-----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, E4hPlqZKmOG7EwCwkpiYvRhyWYSguw5qiJVWQ9138l/TINoToMQzme/w4tNi3tU6 5pxcUBk8YgUqNi3oOgcWeA== 0000891618-01-000269.txt : 20010409 0000891618-01-000269.hdr.sgml : 20010409 ACCESSION NUMBER: 0000891618-01-000269 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25857 FILM NUMBER: 1590744 BUSINESS ADDRESS: STREET 1: 1720 SOUTH AMPHLETT BLVD., 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503417733 10-K 1 f70040e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31,2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ . COMMISSION FILE NUMBER: 000-25857 PERSISTENCE SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3138935 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR SAN MATEO, CALIFORNIA 94402 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $42.5 million as of February 28, 2001 based upon the closing sale price on the Nasdaq National Market reported for such date of $2.97 per share. Shares of Common Stock held by each officer and director and by each person who owns 10% of more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 19,921,369 shares of the registrant's Common Stock issued and outstanding as of February 28, 2001. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive proxy statement for the 2001 Annual Meeting of Stockholders to be held on June 7, 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 We own or have rights to trademarks or trade names that we use in conjunction with the sale of our products and services. "Persistence," as well as the logo for "Live Object Cache," are registered trademarks owned by us. We have registrations pending for the use of our logo with "Persistence," as well as "PowerTier," "Dynamai," and "The Engine for E-Commerce" are also trademarks of ours. This annual report on Form 10-K also makes reference to trademarks and trade names of other companies that belong to them. PART I ITEM 1. BUSINESS. COMPANY OVERVIEW Persistence is a leading provider of transactional application servers and dynamic Web content acceleration servers -- software that processes transactions between users and back-end computer systems in electronic commerce systems. By caching data, or moving information stored in back-end computer systems closer to users, our software dramatically reduces network traffic, resulting in both better network performance and faster transaction processing. In addition, PowerTier application servers implement Sun Microsystems' full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or EJB) standard to enable businesses to deploy sophisticated Java applications, which readily scale, or accommodate rapidly increasing numbers of users. Our PowerTier family of transactional application servers offers the speed, scalability and reliability to enable the next generation of sophisticated, high-volume electronic commerce applications. Our Dynamai Web content accelerator improves the speed and scalability of electronic commerce Web sites that rely heavily on dynamically generated content using technologies such as Java Server Pages and Active Server Pages. Our major customers include AT&T, Boeing, Cisco, FedEx, Fujitsu, Instinet, Intershop, iPIX, Lucent, Morgan Stanley Dean Witter, Motorola, Network Commerce, Nokia, Salomon Smith Barney and Wells Fargo. INDUSTRY BACKGROUND The Internet has evolved into a global communications medium enabling millions of people to share information and conduct business electronically. As the Internet's popularity has increased, companies in industries ranging from securities trading to book selling are extending their core business processes over the Web to conduct electronic commerce with customers, suppliers and partners. The growth of these electronic commerce offerings has led to significant growth in the number of users and transactions conducted over the Web. While creating new business opportunities, the significant growth of electronic commerce has also created tremendous technological challenges for electronic commerce companies struggling to meet the needs of rapidly increasing numbers of users. These companies are discovering that their existing Internet software infrastructure is unable to support thousands of concurrent users or process up to thousands of transactions per second. Even casual observers of the Internet are familiar with these limitations, which include: - Poor performance: Initial electronic commerce offerings were not designed to scale to handle large numbers of users. Internet users accessing these systems often experience lengthy delays as the number of concurrent users increases. - System failures: Initial electronic commerce offerings did not anticipate the level of robustness required to operate 24 hours a day, 7 days a week. Internet users accessing these systems at peak volume can experience frequent system crashes. - Limited adaptability: Initial electronic commerce offerings were built on software infrastructures that offered only limited ability for customization and personalization. To remain competitive, companies must continuously enhance and differentiate their electronic commerce offerings. While these problems have been well-publicized in the business-to-consumer market, we believe that business-to-business interactions face even more