,146 4,008 2,067
Amortization of purchased intangibles .... 799 188 2,066 251
-------- -------- -------- --------
Total operating expenses ............... 9,724 6,924 28,829 15,990
-------- -------- -------- --------
Loss from operations ....................... (3,704) (4,808) (14,324) (8,137)
Interest income .......................... 393 455 1,091 587
Interest and other expense ............... (94) (45) (135) (87)
-------- -------- -------- --------
Net loss ................................... $ (3,405) $ (4,398) $(13,368) $ (7,637)
======== ======== ======== ========
Basic and diluted net loss per share ....... $ (0.18) $ (0.24) $ (0.70) $ (0.68)
======== ======== ======== ========
Shares used in calculating basic
and diluted net loss per share ........... 19,418 18,449 19,175 11,171
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
SEP. 30, SEP. 30,
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $(13,368) $ (7,637)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 2,567 638
Amortization of deferred stock compensation ............. 294 890
Change in allowance for doubtful accounts ............... 694 483
Changes in operating assets and liabilities:
Accounts receivable ................................... (2,045) (2,543)
Prepaids and other currents ........................... (157) (307)
Accounts payable ...................................... (392) 1,856
Accrued compensation and benefits ..................... 2,120 343
Other accrued liabilities ............................. 767 355
Deferred revenues ..................................... 439 (482)
-------- --------
Net cash used in operating activities ............... (9,081) (6,404)
-------- --------
Cash flows from investing activities:
Change in short-term investments ............................ 5,036 (12,660)
Property and equipment additions ............................ (1,102) (692)
Purchased intangibles additions ............................. (345) (1,500)
Deposits and other .......................................... (54) (21)
-------- --------
Net cash provided by (used in) investing activities ... 3,535 (14,873)
-------- --------
Cash flows from financing activities:
Sale of convertible preferred stock, net ................. -- 4,142
Sale of common stock, net of repurchases ................. 2,324 34,349
Repayment of capital lease obligations ................... (268) (253)
-------- --------
Net cash provided by financing activities .......... 2,056 32,238
-------- --------
Net increase (decrease) in cash and cash equivalents ....... (3,490) 16,961
Cash and cash equivalents - beginning of period ............ 22,300 4,938
-------- --------
Cash and cash equivalents - end of period .................. $ 18,810 $ 21,899
======== ========
Noncash investing and financing activities:
Purchased intangibles acquired under long-term obligations $ 885 $ --
======== ========
Conversion of preferred stock into common stock .......... $ -- $ 19,859
======== ========
Common stock issued for purchased intangibles ............ $ 3,337 $ 360
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence Software, Inc. and subsidiary (Persistence(R) or the Company)
develops and markets dynamic caching software to speed business and Internet
transactions. Persistence's PowerTier(R) application server software caches
corporate application data to speed business transactions, while the Company's
Dynamai(TM) application-aware software caches dynamic Web content to speed
Internet transactions.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of September 30, 2000 and for the three and nine month periods
ended September 30, 2000 and 1999 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, 1999 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 Annual Report on Form 10-K as of and for year
ended December 31, 1999 filed with 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, 2000, its condensed
consolidated results of operations for the three and nine month periods ended
September 30, 2000 and 1999, and its cash flows for the nine month periods ended
September 30, 2000 and 1999, 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.
Certain reclassifications have been made to the 1999 financial statement
presentations to conform them to the current year periods' presentations.
3. 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.
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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):
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss (numerator), basic and
diluted ......................... $ (3,405) $ (4,398) $(13,368) $ (7,637)
======== ======== ======== ========
Shares (denominator):
Weighted average common shares
outstanding .................. 19,680 18,984 19,492 11,730
Weighted average common shares
outstanding subject to
repurchase ................... (262) (535) (317) (559)
-------- -------- -------- --------
Shares used in computation,
basic and diluted ............ 19,418 18,449 19,175 11,171
======== ======== ======== ========
Net loss per share, basic and
diluted ......................... $ (0.18) $ (0.24) $ (0.70) $ (0.68)
======== ======== ======== ========
</TABLE>
As of September 30, 2000 and 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, SEPTEMBER 30,
2000 1999
----- -----
<S> <C> <C>
Shares of common stock subject to repurchase 235 462
Outstanding options ........................... 3,975 3,428
----- -----
Total .................................... 4,210 3,890
===== =====
</TABLE>
4. COMPREHENSIVE INCOME
For all periods presented, the Company had no comprehensive income items
other than net loss.
