-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JN3RYyIlM1l7Z9aPAzEhQ9MX2Yc4HQkAypl+0WyPk9dEPjZV8IvojYr1A4Np6vZS etymaGGR4/u74Rc+UN6UWg== 0001019687-03-001308.txt : 20030623 0001019687-03-001308.hdr.sgml : 20030623 20030620173302 ACCESSION NUMBER: 0001019687-03-001308 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERSISTENCE SOFTWARE INC CENTRAL INDEX KEY: 0001084400 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943138935 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25857 FILM NUMBER: 03752383 BUSINESS ADDRESS: STREET 1: 1720 SOUTH AMPHLETT BLVD., 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503417733 MAIL ADDRESS: STREET 1: 1720 S. AMPHLETT BLVD, 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 10-Q/A 1 pers_10qa1-033103.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-25857 ================================================================================ PERSISTENCE SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3138935 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1720 SOUTH AMPHLETT BLVD., THIRD FLOOR SAN MATEO, CALIFORNIA 94402 (Address of principal executive offices, including zip code) (650) 372-3600 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2). Yes [ ] No [X] As of April 30, 2003, there were 2,404,473 shares of the registrant's Common Stock outstanding. EXPLANATORY NOTE This Amendment No. 1 on Form 10-Q/A to our quarterly report on Form 10-Q for the three months ended March 31, 2003 is being filed solely for the purposes of responding to comments received by us from the Staff of the Securities and Exchange Commission. This Amendment speaks as of the original filing date of our quarterly report on Form 10-Q and has not been updated to reflect events occurring subsequent to the original filing date except for the restatement of all share and per share amounts for a 1-for-10 reverse stock split previously approved by our stockholders and effected on June 12, 2003. For the convenience of the reader, we have restated our quarterly report on Form 10-Q in its entirety. INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. 3 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2003 AND DECEMBER 31, 2002. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. 23 ITEM 4. CONTROLS AND PROCEDURES. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 25 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 25 ITEM 5. OTHER INFORMATION. 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 25 SIGNATURES 26 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
MARCH 31, DECEMBER 31, 2003 2002 ------------ ------------ [1] ASSETS Current assets: Cash and cash equivalents $ 7,101 $ 8,903 Accounts receivable, net 1,995 1,252 Prepaid expenses and other current assets 236 392 ------------ ------------ Total current assets 9,332 10,547 Property and equipment, net 290 375 Purchased intangibles, net 87 123 Deposits and other assets 55 55 ------------ ------------ Total assets $ 9,764 $ 11,100 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 293 $ 325 Accrued compensation and related benefits 770 722 Other accrued liabilities 1,026 1,188 Deferred revenues net of long-term portion 2,584 2,529 Current portion of long-term obligations 780 841 ------------ ------------ Total current liabilities 5,453 5,605 Long-term liabilities: Long-term portion of deferred revenues 534 691 Long-term obligations 64 93 ------------ ------------ Total long-term liabilities 598 784 ------------ ------------ Total liabilities 6,051 6,389 ------------ ------------ Stockholders' equity: Preferred stock -- -- Common stock 66,114 66,103 Deferred stock compensation (25) (31) Accumulated deficit (62,377) (61,370) Accumulated other comprehensive loss 1 9 ------------ ------------ Total stockholders' equity 3,713 4,711 ------------ ------------ Total liabilities and stockholders' equity $ 9,764 $ 11,100 ============ ============ [1] The condensed consolidated balance sheet as of December 31, 2002 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
PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------ 2003 2002 --------- --------- Revenues: Licenses $ 1,294 $ 833 Service 1,229 1,328 --------- --------- Total revenues 2,523 2,161 --------- --------- Cost of revenues: Licenses 3 27 Service 477 768 --------- --------- Total cost of revenues 480 795 --------- --------- Gross profit 2,043 1,366 Operating expenses: Sales and marketing 1,531 2,434 Research and development 849 1,118 General and administrative 643 927 Amortization of purchased intangibles 36 212 --------- --------- Total operating expenses 3,059 4,691 --------- --------- Loss from operations (1,016) (3,325) Interest and other income (expense): Interest income 19 35 Interest expense (8) (10) Other, net (3) (9) --------- --------- Total interest and other income (expense) 8 16 --------- --------- Net loss $ (1,008) $ (3,309) ========= ========= Basic and diluted net loss per share $ (0.42) $ (1.65) ========= ========= Shares used in calculating basic and diluted net loss per share 2,403 2,009 ========= ========= See notes to condensed consolidated financial statements. 4 PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,008) $(3,309) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 141 381 Amortization of deferred stock compensation 6 34 Issuance of warrants and options to non-employees and other (8) -- Changes in operating assets and liabilities: Accounts receivable (743) 226 Prepaid expenses and other current assets 156 112 Accounts payable (32) (127) Accrued compensation and related benefits 48 112 Other accrued liabilities (161) 20 Deferred revenues (102) 2,503 -------- -------- Net cash used in operating activities (1,703) (48) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions (19) (26) Purchased intangibles additions -- (45) Deposits and other assets -- (9) -------- -------- Net cash used in investing activities (19) (80) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock 15 76 Borrowing under capital lease obligations -- 34 Repayment of obligations incurred to acquire purchased intangibles -- (55) Borrowing under loan agreement -- -- Repayment of long term liabilities (87) (139) -------- -------- Net cash used in financing activities (72) (84) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (8) (10) -------- -------- CASH AND CASH EQUIVALENTS: Net decrease (1,802) (222) Beginning of period 8,903 7,411 -------- -------- End of period $ 7,101 $ 7,189 ======== ======== See notes to condensed consolidated financial statements. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS Persistence provides a suite of Data Services products that sit between existing databases - such as Oracle and DB2 - and application servers - such as BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure these products, creating a "Data Services" layer that is designed to position business information for more efficient access for users, dramatically reduce network traffic and data latency, and result in better application performance at a much lower infrastructure cost. Persistence integrated Data Services include: object-relational mapping, transactional caching, synchronization, application fail over and rule-based client notification. Persistence's Data Services are also cross-platform, providing a "data bridge" between J2EE, .Net, Java and C++ applications. 2. BASIS OF PRESENTATION The condensed consolidated financial statements included in this filing on Form 10-Q as of March 31, 2003 and for the three month periods ended March 31, 2003 and 2002 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, 2002 balance sheet was extracted from audited financial statements as of 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 condensed 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, 2002 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 March 31, 2003, its condensed consolidated results of operations for the three month periods ended March 31, 2003 and 2002, and its condensed consolidated cash flows for the three month periods ended March 31, 2003 and 2002, have been made. The results of operations and cash flows for any interim period are not necessarily indicative of the operating results and cash flows for any future interim or annual periods. 3. 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. 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. As of March 31, 2003 and 2002, 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): MARCH 31, MARCH 31, 2003 2002 -------- -------- Outstanding options 327 335 Warrants 134 8 -------- -------- Total 461 343 ======== ======== 4. ACCOUNTING FOR STOCK BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS 148 ACCOUNTING FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, requires the disclosure of pro forma net loss as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations 6 were made using the Black-Scholes option pricing model with the following weighted average assumptions for options outstanding under the 1997 Stock Plan: expected life, 30 months following vesting for the three months ended March 31, 2003 and 2002; risk free interest rate of 1.87% for the three months ended March 31, 2003 and 4.73% for the three months ended March 31, 2002; volatility of 155% for the three months ended March 31, 2003 and 151% for the three months ended March 31, 2002; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards granted in 1997 and after had been amortized to expense over the vesting period of the awards, pro forma net loss (net of amortization of deferred compensation expense already recorded for the three months ended March 31, 2003 and 2002) would have been approximately as follows (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 -------- -------- Net loss as reported ............................................. $(1,008) $(3,309) Add: Stock-based employee compensation expense included in reported loss ................................................. 6 34 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards .................. (117) (448) -------- -------- Pro forma net loss ............................................... $(1,119) $(3,723) ======== ======== Basic and diluted net loss applicable to common shareholders per share: As reported ...................................................... $ (0.42) $ (1.65) Pro forma ........................................................ $ (0.47) $ (1.85)