pronounced problems due to the added complexity of 1 3 managing transactions between multiple companies. In addition, we expect the growth of the business-to-business electronic commerce market to outpace the growth of the business-to-consumer market. In large part, the problems facing these organizations, both in business-to-business and business-to-consumer electronic commerce, are derived from the continuing evolution and increasing sophistication of web-based applications. In the early days of the Internet, organizations turned to the Web for information publishing, decision support and simple transaction processing. This first generation of web-based applications focused on extending legacy applications to the Internet. These applications were typically not business- critical, and had relatively simple interactions and limited functionality. The web application server emerged as the infrastructure used to support these first generation applications. Today, use of the Web has changed dramatically as the Web has emerged as a leading platform for conducting electronic commerce. The number of individuals and organizations conducting transactions over the Internet has increased significantly, as organizations have offered increasingly sophisticated and feature-rich electronic commerce applications. At the same time, as organizations have begun to conduct significant volumes of business over the Internet, system failures and delays in transaction processing have ceased to be mere inconveniences and have become serious impediments to doing business. To achieve a competitive advantage in today's environment, many businesses are looking to create web-based electronic commerce offerings that are available 24 hours per day, 7 days per week and that enhance customer loyalty by leveraging partner, supplier and third party relationships. Complicating these challenges further is the need to rapidly develop and deploy these applications on "Internet time." As the Internet has evolved into a critical business platform, the limitations of the software infrastructure used to support electronic commerce have become apparent. The first generation web application servers were not designed to accommodate the high transaction volumes and high performance requirements that characterize electronic commerce today. The next generation of electronic commerce will require a fundamentally new software infrastructure, based on an application server platform optimized for high volume transaction processing over the Internet. The platform must provide: - Real-time scalability: accommodate up to thousands of end users with consistent sub-second response times; - High availability: handle system failures without interruption and without losing critical information for potentially thousands of concurrent users; - Rapid adaptability: allow companies to continuously improve their business processing through automated development and management of differentiated electronic commerce offerings; and - Business-to-business integration: enable businesses to extend their processing across organizational boundaries. PERSISTENCE SOLUTION Our PowerTier and Dynamai family of products consists of transactional application servers that are specifically designed to enable high volume, high performance electronic commerce applications. Our products, PowerTier for EJB, PowerTier for C++ and Dynamai, address the scalability, availability and adaptability demands that typically occur when delivering business solutions over the Internet. Our products offer the following key benefits: Real-Time Response for Thousands of Concurrent Users. Our PowerTier and Dynamai products were designed specifically to accommodate high volume transaction processing and the data integrity requirements of distributed applications. Both PowerTier and Dynamai utilize caching technology. Caching is a process in which data is pulled out of back-end systems and into the server cache, which allows the data to be shared and manipulated by multiple users. Replication between PowerTier server caches using the PowerSync feature allows a cluster of PowerTier servers to provide highly scalable performance as the number of users increases. Dynamai is designed to use a similar clustering scheme to enable successful cooperation among multiple 2 4 caches. This architecture helps reduce the work load on back-end systems and accelerates application performance. The effect of this architecture is to minimize unnecessary network traffic and thereby enable high performance and reliability even with significant transaction volumes. We believe that both our PowerTierand Dynamai products offer superior performance and scalability to support the deployment of large-scale electronic commerce applications. Dramatic Reductions In Time-to-Market for Electronic Commerce Applications. Our PowerTier platform decreases time to market and development cycles for sophisticated electronic commerce applications due to our proprietary and patented object-to-relational mapping technology. This technology enables the automatic generation of software code, which minimizes basic, low-level programming tasks, such as security and database access. The PowerTier platform accelerates development by giving developers access to data in a familiar way, as