5. ACQUISITION
In March 2000, the Company acquired substantially all of the assets of
10BaseJ, Inc. for 140,000 shares of common stock valued at the stock's fair
market value on the acquisition date of $3.1 million. The acquisition cost is
included in purchased intangibles and is being amortized over the estimated
useful life of three years.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
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.
7. SUBSEQUENT EVENTS
In November 2000, 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 continues to have available a $5 million revolving line
of credit facility available through October 31, 2001 and a $1 million equipment
financing facility under which drawdowns are available through April 31, 2001.
As of September 30, 2000, the Company had no borrowings outstanding under either
its $5 million line of credit facility or its $1 million equipment financing
facility with the bank.
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Under the renewed $5 million revolving line of credit facility, any
outstanding borrowings will bear interest at either the bank's base rate (9.5%
as of September 30, 2000) or LIBOR plus 2.0 basis points for a maximum of two
LIBOR advances in $1 million minimum increments having 30, 60, or 90 day
maturities.
Under the new $1 million equipment financing facility, any borrowings
outstanding on May 1, 2001 will automatically convert to a 30-month term loan
having equal monthly payments of principal and interest. Borrowings under the
equipment financing facility will bear interest at the bank's base rate plus
0.50%.
The bank's renewed credit facilities require the Company, among other
things, to maintain a minimum tangible net worth of $10 million and a minimum
quick ratio (current assets not including inventory less current liabilities) of
2 to 1. As of both June 30, 2000 and September 30, 2000, the Company's tangible
net worth fell below the minimum tangible net worth ratio then in effect, and
the bank waived both of those previous events. Borrowings under the facilities
are collateralized by substantially all of the Company's assets.
8
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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, 1999 and 1998 and for each of the years
ended December 31, 1999, 1998, and 1997, included in our Annual Report on Form
10-K as of and for the year ended December 31, 1999 filed with the Securities
and Exchange Commission. 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 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
and our Annual Report on Form 10-K as of and for the year ended December 31,
1999 filed with the Securities and Exchange Commission. 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 the previously released Persistence products with new shared
transactional caching technologies, which enable 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, 1998, and 1999, 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
most recent version of PowerTier for EJB is currently in use by several major
customers and was commercially released in March 2000. 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, which consist of software license revenues and service
revenues, totaled $17.3 million in the nine months ended September 30, 2000 and
$9.7 million in the nine months ended September 30, 1999. 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, as a percentage of total revenues,
sales of PowerTier for EJB transaction servers will increase and sales of
PowerTier for C++ will decrease in the future.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, France, Germany, Hong
Kong and Shanghai. Revenues from PowerTier licenses and services to customers
outside the United States represented $6.2 million, or 36% of total revenues, in
the nine months ended September 30, 2000, $4.1 million, or 28% of total
revenues, in 1999 and $2.9 million, or 29% of total revenues, in 1998. 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 41% of total revenues in the nine months ended
September 30, 2000, 35% of total revenues in 1999, and 55% of total revenues in
1998. In addition, the identity of our top five customers has changed from year
to year. In the future, it is possible that a relatively few large customers
could 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 continue to hire sales people 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.
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We recognize revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statements of Position 98-4 and 98-9. Future
implementation guidance relating to these standards 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 to
make such decision. Arrangements that 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. The number of our employees increased from 113 as of
September 30, 1999 to 144 as of September 30, 2000, representing an increase of
27%. As a result of investments in our infrastructure, we have incurred net
losses in each fiscal quarter since 1996 and, as of September 30, 2000, had an
accumulated deficit of $37.4 million. We anticipate that our operating expenses
will continue to increase, possibly 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. 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:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our PowerTier products and other
products we introduce, including Dynamai;
o the possible loss of sales people;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers;
o the level of product and price competition in the application server
market;
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o our lengthy sales cycle;
o our success in expanding our direct sales force and indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
Our license revenues in the first quarter of 2000 were lower than those in
the fourth quarter of 1999 and our license revenues in the first quarter of 1999
were lower than those in the fourth quarter of 1998. In the future, this trend
may continue, with the fourth quarter of each year accounting for the greatest
percentage of total revenues for the year and a possible 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, 2000 AND 1999
Revenues
Our revenues were $7.1 million for the three months ended September 30,
2000 and $2.6 million for the three months ended September 30, 1999 representing
an increase of 170%. International revenues were $6.2 million for the three
months ended September 30, 2000 and $712,000 for the three months ended
September 30, 1999. In the three months ended September 30, 2000, sales to
Salomon Smith Barney accounted for 33% of total revenues and sales to our top
five customers accounted for 60% of total revenues. 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
License Revenues. License revenues were $5.4 million for the three months
ended September 30, 2000 and $1.7 million for the three months ended September
30, 1999, representing an increase of 207%. License revenues represented 76% of
total revenues for the three months ended September 30, 2000 and 67% of total
revenues for the three months ended September 30, 1999. The increase in software
license revenues was primarily due to sales of our new PowerTier for EJB
application server and the increased size and productivity of our sales team.