The Company accounts for stock-based awards to consultants using the multiple option method as described by FASB Interpretation No. 28. Stock-based compensation expense is recognized as earned. At each reporting date, the Company re-values the stock-based compensation using the Black-Scholes option-pricing model. As a result, the stock-based compensation expense will fluctuate as the fair market value of the Company's common stock fluctuates. 5. COMPREHENSIVE INCOME The components of comprehensive loss, consisting of the Company's reported net loss and unrealized gains or losses in the translation of foreign currencies, are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 -------- -------- Net loss ......................................................... $(1,008) $(3,309) Other comprehensive income (loss)................................. 8 (10) -------- -------- Total comprehensive loss ......................................... $(1,000) $(3,319) ======== ========
6. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair market value. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 is expected to impact the timing of recognition and the amount of future restructuring activities. In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, AND AMENDMENT OF FASB STATEMENT NO. 123. SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, INTERIM 7 FINANCIAL REPORTING, to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method is effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 (see footnote No. 4). Management does not intend to adopt the fair value accounting provisions of SFAS No. 123 and currently believes that the adoption of SFAS No. 148 will not have a material impact on our financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO. 5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34, DISCLOSURE OF INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation also incorporates without reconsideration the guidance in FASB Interpretation No. 34, which is being superseded. The Company adopted the disclosure provisions of FIN 45 effective January 1, 2003 and has provided the required disclosures in Note 7. 7. INDEMNIFICATION In its agreements with customers, the Company generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer. The Company also typically warrants that its maintenance services will be performed consistent with its maintenance policy in effect at the time those services are delivered. The Company believes its maintenance policy is consistent with generally accepted industry standards. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, the Company has not incurred significant expense under its product or services warranties. As a result, the Company believes the estimated fair value on these agreements is minimal. The Company's customer agreements customarily provide for indemnification of customers for intellectual property infringement claims. Such agreements generally limit the scope of the available remedies in a variety of industry-standard methods, included but not limited to product usage, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claim for such indemnifications is outstanding as of March 31, 2003. As a result, the Company believes the estimated fair value of these agreements is minimal. 8. REVERSE STOCK SPLIT On June 12, 2003, the Company effected a 1-for-10 reverse stock split that was previously approved at the Annual Meeting of Stockholders. Accordingly all share and per share amounts in this quarterly report on Form 10-Q/A have been adjusted to reflect the 1-for-10 reverse stock split. 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, 2002 and 2001 and for each of the years ended December 31, 2002, 2001 and 2000, included in our Annual Report on Form 10-K as of and for the year ended December 31, 2002 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," "targeting," 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/A and our Annual Report on Form 10-K as of and for the year ended December 31, 2002 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 Persistence provides a suite of Data Services products that sit between existing databases - such as Oracle and DB2 - and application servers - such as BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure these products, creating a "Data Services" layer that is designed to position business information for more efficient access for users, dramatically reduce network traffic and data latency, and result in better application performance at a much lower infrastructure cost. Persistence integrated Data Services 8 include: object-relational mapping, transactional caching, synchronization, application fail over and rule-based client notification. Persistence's Data Services are also cross-platform, providing a "data bridge" between J2EE, .Net, Java and C++ applications. Persistence caching solutions help systems "remember" answers from each processing step. When the system receives a request for which it has an answer, it can respond immediately, without traveling to back-end databases to generate an answer. Synchronization technology is designed to ensure that these cached answers are always accurate, even as the source data changes. Customer profile management, logistics, exchanges, trading desks, and supply chain management systems are just a few examples of query-intensive online systems that can realize significant increases in capacity and performance through online caching. Customers are able to more effectively manage enterprise data through re-architecting their IT infrastructure using Persistence Data Services products. Persistence Data Services solutions are designed to result in real-time, highly scalable, distributed applications without incurring the high costs of additional hardware and replicated databases. Decision makers and customers located at any location can now have an immediate "business visibility" into their data - that is, an up-to-date view into the data that they need, when and where they need it. Enterprises are creating competitive advantage by achieving the goal of the zero-latency enterprise through Data Services, the immediate distribution and management of business information. Delivering real-time data enhances employee productivity, improves operations, and enables improved relationships with customers. Data Services also ensures business continuity by providing immediate fail-over options preventing data center outages from interrupting business processing. Our EDGEXTEND data services software for Sun Microsystems' full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or EJB) application servers, C++ and .NET application servers offers a data architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft ..NET, plus C++ application servers to support highly distributed and transaction-oriented applications both within data centers and in remote locations. Our DIRECTALERT product is a proactive, personalized client caching and notification reporting product for zero latency applications which extends the reach of enterprise systems to small form-factor devices such as mobile phones, wireless PDAs, and digital set-top boxes. Major customers in 2002 and the first three months ended March 31, 2003 consisted of Adobe, Air France, Applied Biosystems, Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, JP Morgan Chase, Lucent, Motorola, NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney. Our revenues, which consist of software license revenues and service revenues, totaled $2.5 million in the three months ended March 31, 2003 and $2.2 million in the three months ended March 31, 2002. Revenues totaled $14.6 million in 2002, $19.4 million in 2001 and $25.3 million in 2000. License revenues consist of licenses of our software products, which generally are priced based on the number of users or central processing units deploying our software. Service revenues consist of professional services consulting, customer support and training. Because we only commenced selling EDGEXTEND and DIRECTATERT in 2002, we have a limited operating history in the data services markets. We currently expect that sales of our older POWERTIER products will continue to contribute to our revenues, but that sales of our newer EDGEXTEND and DIRECTALERT products will contribute a growing percentage of our revenues over the next several quarters. We market our software and services primarily through our direct sales organizations in the United States, the United Kingdom and Germany. Revenues from licenses and services to customers outside the United States were $1.6 million in the three months ended March 31, 2003, $797,000 in the three months ended March 31, 2002, $4.8 million in 2002, $7.4 million in 2001 and $7.2 million in 2000. The decrease in international revenues from 2001 to 2002 is primarily attributable to general economic conditions in Asia, which was a factor in our decision to close our sales office in Asia in 2002. 