software components, and provides application developers with a framework to rapidly build electronic commerce applications. Similarly, the Dynamai product enhances the performance and scalability of Web-based systems through a relatively simple cache configuration process, which does not require costly re-architecture of existing back-end systems. Protects and Leverages Existing Information Technology Investments. The PowerTier platform enables developers to build new electronic commerce applications while simultaneously integrating existing back-end systems. PowerTier's flexible architecture integrates with disparate database servers, web servers and multiple clients, while supporting multiple programming languages and computing platforms. PowerTier provides enhanced flexibility and interoperability to link existing enterprise applications and systems, allowing businesses to leverage their investments in information technology and extend them over the Internet. Similarly, the Dynamai product is designed to provide its benefits with minimal disruption of existing information technology investments. Leadership in Emerging Standards. Customers are increasingly seeking open, standards-based technology solutions that enable them to develop and implement new applications rapidly. Our PowerTier for EJB products provide application server solutions that support the J2EE specification to enable businesses to deploy high performance, scalable Java applications for the enterprise. We worked with the Sun Microsystems consortium to define an industry-wide component standard to be used when building enterprise applications with the Java language. It is this standard upon which our PowerTier platform is built, and we believe that this emerging platform has the potential to dramatically simplify the development of distributed, multi-tier electronic commerce applications. Sun introduced the Java 2 Platform, Enterprise Edition (J2EE) in 1999, which is a suite of enterprise Java technology specifications. Persistence became one of Sun's first J2EE licensees, and we intend to continue to be a leading adopter and contributor to these technologies as they evolve. Optimized Platform For Business-to-Business Electronic Commerce. Our transactional application server is designed and optimized to enable complex online transactions, providing the necessary scalable, reliable and secure infrastructure. Platforms designed to support the next generation of business-to-business electronic commerce applications must handle hundreds and potentially thousands of concurrent users while simultaneously providing reliability and security, and enabling connections to a myriad of existing and emerging back-end applications. In addition, we believe our PowerTier products are particularly well suited for multi-party, multi-step business-to-business transactions that require server-to-server communication. PERSISTENCE STRATEGY Our objective is to become a leading provider of transactional application server software and dynamic Web content acceleration products that comprise the Internet software infrastructure for high volume, high performance electronic commerce applications. To achieve this goal, we intend to: Increase Partnerships With OEM and Reseller Partners. We intend to continue to develop and expand relationships with OEM and reseller partners. We believe these third parties can effectively market our products, particularly Dynamai, through their existing relationships with our target market customers. We believe that these relationships will provide additional marketing and sales channels for our products and 3 5 facilitate the successful deployment of customer applications. We are currently working with multiple OEM and reseller partners, including Intel, with whom we announced a reseller agreement in February 2001. Capture Market Share in the Emerging Business-to-Business Electronic Commerce Market. We intend to become a market leader in providing software infrastructure to enable sophisticated business-to-business electronic commerce applications. To achieve this objective, we will continue to make investments in building our sales and marketing organizations by shifting to a greater focus on our indirect sales channels. We continue to launch a variety of sales and marketing programs designed to capture market share. We will continue to collaborate with our innovative and advanced customers to develop and deliver product features that address their needs. We believe that this collaboration focuses our overall product development effort and speeds our time-to-market. Extend Technology Leadership Position in Standards-Based Platforms for Next Generation Electronic Commerce. We intend to extend our technology leadership in the transactional application server and dynamic Web content acceleration markets by enhancing our underlying technology to offer real-time scalability, high availability and rapid adaptability for the next generation of electronic commerce applications. To achieve this objective, we will continue to make investments in our research and development organization. In addition, we intend to be a leader in the definition and adoption of emerging technology standards, such as J2EE, which we believe have the potential to dramatically simplify the