Service Revenues. Our service revenues were $1.7 million for the three
months ended September 30, 2000 and $878,000 for the three months ended
September 30, 1999, representing an increase of 97%. The 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 24% of
total revenues for the three months ended September 30, 2000 and 33% of total
revenues for the three months ended September 30, 1999.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of third-party
software packaged with our software, packaging, documentation and associated
shipping costs. Our cost of license revenues was $207,000 for the three months
ended September 30, 2000 and $19,000 for the three months ended September 30,
1999. As a percentage of license revenues, cost of license revenues were 4% for
the three months ended September 30, 2000 and 1% for the three months ended
September 30, 1999.
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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 $857,000 for the three months ended
September 30, 2000 and $490,000 for the three months ended September 30, 1999,
representing an increase of 75%. This increase was primarily due to increased
staffing in our support organization to support a greater installed base of
customers. As a percentage of service revenues, cost of service revenues were
50% for the three months ended September 30, 2000 and 56% 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 $5.2 million for the three months ended September 30, 2000 and
$4.1 million for the three months ended September 30, 1999, representing an
increase of 29%. 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, their compensation,
including sales commissions, travel expenses, additional sales office costs,
professional services and trade show expenses. Sales and marketing expenses
represented 74% of total revenues for the three months ended September 30, 2000
and 155% of total revenues for the three months ended September 30, 1999. We
believe that a continued 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 in sales
and marketing for the foreseeable future, and sales and marketing expenses are
likely to 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 $2.0 million for the three months ended
September 30, 2000 and $1.5 million for the three months ended September 30,
1999, representing an increase of 33%. 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 29% of total revenues for the three months
ended September 30, 2000 and 58% of total revenues for the three months ended
September 30, 1999. We believe that a continued 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 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 $1.6 million for the three months ended September 30, 2000 and
$1.1 million for the three months ended September 30, 1999, representing an
increase of 44%. This increase was primarily the result of the hiring of
additional finance and administrative personnel and consultants, additional
professional services, including general corporate and patent prosecution legal
costs, depreciation, and insurance and other costs associated with being a
public company. General and administrative expenses represented 23% of total
revenues for the three months ended September 30, 2000 and 44% of total revenues
for the three months ended September 30, 1999. We believe that our general and
administrative expenses will continue to increase as a result of the expenses
associated with our growth and public company status, including annual and other
public reporting costs, directors' and officers' liability insurance, investor
relations programs and accounting and legal expenses.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles was $799,000 for the three months ended September 30, 2000 and
$188,000 for the three months ended September 30, 1999. The increase in
amortization was due to the increased level of purchased intangibles.
Net Interest Income. Net interest income consists primarily of earnings on
our cash, cash equivalent and short-term investment balances, offset by interest
expense related to obligations under capital leases and other borrowings. Net
interest income was $299,000 for the three months ended September 30, 2000 and
$410,000 for the three months ended September 30, 1999, representing a decrease
of $111,000. This decrease was a result of a decrease in interest earning funds.
We expect that net interest income will decrease as we continue to use our net
proceeds from our initial public offering.
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1999, 1998 and 1997 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
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transactions as of September 30, 2000 was $763,000, net of amortization.
Deferred stock compensation is being amortized ratably over the vesting periods
of these securities. Amortization expense was $103,000 in the three months ended
September 30, 2000 and $195,000 in the three months ended September 30. 1999.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues
Our revenues were $17.3 million for the nine months ended September 30,
2000 and $9.7 million for the nine months ended September 30, 1999 representing
an increase of 77%. International revenues were $6.2 million for the nine months
ended September 30, 2000 and $2.1 million for the nine months ended September
30, 1999. In the nine months ended September 30, 2000, sales to Salomon Smith
Barney accounted for 14% of total revenues and sales to our top five customers
accounted for 41% of total revenues. 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.