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 revenue from product sales to a limited number of customers. Sales of products to our top five customers accounted for 52% of our total revenues in the three months ended March 31, 2003, 46% of our total revenues in the three months ended March 31, 2002, 55% of total revenues in 2002, 45% of total revenues in 2001, and 40% of total revenues in 2000. In addition, the identity of our top five customers has changed from year to year. In the future, it is likely that a relatively few large customers could continue to account for a relatively large proportion of our revenues and these customers are likely to differ year to year. 9 To date, we have sold our products primarily through our direct sales force, and we will need to continue to hire sales people, in particular those with expertise in channel sales, in order to meet our sales goals. In addition, our ability to achieve significant revenue growth will depend in large part on our success in establishing and leveraging relationships with independent software vendors, systems integrators, OEM partners and other resellers. Our critical accounting policies and estimates were discussed in our Annual Report on Form 10-K as of and for the year ended December 31, 2002. No changes in these policies and estimates have occurred for the three months ended March 31, 2003. We recognize revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition," as amended by Statements of Position 98-4 and 98-9. Future implementation guidance relating to these standards or any future standards may result in unanticipated changes in our revenue recognition practices, and these changes could affect our future revenues and earnings. We recognize license revenues upon shipment of the software if collection of the resulting receivable is probable, an agreement has been executed, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. Undelivered elements in these arrangements typically consist of services or additional software products. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. Royalty revenues are recognized when the software or services has been delivered, collection is reasonably assured and the fees are determinable. We recognize revenues from customer training, support and professional services consulting as the services are performed. We generally recognize support revenues ratably over the term of the support contract. If support or professional services consulting are included in an arrangement that includes a license agreement, amounts related to support or professional services consulting are allocated based on vendor-specific objective evidence. Vendor-specific objective evidence for support and professional services consulting is based on the price at which such elements are sold separately, or, when not sold separately, the price established by management having the relevant authority to make such decision. 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. We had 68 employees as of December 31, 2002 and 60 as of March 31, 2003, representing a decrease of 12%. This decrease was due primarily to assessments during the quarter of efficient staffing requirements. We have incurred net losses in each quarter since 1996 and, as of March 31, 2003, had an accumulated deficit of $62.4 million. We are currently targeting that each of sales and marketing expenses, research and development expenses, and general and administrative expenses for 2003 will be below 2002 spending levels. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicative of future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. While we are targeting to begin achieving profitability on a quarterly basis beginning in either the third or fourth quarter of 2003, we may not achieve it. Our success depends significantly upon broad market acceptance of our recently introduced EDGEXTEND and, to a lesser degree, the DIRECTALERT products. Our performance will also depend on the level of capital spending in our target market of customers and on the growing and widespread adoption of the market for data services and data integration. RESULTS OF OPERATIONS THREE MONTHS (FIRST QUARTERS) ENDED MARCH 31, 2003 AND 2002 Revenues Our revenues were $2.5 million for the three months ended March 31, 2003 and $2.2 million for the three months ended March 31, 2002, representing an increase of 14%. International revenues were $1.6 million for the three months ended March 31, 2003 and $797,000 for the three months ended March 31, 2002, representing an increase of 102%. The increase was primarily due to a $600,000 sale to Adobe Systems in Germany. For the three months ended March 31, 2003, Adobe Systems and JP Morgan Chase accounted for 23% and 10% of total revenues respectively and sales of products and services to our top five customers accounted for 52% of total revenues. For the three months ended March 31, 2002, Salomon Smith Barney and Lucent Technologies accounted for 15% and 10% of total revenues respectively and sales of products and services to our top five customers accounted for 46% of total revenues. 10 License Revenues. License revenues consist of licenses of our software products, which generally are priced based on the number of users or central processing units deploying our software. License revenues were $1.3 million for the three months ended March 31, 2003 and $833,000 for the three months ended March 31, 2002, representing an increase of 55%. License revenues represented 51% of total revenues for the three months ended March 31, 2003 and 39% of total revenues for the three months ended March 31, 2002. The difference in software license revenues was primarily due to the deferral of license revenue for a major contract negotiated in the first quarter of 2002 in the amount of $2.2 million, which resulted in lower revenue recognized in the same period. Given the continuing dramatically reduced level of information technology spending, license revenues may fluctuate substantially over the next several quarters. In addition, for the same reason, revenues may remain flat or decline for 2003 compared to 2002. Service Revenues. Service revenues consist of professional services consulting, customer support and training. Our service revenues were $1.2 million for the three months ended March 31, 2003 and $1.3 million for the three months ended March 31, 2002, representing a decrease of 7%. This decrease was primarily due to lower revenues from technical support contracts in the amount of $65,000 and to a reduced level of consulting services performed during the quarter which lowered revenues by $34,000. Service revenues represented 49% of total revenues for the three months ended March 31, 2003 and 61% of total revenues for the three months ended March 31, 2002. Cost of Revenues Cost of License Revenues. Cost of license revenues consists of royalties, packaging, documentation and associated shipping costs. Our cost of license revenues was $3,000 for the three months ended March 31, 2003 and $27,000 for the three months ended March 31, 2002. As a percentage of license revenues, cost of license revenues decreased to less than 1% for the three months ended March 31, 2003 from 3% for the three months ended March 31, 2002. The decrease in cost of revenues was largely due to the lower sales of third party software that required the payment of royalties. Cost of license revenues may vary between periods depending on the sales of any licensed third party products. Cost of Service Revenues. Cost of service revenues consists of personnel, contractors and other costs related to the provision of professional services consulting, customer support and training. Our cost of service revenues was $477,000 for the three months ended March 31, 2003 and $768,000 for the three months ended March 31, 2002, representing a decrease of 38%. This decrease was primarily due to a $237,000 reduction in staffing and personnel related costs and a $54,000 reduction in our use of external consultants. As a percentage of service revenues, cost of service revenues was 39% for the three months ended March 31, 2003 and 58% for the three months ended March 31, 2002. Cost of service revenues as a percentage of service revenues may vary between periods due to our use of consultants. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of salaries, benefits, commissions and bonuses earned by sales and marketing personnel, travel, and marketing and promotional expenses. Our sales and marketing expenses were $1.5 million for the three months ended March 31, 2003 and $2.4 million for the three months ended March 31, 2002, representing a decrease of 37%. This decrease was due to a $627,000 reduction in staffing and personnel related costs as well as a decrease of $238,000 in commissions expensed as compared to the three months ended March 31, 2002 as a result of payments made on a major contract negotiated in the first quarter of 2002 on which revenue was not recognized until subsequent periods. Sales and marketing expenses represented 61% of total revenues for the three months ended March 31, 2003 and 113% of total revenues for the three months ended March 31, 2002. We are presently targeting that 2003 sales and marketing expense levels will be lower than comparable 2002 expense levels. Research and Development. Research and development expenses consist primarily of salaries and benefits for software developers, product managers and quality assurance personnel and payments to external software consultants. Our research and development expenses were $849,000 for the three months ended March 31, 2003 and $1.1 million for the three months ended March 31, 2002, representing a decrease of 24%. This decrease was due to a $226,000 reduction in staffing and personnel related costs. Research and development expenses represented 34% of total revenues for the three months ended March 31, 2003 and 52% of total revenues for the three months ended March 31, 2002. We are presently targeting that 2003 research and development expense levels will be lower than comparable 2002 expense levels. General and Administrative. General and administrative expenses consist of salaries, benefits and related costs for our finance, administrative and executive management personnel, legal costs, bad debt write-offs and various costs associated with our status as a public company. Our general and administrative expenses were $643,000 for the three months ended March 31, 2003 and $927,000 for the three months ended March 31, 2002, representing a decrease of 31%. This decrease was due to reductions of $43,000 of staffing and personnel related costs and $79,000 of bad debt expenses. General and administrative expenses represented 25% of total revenues for the three months 11 ended March 31, 2003 and 43% of total revenues for the three months ended March 31, 2002. We are presently targeting that 2003 general and administrative expense levels will be lower than comparable 2002 expense levels. Amortization of Purchased Intangibles. Amortization of purchased intangibles was $36,000 for the three months ended March 31, 2003 and $212,000 for the three months ended March 31, 2002, representing a decrease of 83%. The decrease in amortization expense was related to several intangible assets that were fully amortized in 2002 and due to a revaluation and impairment review in December 2002 which resulted in a write-off of purchased intangibles of $160,000. Interest and Other Income (Expense). Interest and other income (expense) consists of earnings on our cash and cash equivalents, offset by interest expense related to obligations under capital leases and other equipment related borrowings, and various miscellaneous state and foreign taxes and other expenses. Interest and other income (expense) was $8,000 for the three months ended March 31, 2003 and $16,000 for the three months ended March 31, 2002, representing a decrease of 50%. Stock-Based Compensation. Certain options granted and common stock issued in the past 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 March 31, 2003 was $25,000, net of amortization. Deferred stock compensation is being amortized ratably over the vesting periods of these securities. Amortization expense, which is included in operating expenses, was $6,000 in the three months ended March 31, 2003 and $34,000 in the three months ended March 31, 2002. We expect to record amortization expense related to these securities of approximately $6,000 for the remainder of 2003. Provision for Income Taxes. Since inception, we have incurred net operating losses for federal and state tax purposes and have only recognized minimal tax provisions within our international subsidiaries. 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. QUARTERLY RESULTS OF OPERATIONS 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 shifts in demand for and market acceptance among our various products, including our newer products EDGEXTEND and DIRECTALERT, and our older POWERTIER product; o introduction of new products or services by us or our competitors; o annual or quarterly budget cycles of our customers or prospective customers; o the level of product and price competition in the application server and data management market; o our lengthy sales cycle; o our success in maintaining our direct sales force and expanding indirect distribution channels; o the mix of direct sales versus indirect distribution channel sales; o the possible loss of sales people; 12 o the mix of products and services licensed or sold; o the mix of domestic and international sales; and o our success in penetrating international markets and general economic conditions in these markets. The typical sales cycle of our products is long and unpredictable, and is affected by seasonal fluctuations as a result of our customers' fiscal year budgeting cycles and slow summer purchasing patterns in Europe. We typically receive a substantial portion of our orders in the last two weeks of each quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our business primarily through a private placement of our common stock in the amount of $2.0 million in November 2002, our initial public offering of common stock in June 1999, which totaled $34.1 million in aggregate net proceeds and private sales of convertible preferred stock, which totaled $19.9 million in aggregate net proceeds. We also are financing our business through loans as described below and capital leases. As of March 31, 2003, we had $7.1 million of cash and cash equivalents and our working capital was $3.9 million. Net cash used in operating activities was $1.7 million for the three months ended March 31, 2003 and $48,000 for the three months ended March 31, 2002. For the three months ended March 31, 2003, cash used in operating activities was attributable primarily to $1.0 million in net losses and an increase of $743,000 in accounts receivable from that was mainly due to one large sale in the last week of the quarter. For the three months ended March 31, 2002, cash used in operating activities was attributable primarily to net losses of $3.3 million offset by an increase of $2.5 million in deferred revenue and depreciation and amortization of $381,000. Net cash used in investing activities was $19,000 for the three months ended March 31, 2003 and $80,000 for the three months ended March 31, 2002. For the three months ended March 31, 2003, net cash used in investing activities was attributable to the purchase of $19,000 worth of property and equipment. For the three months ended March 31, 2002, net cash used in investing activities was attributable primarily to the purchase of $45,000 worth of intangibles. Net cash used in financing activities was $72,000 for the three months ended March 31, 2003 and $84,000 for the three months ended March 31, 2002. For the three months ended March 31, 2003, net cash used in financing activities was attributable primarily to $87,000 in loan repayments. For the three months ended March 31, 2002, net cash used in financing activities was attributable primarily to $139,000 in loan repayments offset by proceeds of $76,000 from sales of common stock as a result of option exercises. We have credit facilities with Comerica Bank. We have a $2.5 million revolving line of credit facility at March 31, 2003 available through April 30, 2004 under which no borrowings were outstanding as of March 31, 2003. We also have a $655,000 equipment term loan under which $175,000 was outstanding as of March 31, 2003. We are required to make principal payments of $21,843 per month, plus interest at the bank's base rate plus 0.5% per annum payable in 30 monthly installments. We also have an additional $149,000 equipment term loan under which $133,000 was outstanding as of March 31, 2003. This facility is an 18 month term loan with principal payments of $8,284 per month beginning on February 1, 2003 plus interest at the bank's base rate plus 1% per annum. Our credit facilities with Comerica Bank currently require, among other things, that we maintain a tangible net worth of at least $2.25 million. In addition, we must experience net losses below $750,000 for the quarter ending June 30, 2003 and $250,000 for the quarter ending September 30, 2003, and we must show a profit of at least one dollar for each quarter thereafter. As of March 31, 2003 we were in compliance with our debt covenants and we expect to meet these covenants in the future, provided that we meet our targets with respect to revenues and accounts receivable collections. Borrowings under the facilities are collateralized by substantially all of our assets including our intellectual property. Currently we have no material commitments for capital expenditures nor do we anticipate a material increase in capital expenditures and lease commitments. We are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least March 31, 2004, provided that we meet our targets with respect to revenues and accounts receivable collections. 