development of distributed, multi-tier applications. We have been a pioneer in the areas of caching and object-relational mapping, and hold several patents on core technologies. We intend to continue to innovate and create new enabling technologies for electronic commerce. Expand Product Platform to Offer Complementary Solutions. In addition to extending our technology leadership, we intend to broaden and enhance our product platform to incorporate complementary solutions for developing and deploying sophisticated electronic commerce applications. We will continue to make investments in our research and development organization for many of these product initiatives. We will also consider, from time to time, bolstering these internal efforts with strategic acquisitions. For example, we have recently licensed real-time client notification technology, which provides the client notification infrastructure through updates of server-side information resources that are processed and routed to clients of the PowerTier for EJB application server. The addition of these complementary technologies will enable us to offer a more complete platform for our customers. Leverage Installed Customer Base. We believe that there are significant opportunities to expand the use of our products throughout our current customer base. Although most organizations initially deploy our products on a departmental or pilot basis, we believe that initial customer success with these deployments may lead to significant opportunities for enterprise-wide adoption. Further, we believe that most companies, including our customers, are just beginning to fully capitalize on the opportunities created by the Web. As these companies increasingly migrate their core business processes to the Web, we believe they will need additional licenses of our software to support and enable their new electronic commerce applications. Strengthen International Presence. We believe there are significant international opportunities for our products and services, in particular, in Europe and Asia. Currently, we have established direct sales operations in the United Kingdom, Germany, Hong Kong and Shanghai. In addition to our direct sales operations, we also distribute our products throughout Europe and Asia with distributors and systems integrators. We intend to extend these international third-party distributor and systems integrator relationships. 4 6 PRODUCTS Our PowerTier platform is a family of transactional application server products that deliver scalability, high availability and rapid adaptability for high volume, high performance electronic commerce applications. Our current product line consists of PowerTier for EJB, which was released in 1998, and PowerTier for C++, which was released in 1997. The following table describes the major features and benefits of our PowerTier platform.
PRODUCT FEATURES BENEFITS ------- -------- -------- POWERTIER FOR EJB Shared transactional object cache Enables real-time scalability by reducing database traffic Application server cache Synchronization Allows cooperative processing across organizational boundaries Application server failover Delivers high availability by replicating information across clusters of application server caches PowerPage Enhances developer productivity Integrated end-to-end systems, including: Delivers out of box productivity and an - Servlets end-to-end development and deployment - Web server platform - XML server - EJB server EJB 1.1-compliant security encryption Simplifies developer inclusion of encryption Support for J2EE standard Protects customers' IT investments as a result of open solution POWERTIER FOR C++ Shared transactional object cache Enables real-time scalability by reducing database traffic Application server cache Synchronization Allows cooperative processing across organizational boundaries Application server failover Delivers high availability by replicating information across clusters of application server caches Support for CORBA standard Protects customers' IT investments as a result of open solution
PowerTier for EJB Our PowerTier for EJB application server platform incorporates our patented technologies into one of the few J2EE-based transactional application servers. The EJB and J2EE standards, as defined by the Java Software division of Sun Microsystems, are gaining rapid acceptance as a programming language for complex enterprise applications. J2EE provides a consistent way to program and integrate services for companies building distributed business-to-business applications with the Java programming language. The EJB standard specifies container-managed persistent objects, which automate the mapping between EJB components and relational database tables. This feature allows programmers to build complex applications quickly by making relational data look like software components, which can be easily manipulated. We worked with the Sun Microsystems consortium to help define the initial EJB standard, and we continue to contribute to new versions of the EJB standard. Our PowerTier for EJB platform now runs on the Windows NT and multiple varieties of the Unix operating systems. Our latest version of PowerTier for EJB, PowerTier 6 with PowerPage, is designed to simplify the complex task of developing high