License Revenues. License revenues were $12.6 million for the nine months
ended September 30, 2000 and $7.3 million for the nine months ended September
30, 1999, representing an increase of 73%. License revenues represented 73% of
total revenues for the nine months ended September 30, 2000 and 75% of total
revenues for the nine months ended September 30, 1999. The increase in software
license revenues was primarily due to sales of our new PowerTier for EJB
application server and the increased size and productivity of our sales team.
Service Revenues. Our service revenues were $4.6 million for the nine
months ended September 30, 2000 and $2.4 million for the nine months ended
September 30, 1999, representing an increase of 91%. The 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 27% of
total revenues for the nine months ended September 30, 2000 and 25% of total
revenues for the nine months ended September 30, 1999.
Cost of Revenues
Cost of License Revenues. Our cost of license revenues was $273,000 for the
nine months ended September 30, 2000 and $117,000 for the nine months ended
September 30, 1999. As a percentage of license revenues, cost of license
revenues were 2% for the nine months ended September 30, 2000 and 2% for the
nine months ended September 30, 1999.
Cost of Service Revenues. Our cost of service revenues was $2.5 million for
the nine months ended September 30, 2000 and $1.8 million for the nine months
ended September 30, 1999, representing an increase of 40%. This increase was
primarily due to increased staffing in our support organization to support a
greater installed base of customers. As a percentage of service revenues, cost
of service revenues were 54% for the nine months ended September 30, 2000 and
73% 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. Our sales and marketing expenses were $16.5 million
for the nine months ended September 30, 2000 and $9.0 million for the nine
months ended September 30, 1999, representing an increase of 83%. 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, their compensation, including sales commissions,
advertising and travel expenses, additional sales office costs, professional
services and trade show expenses. Sales and marketing expenses represented 96%
of total revenues for the nine months ended September 30, 2000 and 93% of total
revenues for the nine months ended September 30, 1999.
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Research and Development. Our research and development expenses were $6.3
million for the nine months ended September 30, 2000 and $4.6 million for the
nine months ended September 30, 1999, representing an increase of 35%. 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 for the nine
months ended September 30, 1999 also include a one-time $303,000 compensation
charge associated with the issuance of common stock to an investor at a price
that was less than the deemed fair value for accounting purposes. Research and
development expenses represented 36% of total revenues for the nine months ended
September 30, 2000 and 48% of total revenues for the nine months ended September
30, 1999.
General and Administrative. Our general and administrative expenses were
$4.0 million for the nine months ended September 30, 2000 and $2.1 million for
the nine months ended September 30, 1999, representing an increase of 94%. This
increase was primarily the result of the hiring of additional finance and
administrative personnel, additional professional services, including corporate
and patent prosecution legal costs, depreciation, and insurance and other costs
associated with being a public company. General and administrative expenses
represented 23% of total revenues for the nine months ended September 30, 2000
and 21% of total revenues for the nine months ended September 30, 1999.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles was $2.1 million for the nine months ended September 30, 2000 and
$251,000 for the nine months ended September 30, 1999. The increase in
amortization was due to the increased level of purchased intangibles.
Net Interest Income. Net interest income consists primarily of earnings on
our cash, cash equivalents and short-term investment balances, offset by
interest expense related to obligations under capital leases and other
borrowings. Net interest income was $956,000 for the nine months ended September
30, 2000 and $500,000 for the nine months ended September 30, 1999, representing
an increase of $456,000. This increase was earned on the net proceeds received
from our initial public offering of common stock on September 24, 1999.
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1999, 1998 and 1997 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, 2000 was $763,000, net of amortization.
Deferred stock compensation is being amortized ratably over the vesting periods
of these securities. Amortization expense was $294,000 in the nine months ended
September 30, 2000 and $890,000 in 1999.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our
initial public offering of common stock in June 1999, which totaled $34.0
million in aggregate net proceeds, and private sales of convertible preferred
stock, which totaled $19.9 million in aggregate net proceeds, through September
30, 2000. We have also financed our business through a loan in the principal
amount of $800,000 and capitalized leases. As of September 30, 2000, we had an
aggregate of $21.1 million in cash, cash equivalents and short-term investments,
and $18.9 million of working capital.