13 If we experience difficulties in achieving our targets with respect to revenues and accounts receivable collections, our cash and cash equivalents may not be sufficient to meet our anticipated cash needs. Accordingly, our operating plans could be restricted and our business could be harmed. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain an additional credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we may not be able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain this additional financing, our business could be jeopardized. 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. The risks and uncertainties described below are intended to be the ones that are specific to our company or industry and that we deem to be material, but are not the only ones that we face. WE HAVE A LIMITED OPERATING HISTORY IN THE DATA SERVICES MARKETS. Because we only commenced selling EDGEXTEND and DIRECTALERT in 2002, we have a limited operating history in the data services markets. We thus face the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in the rapidly changing software industry. These risks include: o the timing and magnitude of capital expenditures by our customers and prospective customers; o our need to achieve market acceptance for our new product introductions, including DIRECTALERT and EDGEXTEND; o our dependence for revenue from our POWERTIER product, which was first introduced in 1997 and has achieved only limited market acceptance; o our need to expand our distribution capability through various sales channels, including a direct sales organization, original equipment manufacturers, third party distributors, independent software vendors and systems integrators; o our unproven ability to anticipate and respond to technological and competitive developments in the rapidly changing market for dynamic data management; o our unproven ability to compete in a highly competitive market; o the decline in spending levels in the software infrastructure market; o our dependence on the Java programming language, commonly known as J2EE, becoming a widely accepted standard in the transactional application server market; and o our dependence upon key personnel. BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NOT BECOME OR REMAIN PROFITABLE. We may not achieve our targeted revenues, and we may not be able to achieve or maintain profitability in the future. We have incurred net losses each year since 1996. In particular, we incurred losses of $1 million in the three months ended March 31, 2003, $5.4 million in 2002, $15.1 million in 2001 and $16.7 million in 2000. As of March 31, 2003, we had an accumulated deficit of $62.4 million. While we are currently targeting decreases in each of sales and marketing, research and development, and general and administrative expenses for 2003, as compared to each of the levels of those expenses in 2002, we will still need to achieve our targets with respect to revenues and accounts receivable collections in order to preserve cash. Because our product markets are new and evolving, we cannot accurately predict either the future growth rate, if any, or the ultimate size of the markets for our products. 14 WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH GENERATED BY OUR OPERATIONS. Since inception, we have generally had negative cash flow from operations. To date, we have financed our business primarily through sales of common stock and convertible preferred stock and not through cash generated by our operations. We expect to have negative cash flows from operations for the year ending December 31, 2003. WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. We are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least March 31, 2004 provided that we meet our targets with respect to revenues and accounts receivable collections. If we experience difficulties in achieving our targets with respect to revenues and accounts receivable collections, our cash and cash equivalents may not be sufficient to meet our anticipated cash needs. Accordingly, our operating plans could be restricted and our business could be harmed. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain an additional credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we may not be able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain this additional financing, our business could be jeopardized. THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future as a result of a number of factors, many of which are outside our control. In prior years, we have often experienced an absolute decline in revenues from the fourth quarter to the first quarter of the next year. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following: o our ability to close relatively large sales on schedule; o delays or deferrals of customer orders or deployments; o delays in shipment of scheduled software releases; o shifts in demand for and market acceptance among our various products, including our newer products, EDGEXTEND and DIRECTALERT, and our older POWERTIER product; o introduction of new products or services by us or our competitors; o annual or quarterly budget cycles of our customers or prospective customers; o the level of product and price competition in the application server and data services markets; o our lengthy sales cycle; o our success in maintaining our direct sales force and expanding indirect distribution channels; o the mix of direct sales versus indirect distribution channel sales; o the possible loss of sales people; o the mix of products and services licensed or sold; 15 o the mix of domestic and international sales; and o our success in penetrating international markets and general economic conditions in these markets. We typically receive a substantial portion of our orders in the last two weeks of each fiscal quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Also, we tend to experience slower sales patterns in Europe in the third quarter. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO IT IS DIFFICULT TO FORECAST OUR REVENUES. Any delay in sales of our products or services could cause our quarterly revenues and operating results to fluctuate. The typical sales cycle of our products is long and unpredictable and requires both a significant capital investment decision by our customers and our education of prospective customers regarding the use and benefits of our products. Our sales cycle is generally between three and nine months. A successful sales cycle typically includes presentations to both business and technical decision makers, as well as a limited pilot program to establish a technical fit. Our products typically are purchased as part of a significant enhancement to a customer's information technology system. The implementation of our products involves a significant commitment of resources by prospective customers. Accordingly, a purchase decision for a potential customer typically requires the approval of several senior decision makers. Our sales cycle is affected by the business conditions of each prospective customer, as well as the overall economic climate for technology-related capital expenditures. Due to the relative importance of many of our product sales, a lost or delayed sale could adversely affect our quarterly operating results. Our sales cycle is affected by seasonal fluctuations as a result of our customers' fiscal year budgeting cycles and slow summer purchasing patterns in Europe. WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES. Historically, we have received a substantial portion of our revenues from product sales to a limited number of customers. In addition, the identity of our top five customers has changed from year to year. In the three months ended March 31, 2003, sales of products and services to our top five customers accounted for 52% of total revenues, with Adobe Systems and JP Morgan Chase accounting for 23% and 10% of total revenues, respectively. In the three months ended March 31, 2002, sales of products and services to our top five customers accounted for 46% of total revenues with Salomon Smith Barney and Lucent Technologies accounting for 15% and 10% of total revenues, respectively. In the year ended December 31, 2002, sales to our top five customers accounted for 55% of total revenues with Cablevision and Salomon Smith Barney accounting for 26% and 13% of total revenues, respectively. In the year ended December 