performance, scalable web applications and eliminate the need to compromise between powerful application servers and simplicity of web page creation. The PowerTier 6 application server is designed to have an end-to-end J2EE development platform that enhances development team productivity and allows scalable, flexible applications to be rolled out at internet speed. PowerPage is designed to give web developers a head start by providing them with a pre-built HTML framework from which to work, as well as an EJB-based back-end for maintainability and scalability. PowerPage is also designed to automatically generate Java Server Pages (JSPs), which provide the interface 5 7 between the browser and the EJB server. The end result of the design is to have dynamic HTML pages with access to EJBs, thus greatly reducing the manual coding of hundreds of lines required for a distributed application. PowerTier 6 also: - Is designed to be security compliant with Sun's EJB 1.1 specification, providing integrated and comprehensive authorization, authentication and encryption capability for new applications - Includes an enterprise class Servlet Engine tightly integrated with PowerTier 6, with support for Java servlets and JSPs. The Servlet Engine is designed to be scalable and fault tolerant. PowerTier for C++ Our PowerTier for C++ product is a high-performance transactional application server platform, which is based on our patented technologies and the Common Object Request Broker Architecture, or CORBA, standard for communication between distributed applications. The CORBA standard is managed by an industry group called the Object Management Group, of which we are a contributing member. We are also one of the authors, along with Oracle, IBM and others, of an emerging component of the overall CORBA standard, called the Persistent State Service specification. Our PowerTier for C++ platform runs on the Windows NT and Unix operating systems. We have licensed the J2EE platform and are a contributor to the Java standard. Patented Technology Platform Our application server cache software architecture and cache replication technology have been designed to serve as the foundation for a variety of scalable electronic commerce applications. - Shared Caching. Our cache technology is the foundation for the high performance characteristics of our transactional application server. To maximize performance, dynamic information such as product inventory data is retrieved from a database into the application server cache. This in-memory information may be accessed simultaneously by multiple users, saving each user from having to access a disk-based database for that information. This feature reduces network traffic between the application server and the database, delivering higher performance. - Transactional Caching. To enable users to get a consistent view of information within the shared cache, our technology prevents one user from seeing uncommitted changes made by another user. The ability of our shared application server cache to isolate users from dynamic changes to component information, such as inventory data, differentiates our application server cache from other caching technologies which can only manage static information, such as web pages. This feature allows high performance caching of dynamic or transactional information. - Cache Replication. Our cache replication technology provides the foundation for the scalability, stateful availability and fault tolerance of our transactional application server. We define stateful availability as a system that can transfer a user in the middle of a complex business operation, such as a portfolio valuation, from one application server to another without interruption or losing business state, such as the user's portfolio information. To provide stateful scalability, information from one application server cache can be synchronized with information in one or more other application server caches. Companies can deploy additional replicated application server caches to increase their ability to support more users, allowing them to use several smaller computers to do the work of one larger and more expensive computer. Users' requests are automatically routed to the application server with the most free capacity, enabling high performance, notwithstanding increases in user volumes. In the event of an application server failure, that application server's responsibilities are automatically reassigned to another application server, improving system availability. - Cluster Management. We have developed complementary, proprietary administration software, which enables remote administration for clusters of application servers, reducing both administrative costs and the possibility of error. This management software also enables centralized monitoring, via a 6 8 standard web browser, of the cluster through any individual application server. This feature contributes to greater system availability and reduced administrative costs. - Development Automation. Our PowerTier development environment includes frameworks to automate or eliminate many development tasks. The proprietary and patented object-relational mapping feature automatically generates the software code to translate software components into relational databases. This feature