Net cash used for operating activities was $9.1 million in the nine months
ended September 30, 2000 and $6.4 million for the nine months ended September
30, 1999. For each of the nine months ended September 30, 2000 and 1999, cash
used for operating activities was attributable primarily to net losses and
increases in accounts receivable. Those increases were primarily offset by
depreciation and amortization, amortization of deferred stock compensation and
deferred revenues, and for the nine months ended September 30, 2000, an increase
in accrued compensation and benefits and other accrued liabilities, and for the
nine months ended September 30, 1999, an increase in accounts payable.
Net cash provided by (used in) investing activities was $3.5 million
provided in the nine months ended September 30, 2000 and $14.9 million used in
the nine months ended September 30, 1999. For the nine months ended September
30, 2000, cash was provided by investing activities through the conversion of
short-term investments into cash and cash equivalents, offset by additions to
property and equipment and additions to purchased intangibles. For the nine
months ended September 30, 1999, cash used in investing activities primarily
reflected investments in short-term investments and purchased intangibles.
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Net cash provided by financing activities was $2.1 million in the nine
months ended September 30, 2000 and $32.2 million in the nine months ended
September 30, 1999. Cash provided by financing activities during the nine months
ended September 30, 2000 was primarily attributable to proceeds from the
issuance of common stock through the exercise of employee stock options. Cash
provided by financing activities during the nine months ended September 30, 1999
was primarily attributable to proceeds from the issuance of both common and
preferred stock.
We have credit facilities with Comerica Bank. Under those credit
facilities, the Company has a $5.0 million revolving line of credit facility
available through October 31, 2001 and a second equipment financing facility for
an amount up to $1 million under which drawdowns are available through April 31,
2001. As of September 30, 2000 we had no borrowings outstanding under the
revolving line of credit facility or the second equipment financing facility. As
of September 30, 2000, we had a promissory note in favor of Comerica related to
our first equipment financing facility, under which $401,000 out of an original
$800,000 was outstanding. 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 18 monthly installments. The bank's credit facilities require the
Company, among other things, to maintain a minimum tangible net worth of $10
million and a minimum quick ratio (current assets not including inventory less
current liabilities) of 2 to 1. As of both June 30, 2000 and September 30, 2000,
the Company's tangible net worth fell below the minimum tangible net worth ratio
then in effect, and the bank waived both of those previous events. Borrowings
under the facilities are collateralized by substantially all of the Company's
assets.
Although we have no material commitments for capital expenditures, we
anticipate an increase, possibly substantial, 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 our 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 year. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued accounting
statement 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 us beginning in 2001. We are
currently evaluating the impact of SFAS No. 133 on our financial statements and
related disclosures.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this Quarterly Report on Form 10-Q and our Annual
Report on Form 10-K as of and for the year ended December 31, 1999 filed with
the Securities and Exchange Commission. The risks and uncertainties described
below are intended to be the ones that are specific to our company or industry
and that we deem to be material, but are not the only ones that we face.
We Have A Limited Operating History In The Application Server Market.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:
o our substantial dependence for revenue from our PowerTier for C++
product, which was first introduced in 1997 and has achieved only
limited market acceptance;
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o our substantial dependence for revenue from our PowerTier for EJB
product, which was first introduced in 1998 and has achieved only
limited market acceptance;
o our need to expand our distribution capability through both a direct
sales organization and third party distributors and systems
integrators;
o our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for
application servers;
o our unproven ability to compete in a highly competitive market;
o uncertainty as to the growth rate in the electronic commerce market
and, in particular, the business-to-business electronic commerce
market;
o our need to achieve market acceptance for our new product
introductions, including Dynamai;
o our dependence on Enterprise JavaBeans, commonly known as EJB,
becoming a widely accepted standard in the transactional application
server market; and
o our dependence upon key personnel.
Because We Have A History Of Losses And Negative Cash Flow, We May 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 $4.7 million in 1997, $4.1
million in 1998 and $11.3 million in 1999, and $13.4 million in the nine months
ended September 30, 2000. As of September 30, 2000, we had an accumulated
deficit of approximately $37.4 million. In addition, while we are unable to
predict accurately our future operating expenses, we currently expect these
expenses to increase, potentially substantially, as we continue to expand our
product development and sales and marketing efforts and administrative expenses
as a result of our public company status and patent prosecution. 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 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.