31, 2001, sales to our top five customers accounted for 45% of total revenues with Salomon Smith Barney and Cablevision accounting for 15% and 11% of total revenues, respectively. In year ended December 31, 2000, sales to Salomon Smith Barney accounted for 16% of total revenues and sales to our top five customers accounted for 40% of total revenues. If we lose a significant customer, or fail to increase product sales to an existing customer as planned, we may not be able to replace the lost revenues with sales to other customers. In addition, because our marketing strategy is to concentrate on selling products to industry leaders, any loss of a customer could harm our reputation within the industry and make it harder for us to sell our products to other companies in that industry. The loss of, or a reduction in sales to, one or more significant customers would likely result in a decrease in our revenues. WE ARE CURRENTLY TARGETING THAT A MATERIAL PORTION OF OUR REVENUES WILL BE DERIVED FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND; HOWEVER THERE ARE TECHNICAL AND MARKET RISKS ASSOCIATED WITH NEW PRODUCTS. Sales of our EDGEXTEND products currently represent a material percentage of our revenues. New products, like EDGEXTEND and DIRECTALERT, often contain errors or defects, particularly when first introduced. Any errors or defects could be serious or difficult to correct and could result in a delay of product release or adoption resulting in lost revenues or a delay in gaining market share, which could harm our revenues and reputation. In addition, market adoption is often slower for newer products, like EDGEXTEND and DIRECTALERT, than for existing products. Because we are focusing our marketing and sales efforts on our newer EDGEXTEND data management product, any failure in market adoption of this product could affect our business. 16 BECAUSE OUR PRODUCTS PROVIDE ADDITIONAL FEATURES TO SUCCESSFUL APPLICATION SERVER PRODUCTS FROM IBM AND BEA, THEY MAY ADD THESE FEATURES TO A FUTURE VERSION OF THEIR PRODUCT, REDUCING THE NEED FOR OUR PRODUCTS. Because IBM and BEA control the development schedule and feature set of their products, we need to maintain a good working relationship with IBM and BEA if we decide to develop future versions of EDGEXTEND for those new versions of WebSphere and WebLogic. Failure to develop future versions compatible with the latest versions from IBM and BEA could greatly reduce market acceptance for our products. IBM or BEA could add features to their products, which would reduce or eliminate the need for our products, which could harm our business. They could develop their products in a more proprietary way to favor their own products, or as those offered by a third party, which could make it much harder for us to compete in the J2EE software market. WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD AND THE JAVA 2 ENTERPRISE EDITION (J2EE) STANDARD AND DISTRIBUTED OBJECT COMPUTING, AND IF THESE TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER. We are focusing our marketing efforts on our EDGEXTEND products, which are based on three technologies, which have not been widely adopted by a large number of companies. These three technologies are a distributed object computing architecture, Sun Microsystems' Java programming language and J2EE. Distributed object computing combines the use of software modules, or objects, communicating across a computer network to software applications, such as our EDGEXTEND products. Our products depend upon and conform to the EJB standard. Sun Microsystems released the EJB standard in 1998, and thus far EJB has had limited market acceptance. EJB is a part of the J2EE standard; J2EE is the Java programming standard for use in an application server. Since most of our products depend upon the specialized J2EE and EJB standards, 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 material portion of our future revenues will come from sales of products based on the J2EE standard. Thus, our success depends significantly upon broad market acceptance of distributed object computing in general, and Java application servers in particular. If J2EE and 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 need to increase our research and development investment over our current targeted spending levels to maintain our technological leadership. Our future success depends on our ability to continue to enhance our current products and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments. For example, as Sun Microsystems introduces new J2EE specifications, we may need to introduce new versions of EDGEXTEND designed to support these new specifications to remain competitive. If IBM or BEA introduce new versions of WebSphere and WebLogic, we may need to introduce new versions of EDGEXTEND designed to support these new versions. If we do not bring enhancements and new versions of our products to market in a timely manner, our market share and revenues could decrease and our reputation could suffer. If we fail to anticipate or respond adequately to changes in technology and customer needs, or if there are any significant delays in product development or introduction, our revenues and business could suffer. Our EDGEXTEND for WebSphere product was released in March 2002, our EDGEXTEND for WebLogic product was released in August 2002 and our EDGEXTEND for ..NET product was released in October 2002. Any delays in releasing future enhancements to these products or new products on a generally available basis may materially effect our future revenues. BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES. We must maintain a strong direct sales team to generate revenues. In the last several years, we have experienced significant turnover in our sales team. In the past, newly hired employees have required training and approximately six to nine months experience to achieve full productivity. Like many companies in the software industry, we are likely to continue to experience turnover in our sales force and we may not be able to hire enough qualified individuals in the future. As a result of our employee turnover, a number of our sales people are relatively new and we may not meet our sales goals. In addition, our recently hired employees may not become productive. 17 BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES CHANNEL THROUGH INDEPENDENT SOFTWARE VENDORS, SYSTEMS INTEGRATORS, OEM PARTNERS AND OTHER RESELLERS, 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 revenue growth will depend in large part on our success in establishing and leveraging relationships with independent software vendors, system integrators, OEM partners and 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 sales efforts of these third parties. In addition, because these relationships are nonexclusive, these third parties may choose to sell application servers, data management products 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 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 large projects to fully deploy our products and achieve our revenue goals. These enterprise projects often take many years to complete and can be delayed by a variety of factors, including general or industry-specific economic downturns, our customers' budget constraints, other customer-specific delays, problems with other system components or delays caused by the OEM, independent software vendors, system integrators or other third-party partners who may be managing the system deployment. If our customers cannot successfully implement large-scale deployments, or they determine for any reason that our products cannot accommodate large-scale deployments or that our products are not appropriate for widespread use, our business could suffer. In addition, if an OEM, independent software vendors, system integrator or other third-party partner fails to complete a project utilizing our product for a customer in a timely manner, our revenues or business reputation could suffer. BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR THEIR OWN PRODUCTS. Because Sun Microsystems controls the J2EE standard, we need to maintain a good working relationship with Sun Microsystems as we decide to develop future versions of EDGEXTEND, as well as additional products using J2EE, that will gain market acceptance. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents, and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell some competing products that would, in the absence of this license agreement, infringe our patents. Because Sun Microsystems controls the J2EE standard, it could develop the J2EE standard in a more proprietary way to favor a product offered by its own products, or a third party, which could make it much harder for us to compete in the J2EE software market. MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD ACCEPTANCE. Our primary success has come in the J2EE market. Microsoft has established a competing standard for distributed computing, .NET. Our .NET products are new and unproven in the marketplace. If this standard gains widespread market acceptance over the J2EE or CORBA standards, our business could 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 or change purchasing decisions. We expect that Microsoft's presence in the application server market will increase competitive pressure in this market. WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE. The markets for our products are intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors in our markets are: o performance, including scalability, integrity and availability; 18 o ability to provide a competitive return on investment to the customer; o flexibility; o use of standards-based technology (e.g. J2EE); o ease of integration with customers' existing enterprise systems; o ease and speed of implementation; o quality of support and service; o security; o company reputation and perception of viability; and o price. In the EDGEXTEND market, alternative technology is available from a variety of sources. Companies such as Versant, Gemstone and Excelon are middleware vendors that offer alternative data management solutions that directly target EDGEXTEND's market. In addition, many prospective customers may build their own custom solutions. In the DIRECTALERT market, alternative approaches are provided by a variety of sources, including the potential for internal development. Company vendors such as SpiritSoft, TIBCO and IBM provide message-oriented middleware software which may evolve into competitive products. Vendors such as webMethods and Business Objects provide alternative architectures for business intelligence information. DIRECTALERT is based on licensed technology, which we may distribute on a non-exclusive basis. We continue to sell current and earlier versions of POWERTIER for J2EE application server to current customers. Our competitors for POWERTIER include both publicly and privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE Application Server). Many customers may not be willing to purchase our POWERTIER products because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors have pre-existing customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. IF THE MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS AND SERVICES DO 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 markets for infrastructure software for networks and web-based products and services. If these markets do not develop in the manner we currently envision, our business could be harmed. Moreover, critical issues concerning the commercial use of the Internet, including security, cost, accessibility and quality of network service, remain unresolved and may negatively affect the growth of the Internet as a platform for conducting various forms of electronic commerce. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased activity or due to increased government regulation. OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS. Achieving our planned revenue targets and other financial objectives will place significant demands on our management and other resources, in particularly because we must achieve our revenue and product development goals using both fewer people and less money. Our ability to manage our resources effectively will require us to continue to improve our sales process and to train, motivate and manage our employees. If we are unable to manage our business effectively within our current budget, we may not be able to retain key personnel and the quality of our services and products may suffer. 19 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. We do not have a key person life insurance policy covering Mr. Keene or any other officer or key employee. Our success will depend in large part upon our ability to attract and retain highly-skilled employees, particularly sales personnel and software engineers. If we are not successful in attracting and retaining these skilled employees, our sales and product development efforts would suffer. In addition, if one or more of our key employees resigns to join a competitor or to form a competing company, the loss of that employee and any resulting loss of existing or potential customers to a competitor could harm our business. If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR SOFTWARE MAY BE DELAYED. Complex software products often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Our products have in the past contained and may in the future contain errors and defects, which may be serious or difficult to correct and which may cause delays in subsequent product releases. Delays in shipment of scheduled software releases or serious defects or errors could result in lost revenues or a delay in market acceptance, which could have a material adverse effect on our revenues and reputation. WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS. Because our customers use our products for important business applications, errors, defects or other performance problems could result in financial or other damages to our customers. They could pursue claims for damages, which, if successful, could result in our having to make substantial payments. Although our purchase agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions. A product liability claim brought against us, even if meritless, would likely be time consuming and costly for us to litigate or settle. A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS. Our future success will depend, in part, on our successful development of international markets for our products. Approximately 64% of our total revenues came from sales of products and services outside of the United States for the three months ended March 31, 2003 and approximately 37% of our revenues came from sales of products and services outside of the United States for the three months ended March 31, 2002. Approximately 33% of our total revenues came from sales of products and services outside of the United States for the year ended December 31, 2002. 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, we expect that we will depend more heavily on third party distributors to sell our products in the future; however we have not yet achieved results from this strategy. The success of our international strategy will depend on our ability to develop and maintain productive relationships with these third parties. The failure to develop key international markets for our products could cause a reduction in our revenues. Additional risks related to our international expansion and operation include: o difficulties of staffing, funding and managing foreign operations; o future dependence on the sales efforts of our third party distributors to expand business; o longer payment cycles typically associated with international sales; o tariffs and other trade barriers; o failure to comply with a wide variety of complex foreign laws and changing regulations; o exposure to political instability, acts of war, terrorism and economic downturns; 20 o failure to localize our products for foreign markets; o restrictions under U.S. law on the export of technologies; o potentially adverse tax consequences; o reduced protection of intellectual property rights in some countries; and o currency fluctuations. The majority of our product sales outside the United States are denominated in U.S. dollars. We do not currently engage in any hedging transactions to reduce our exposure to currency fluctuations as a result of our foreign operations. We are not currently ISO 9000 compliant, nor are we attempting to meet all foreign technical standards that may apply to our products. Our failure to develop our international sales channel as planned could cause a decline in our revenues. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION MAY BE IMPAIRED. Our success depends on our ability to protect our proprietary rights to the technologies used in our products, and yet the measures we are taking to protect these rights may not be adequate. If we are not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and services, which could harm our business. We rely on a combination of patents, copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary technology, but these legal means afford only limited protection. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs and diversion of management attention and resources. 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 entrants into our market increases, the possibility of an intellectual property claim against us grows. For example, we may be inadvertently infringing a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware, which will cause us to be infringing when it issues in the future. To address these patent infringement claims, we may have to enter into royalty or licensing agreements on disadvantageous commercial terms. Alternatively, we may be unable to obtain a necessary license. A successful claim of product infringement against us, and our failure to license the infringed or similar technology, would harm our business. In addition, any infringement claims, with or without merit, would be time-consuming and expensive to litigate or settle and would divert management attention from administering our core business. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. If our current stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, and unregistered shares to be registered in the future, the market price of our common stock could fall. As of March 31, 2003, we had approximately 2,404,473 shares of common stock outstanding. Virtually all of our shares, other than shares held of affiliates, are freely tradable. Shares held by affiliates are tradable, subject to the volume and other restrictions of Rule 144. In addition, we filed a registration statement on Form S-3 with the SEC on April 30, 2003 covering the resale of 375,869 shares of our common stock and 133,513 shares of common stock issuable upon exercise of outstanding warrants on behalf of certain stockholders, including funds affiliated with Needham Capital Partners. We have also agreed to file an additional registration statement on the request of the stockholders affiliated with Needham Capital Partners under certain circumstances. Upon the effectiveness of the registration statement filed on April 30, 2003, the stockholders included in the registration statement may freely trade their registered shares in the public market (subject to certain restrictions as a result of the status of the stockholders as affiliates of the Company) which could result in a decrease in the price of our stock. These sales of common stock could impede our ability to raise funds at an advantageous price, or at all, through the sale of securities. 21 OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, AND WE HAVE RECEIVED A NOTICE FROM NASDAQ REGARDING THE POSSIBLE DELISTING OF OUR STOCK FROM THE NASDAQ SMALLCAP MARKET. Our common stock price has been and may continue to be highly volatile, and we expect that the market price of our common stock will continue to be subject to significant fluctuations, as a result of variations in our quarterly operating results and the overall volatility of the Nasdaq SmallCap Market. These fluctuations have been, and may continue to be, exaggerated because an active trading market has not developed for our stock. Thus, investors may have difficulty selling shares of our common stock at a desirable price, or at all. Furthermore, we have received a notice from the Nasdaq SmallCap Market that if our stock does not meet the minimum $1.00 per share minimum requirement for a 10-day period by June 2, 2003, our stock may be delisted from the Nasdaq SmallCap Market. If we cannot achieve compliance we expect to receive a formal delisting notice from the Nasdaq SmallCap Market. We currently intend to seek a Nasdaq hearing for appeal if and when we receive such notice of delisting. The maintenance of our Nasdaq SmallCap Market listing is very important to us. We are seeking approval for a reverse stock split at our upcoming annual meeting of stockholders in June 2003 in order to enable us to maintain our Nasdaq SmallCap Market listing. If our stock is delisted from the Nasdaq SmallCap Market, our stock would trade on the OTC "bulletin board". Delisting from the Nasdaq SmallCap Market could negatively impact our reputation and consequently our business. In addition, the market price of our common stock may rise or fall in the future as a result of many factors, such as: o variations in our quarterly results; o announcements of technology innovations by us 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 and expectations regarding capital spending in the software industry and in our customers' industries; and o adoption of new accounting standards affecting the software industry. The market prices of the common stock of many companies in the software and Internet industries have experienced extreme price and volume fluctuations, which have 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. 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; 22 o limiting the persons who may call special meetings of stockholders; o prohibiting stockholder action by written consent; and 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. While we have no current agreements or negotiations underway with respect to any major acquisitions of third-party technology, 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 impairment of goodwill and amortization of 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. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Sensitivity. Our operating results are sensitive to changes in the general level of U.S. interest rates. If market interest rates had changed by ten percent in the three months ended March 31, 2003, our operating results would not have changed materially. As of March 31, 2003, most of our cash equivalents were invested in money market accounts and, thus, the principal values are not susceptible to changes in short-term interest rates. Foreign Currency Fluctuations. We have certain operating transactions in foreign currencies, and maintain balances that are due or payable in foreign currencies at March 31, 2003. We estimate that a hypothetical ten percent change in foreign currency rates in the three months ended March 31, 2003 would not have impacted our financial results of operations materially. We do not hedge any of our foreign currency exposure. 23 ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives and are effective in doing so. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 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. (c) SALES OF UNREGISTERED SECURITIES. On October 18, 2002, the Company issued to RTX Securities Corporation a warrant to purchase up to 5,000 shares of common stock, at a purchase price equal to $3.80 per share in connection with the engagement of RTX Securities Corporation by the Company. The issuance of the above warrant was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving any public offering. RTX Securities Corporation may exercise the warrant at any time after the date of issuance. ITEM 5. OTHER INFORMATION. In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we are required to disclose the non-audit services approved by our Audit Committee to be performed by Deloitte & Touche LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. Deloitte & Touche LLP did not provide any non audit services for the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS: 4.3* Common Stock Warrant, Warrant No. W-CS-2, dated October 18, 2002, issued to RTX Securities Corporation. 10.23* Registration Rights Agreement dated as of October 18, 2002 between Persistence and RTX Securities Corporation. 99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to our Registration Statement on Form S-3 (File No. 333-104878), filed on April 30, 2003. (b) REPORTS ON FORM 8-K: A report on Form 8-K filed April 24, 2003, reporting under Item 9 the announcement that on April 24, 2003, the Company issued a press release regarding its financial results for the quarter ended March 31, 2003. In accordance with Securities and Exchange Commission Release No. 33-8216, the information contained in the Form 8-K, which was intended to be furnished under Item 12, "Results of Operations and Financial Condition," was instead furnished under Item 9, "Regulation FD Disclosure." 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to Quarterly Report on Form 10-Q 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: June 20, 2003 26 CERTIFICATIONS I, Christopher T. Keene, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Persistence Software, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 20, 2003 /s/ CHRISTOPHER T. KEENE ------------------------- Christopher T. Keene Chief Executive Officer 27 CERTIFICATIONS I, Christine Russell, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Persistence Software, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 20, 2003 /s/ CHRISTINE RUSSELL ----------------------- Christine Russell Chief Financial Officer 28 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION --- ----------- 4.3* Common Stock Warrant, Warrant No W-CS-2, dated October 18, 2002, issued to RTX Securities Corporation. 10.23* Registration Rights Agreement dated as of October 18, 2002 between Persistence and RTX Securities Corporation. 99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to our Registration Statement on Form S-3 (File No. 333-104878), filed on April 30, 2003. EX-99.1 3 pers_10qa1exh99-1.txt Exhibit 99.1 PERSISTENCE SOFTWARE, INC. CERTIFICATION PRUSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Persistence Software, Inc. (the "Company") on Form 10-Q/A for the quarter ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher T. Keene, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ CHRISTOPHER T. KEENE - ------------------------ Christopher T. Keene Chief Executive Officer June 20, 2003 EX-99.2 4 pers_10qa1exh99-2.txt Exhibit 99.2 PERSISTENCE SOFTWARE, INC. CERTIFICATION PRUSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Persistence Software, Inc. (the "Company") on Form 10-Q/A for the quarter ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christine Russell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ CHRISTINE RUSSELL - ----------------------- Christine Russell Chief Financial Officer June 20, 2003 -----END PRIVACY-ENHANCED MESSAGE-----