reduces the programming time required to build enterprise applications. The PowerTier application server includes pre-built software services for data management, transaction management and communications, relieving the developer from having to build these services from scratch. - Standards-based. The PowerTier application server platform uses an open architecture that is based on industry standards such as Java, C++, CORBA, Windows NT, UNIX, SQL, J2EE, EJB and others. Dynamai Our Dynamai Web content accelerator improves the speed and scalability of electronic commerce Web sites that rely heavily on dynamically generated content using technologies such as Java Server Pages and Active Server Pages. The Dynamai product was released in 2000. The following table describes the major features and benefits of Dynamai.
PRODUCT FEATURES BENEFITS ------- -------- -------- Dynamai Dynamic Web object cache Enables real-time scalability by reducing application server and database workload Event-based content invalidation Supports maintenance of "fresh' information in cache Automatic cache clustering Delivers high availability by replicating information across clusters of application server caches On-the-fly content adaptation Allows caching of personalized content
We believe that research and product development will be a key to our success as a leader in the transactional application server and dynamic Web content acceleration markets. Our research and development expenditures totaled $8.1 million for 2000, $6.4 million for 1999, and $4.2 million for 1998. 7 9 CUSTOMERS Our software products are licensed to customers worldwide for use in a wide range of electronic commerce applications, including real-time electronic trading, supply chain management, internet network management, application outsourcing and customer relationship management. The following table lists a representative selection of customers who have purchased our products. E-COMMERCE/INTERNET FINANCIAL SERVICES/EXCHANGES budget.com Capital Group Cisco Systems* Capital One Financial Computer Science Corp. CNP Assurances* DiCarta Credit Suisse First Boston* Fujitsu* Cyberslotz Globe ID Software Instinet* Imind* JP Morgan Internet Pro Kinetech Services Intershop* Morgan Stanley Dean Witter* Mercata Nike Securities NBC Internet Norwest* Netscape Wofex Network Appliance Solomon Smith Barney* Nexus Limited Corp* Zurich Arippina Gruppe Object Space Open Environment TRANSPORTATION & LOGISTICS Persistence E Solutions Air Canada Pipeline Software Air France Rightworks* Executive Jet ShopNow.com* FedEx* Smallworld.com Hekimian Laboratories Systemax Sabre Group Holdings (American Airlines) Systemhaus der ABC PrivateKunde Transquest Information (Delta Airlines)* TurstTheDJ.com WorldRes.com Uyisys 4T Solutions MANUFACTURING & DISTRIBUTION Asea Brown Boveri Power T&D COMMUNICATIONS Boeing AT&T Enron Bell Atlantic IBM* BellCore* Nippon Steel* BellSouth Non-Stop Solutions Bull Ingenerie (France Telecom) Perkin-Elmer* CellularOne Group Raytheon Cross Keys Systems SuperValu* CSC Holdings (Cablevision)* Titan Systems Lucent Technologies* Xerox Motorola* Nextel OTHER Nokia* Caldwell-Spartin Qualcomm Convergy Information* Scientific-Atlanta Fermi National Accelerator Laboratory Sequel Systems National Aeronautics and Space Sprint Administration Telstra (Australia)
- --------------- * Denotes customers who have ordered at least $500,000 in products. 8 10 In 2000, sales of products and services to Salomon Smith Barney accounted for 16% of our total revenues. In 1999, sales of products and services to Cisco accounted for 13% of our total revenues. In 1998, sales of software licenses to Cisco accounted for 14% of total revenues, and sales of software licenses to Instinet accounted for 17% of total revenues. The following case studies illustrate how selected customers have used our products to address their electronic commerce and core business application needs. These case studies are based on information supplied by these customers, however we believe the information is accurate in all material respects. Reuters, the parent of Instinet, and Cisco are both stockholders in our company. Real-Time Electronic Trading Network Instinet Corporation. Instinet is the world's largest electronic agency broker in equity securities. Historically, trading in fixed income securities occurred almost exclusively over the telephone. Instinet revolutionized this telephone-based fixed income trading with a global electronic broker trading service for fixed income dealers that can accommodate up to 1,000 transactions per second. It has designed a system that was just brought live in the U.S., which is expected to use hundreds of replicated PowerTier application servers operating in concert when fully deployed to meet the performance and scalability requirements of its electronic fixed income broker service. In 1998, sales of software licenses to Instinet accounted for 17% of total revenues. Intranet Supply Chain Management Federal Express Corporation. The world's largest express transportation company, FedEx transports more than three million items to over 200 countries each business day, using a fleet of more than 620 aircraft and 44,000 vehicles. In its effort to improve on-time deliveries, FedEx has built a global operations