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:
o the issuance of additional securities could result in:
o debt securities with rights senior to the common stock;
o dilution to existing stockholders as a result of issuing
additional equity or convertible debt securities;
o debt securities with restrictive covenants that could restrict
our ability to run our business as desired; or
o securities issued on disadvantageous financial terms.
o the failure to procure needed funding could result in:
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o a reduction in scope in our planned product development or
marketing efforts; or
o 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 quarter to the first quarter of the next year. If our future
quarterly operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our PowerTier products and other
products we introduce;
o the possible loss of sales people;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers;
o the level of product and price competition in the application server
market;
o our lengthy sales cycle;
o our success in expanding our direct sales force and indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. 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
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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.
We Depend On A Relatively Small Number Of Significant Customers, And The Loss Of
One Or More Of These Customers Could Result In A Decrease In Our Revenues.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In the nine months ended
September 30, 2000, sales to Salomon Smith Barney accounted for 14% of total
revenues and sales to our top five customers accounted for 41% of total
revenues. In 1999, sales of products and services to Cisco accounted for 13% of
our total revenues, and sales of products and services to our top five customers
accounted for 35% 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 has 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 may continue to 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 and 2000, we continued to hire new salespeople. In order to meet
our future sales goals, we will
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need to hire more salespeople 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 sales team is relatively new, they may not 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, 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 its subsidiary, iPlanet, 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.
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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:
o performance, including scalability, integrity and availability;
o ability to provide a complete software platform;
o flexibility;
o use of standards-based technology;
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
Our competitors include both publicly and privately-held enterprises,
including BEA Systems (WebLogic), Secant Technologies, 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. In addition, some competitors offer
products that are less complex than our PowerTier products and require less
customization to implement with potential customers' existing systems. Thus,
potential customers engaged in simpler business-to-business e-commerce
transactions may prefer these "plug-and-play" products to our more complex
offerings. Moreover, there are other very large and established companies,
including Microsoft, who offer alternative solutions and are thus indirect
competitors. Further, dozens of companies have already supported, or 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 harmed. Moreover, critical
issues concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
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
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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
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 36% of our revenues came
from sales of products and services outside of the United States in the nine
months ended September 30, 2000. Approximately 28% of our revenues came from
sales of products and services outside the United States during 1999, and
approximately 29% of our revenues came from sales of products and services
outside the United States during 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:
o difficulties of staffing and managing foreign operations;
o our dependence on the sales efforts of our third party distributors;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
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<PAGE> 22
o exposure to political instability and economic downturns;
o failure to localize our products for foreign markets;
o restrictions on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o 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. We have commenced patent
infringement actions against two competitors -- See "Part II, Other Information,
Item 1, Legal Proceedings." 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 Patent Infringement.
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.
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. As of October 31, 2000, we
had 19.9 million shares of common stock outstanding. Beginning in December 1999,
approximately 14.4 million shares of restricted common stock held by our
stockholders became eligible for sale in the public market, in some cases
subject to volume and other restrictions under Rule 144.
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Our Stock Price Has Been, And May Continue To Be, Volatile.
Our common stock has only been available in the public market since June
24, 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:
o variations in our quarterly results;
o announcements of technological innovations by us or our competitors;
o introductions of new products by us or our competitors;
o acquisitions or strategic alliances by us or our competitors;
o hiring or departure of key personnel;
o the gain or loss of a significant customer or order;
o changes in estimates of our financial performance or changes in
recommendations by securities analysts;
o market conditions in the software industry and in our customers'
industries; and
o 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.
Our Executive Officers And Directors Own A Large Percentage Of Our Voting Stock
And Could Exert Significant Influence Over Matters Requiring Stockholder
Approval.
As of October 31, 2000, executive officers and directors, and entities
affiliated with them, owned approximately 28% 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. 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.
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:
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
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o 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 acquired object request broker technology and servlet engine
technology. 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:
o issue equity securities that would dilute existing stockholders'
percentage ownership;
o incur substantial debt;
o assume contingent liabilities; or
o take substantial charges in connection with the amortization of
goodwill and other intangible assets.