center to monitor and control the movement of shipments worldwide. The global operations center functions as the nerve center of the FedEx transportation system, handling daily occurrences including changing flight schedules, emergency maintenance, inclement weather and excess package volumes. Because the company's existing mainframe systems lacked the required flexibility and performance, FedEx turned to us for help in building a high performance intranet system. By managing complex flight schedule information from multiple data sources within a PowerTier application server cache, the global operations center can provide real-time contingency plans, enabling FedEx to provide consistently high on-time package delivery rates and superior customer service. FedEx estimates that, using the PowerTier development environment, it has been able to significantly reduce development time for new system functionality compared to development in its traditional mainframe environment. Internet Service Provider Network Management Cisco Systems, Inc. A worldwide leader in networking for the Internet, Cisco Systems is committed to delivering hardware and software solutions that enable Service Providers to meet the rapid growth of the Internet. The Cisco Service Management System, or CSM, gives Service Providers sophisticated tools to automate time-consuming network management tasks. For this system, Cisco required a highly scalable, standards-based application server platform for deploying network management applications for managed business services such as virtual private networks, Internet telephony and electronic commerce. To meet these requirements, Cisco chose the PowerTier platform. For the Cisco IP Manager product within the CSM system, PowerTier application server caching enables real-time simulation of network configuration changes, preventing costly network outages. The PowerTier development environment also enables Cisco to create a common component framework that can be reused to reduce development time for future CSM network services. In 1999, sales of products and services to Cisco accounted for 13% of our total revenues, and in 1998, sales of software licenses to Cisco accounted for 14% of total revenues. 9 11 Application Outsourcing over the Internet Celera Genomics. Celera provides gene discovery and characterization services for drug discovery and development. Celera's GeneTag technology is a novel gene expression analysis method that enables pharmaceutical companies to develop new and potentially life-saving drugs by discovering and monitoring genes involved in disease. Celera's BioScope software application allows customers to access their data securely and remotely over the Internet. To allow clients to quickly analyze and view the GeneTag results, Celera needed a sophisticated software platform that could process hundreds of thousands of gene expression comparisons while avoiding data bottlenecks. Celera selected PowerTier to achieve these goals. The BioScope application utilizes the PowerTier application server cache for high volume data analysis. With the PowerTier development environment, Celera has been able to use both the Java and C++ languages to deliver the BioScope software application in only four months. Dynamic Visual Content Delivery over the Internet Internet Pictures Corporation. IPIX is a leader in delivering dynamic visual content for the Internet. Its technology is used by several of the Internet's most popular brands, such as eBay, Yahoo! and Realtor.com. iPIX's Virtual Tours for real estate are the daily destination for hundreds of thousands of real estate buyers and sellers worldwide. These tours allow potential buyers to view immersive 360-degree tours of properties at their leisure. IPIX chose Dynamai to speed up the performance of its back-end servers, handle traffic spikes gracefully and reduce the cost of building out its infrastructure to support a growing customer base. They were able to put Dynamai into production in a matter of days, achieving a 35x improvement in site scalability with almost no changes to their existing infrastructure. SALES AND MARKETING We sell our products through both a direct sales force and third party distributors. As of December 31, 2000, we had 68 people in our sales and marketing organization, of which 41 were in the United States, 18 were in European offices, and 9 were in our Asian offices. To support the complex enterprise nature of our sales, our direct sales force is organized into two-member teams of one sales representative and one sales engineer. We intend to increase the size of our sales force focused on indirect distribution channels. Our sales cycle is relatively long, generally between three and nine months. A successful sales cycle typically includes presentations to both business and technical decision makers, as well as a limited pilot program to establish technical fit. We have engaged in, and may engage in a variety of targeted marketing activities, including focused advertising, public relations, seminars, trade shows and customer-oriented web site management. We have also made substantial marketing investments in education and training for the EJB and C++ markets. We hold periodic seminars in order to train developers in the EJB community. Our web