Acquisitions also entail numerous risks, including:
o difficulties in assimilating acquired operations, products and
personnel with our pre-existing business;
o unanticipated costs;
o diversion of management's attention from other business concerns;
o adverse effects on existing business relationships with suppliers and
customers;
o risks of entering markets in which we have limited or no prior
experience; and
o 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.
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 Remaining Net
Proceeds To Fund Operating Losses, For Acquisitions Or For Other Corporate
Purposes.
We have not designated any specific use for the net proceeds of our initial
public offering of common stock. As a result, our management and board of
directors has broad discretion in spending the remaining net proceeds of that
offering. We currently expect to use the remaining 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 remaining net proceeds for further development of our product
lines through acquisitions of products, technologies and businesses.
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 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, 2000, the fair value of our cash equivalents and short-term
investments would change by approximately $125,000.
Foreign Currency Fluctuations. We have not had any significant transactions
in foreign currencies, nor did we have any significant balances that are due or
payable in foreign currencies at September 30, 2000. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 6, 1999, the Company filed a patent infringement action in the
United States District Court for the Northern District of California against The
Object People Inc. and The Object People (U.S.) Inc. (collectively, "TOP"),
Persistence Software, Inc. v The Object People Inc., et al., Case No. C 99-5182
MMC (N.D. Cal.). On December 14, 1999, the Company filed a similar action
against Secant Technologies, Inc. ("Secant"), Persistence Software, Inc. v.
Secant Technologies, Inc., Case No. C 00-20210 SW (N.D. Cal.). A motion is
pending to consolidate the two actions into one lawsuit. The Company alleges in
both cases that TOP and Secant's software products infringe three of the
Company's patents, and TOP and Secant have contributed to the infringement of,
and induced the infringement of, the Company's patents by third parties (i.e.,
their respective customers). The three patents owned by the Company that are at
issue in these actions are U.S. Patent No. 5,499,371, No. 5,615,362, and No.
5,706,506. The Company also has asserted claims against TOP and Secant for
unfair business practices under California Business and Professions Code
Sections 17200 et seq. ("Section 17200").
On December 22, 1999, TOP filed its Answer to the Company's Complaint and
asserted counterclaims for declaratory relief that the Company's patents are
invalid and unenforceable, as well as counterclaims that allege that the
Company's filing of the lawsuit itself constitutes a violation of the Lanham Act
and unfair business practices under Section 17200. On January 31, 2000, Secant
filed its Answer to the Company's Complaint and asserted only counterclaims for
declaratory relief that the Company's patents are invalid and unenforceable.
Both suits are in the early stages, and discovery has not been completed.
While management believes that the Company's claims are valid, that the
counterclaims asserted by TOP and Secant are without merit, and that any
potential liability that the Company might incur to TOP or Secant is immaterial
as the only counterclaims alleging damages are TOP's claims under the Lanham Act
and Section 17200, it is not possible at this time to determine the ultimate
outcome of these actions.
Except as described above, the Company is not currently subject to any
material legal proceedings, though it may from time to time become a party to
various legal proceedings that arise in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) Use of Proceeds
Our registration statement on Form S-1, SEC File No. 333-76867, for our
initial public offering of common stock became effective on June 24, 1999. We
registered and sold an aggregate of 3,450,000 shares of common stock under the
registration statement at a per share price of $11.00. Our underwriters were
BancBoston Robertson Stephens, U.S. Bancorp Piper Jaffray, and Soundview
Technology Group. Offering proceeds, net of aggregate underwriting commissions
and discounts of $2.7 million and other offering transaction expenses of $1.1
million, were $34.1 million. None of the underwriting commissions and discounts
or other offering transaction expenses were direct or indirect payments to our
directors, officers, or holders of 10% or more of our stock. From June 24, 1999
through September 30, 2000, we have used the net offering proceeds as follows:
<TABLE>
<S> <C>
Working capital expenditures............................ $ 14.6 million
Acquiring property and equipment ....................... 1.8 million
Acquiring purchased intangibles......................... 2.5 million
Repayment of capitalized lease obligations.............. 0.5 million
--------------
19.4 million
Investing in short-term, investment grade,
interest-bearing securities ............................ 14.7 million
--------------
$ 34.1 million
==============
</TABLE>
Each of the above amounts represents our best estimate of our use of the
net proceeds. None of the net offering proceeds were paid directly or indirectly
to our directors, officers, or holders of 10% or more of our stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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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.
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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 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
28