site allows developers to download a demonstration version of our products. We intend to continue to develop and expand relationships with OEM and reseller partners. We believe these third parties can effectively market our products, particularly Dynamai, through their existing relationships with our target market customers. We believe that these relationships will provide additional marketing and sales channels for our products and facilitate the successful deployment of customer applications. We are currently working with multiple OEM and reseller partners, including Intel, with whom we announced a reseller agreement in February 2001. In international markets, we plan to expand our sales through indirect channels, such as distributors and original equipment manufacturers. As of December 31, 2000, we were represented by seven international distributors, who sell our products in Europe, Asia and Latin America. 10 12 COMPETITION The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors in our market are: - performance, including scalability, integrity and availability; - ability to provide a complete software platform; - flexibility; - use of standards-based technology; - ease of integration with customers' existing enterprise systems; - ease and speed of implementation; - quality of support and service; - security; - company reputation; and - price. Our competitors for both PowerTier and Dynamai include both publicly and privately-held enterprises, including BEA Systems (WebLogic), Secant Technologies, IBM (WebSphere), Oracle (OAS) and Sun Microsystems (iPlanet). Many customers may not be willing to purchase our PowerTier or Dynamai 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. In addition, some competitors offer products that are less complex than our PowerTier products and require less customization to implement with potential customers' existing systems. Thus, potential customers engaged in simpler business-to-business e-commerce transactions may prefer these "plug-and-play" products to our more complex offerings. Moreover, there are other very large and established companies, including Microsoft, who offer alternative solutions and are thus indirect competitors. Further, dozens of companies have announced their intention to support EJB/J2EE and may compete against us in the future. These competitors and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. See also "Risk Factors -- Because we compete with Sun Microsystems, who controls the EJB/J2EE standard, we face the risk that they may develop this standard to favor their own products" and "-- Microsoft has established a competing application server standard, which could diminish the market potential for our products if it gains widespread acceptance." In addition, in the PowerTier for C++ market, many potential customers build their own custom application servers, so we effectively compete against our potential customers' internal information technology departments. In the Dynamai market, similar dynamic Web content acceleration technology is available from a variety of sources, including but not limited to internal development, application server vendors such as Oracle, electronic commerce software vendors such as Intershop and ATG, content delivery networks such as Akamai and epicRealm, and emerging software and hardware appliance vendors such as Chutney and Cachier, who are directly targeting Dynamai's market. INTELLECTUAL PROPERTY RIGHTS Our performance may depend on our ability to protect our proprietary rights to the technologies used in our principal products. If we are not adequately protected, our competitors can use the intellectual property 11 13 that we have developed to enhance their products and services, which would harm our business. We rely on a combination of patents, copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, but these legal means afford only limited protection. As of February 28, 2001, we had five issued United States patents and two pending United States patent applications with allowable subject matter. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Thus, the measures we are taking to protect our proprietary rights in the United States and abroad may not be adequate. Finally, our competitors may independently develop similar technologies. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows. For example, we may be inadvertently infringing a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware, which will cause us to be infringing when it issues in the future. To address these patent infringement claims, we may have to enter into royalty or licensing agreements on disadvantageous commercial terms. Alternatively, we may be unable to obtain a necessary license. A successful claim of product infringement against us, and our failure to license the infringed or similar technology, would harm our business. In addition, any infringement claims, with or without merit, would be time-consuming and expensive to litigate or settle and would divert management attention from administering our core business. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell competing products that would, in the absence of this license agreement, infringe our patents. Under this agreement, Sun Microsystems made a one-time payment to us. Neither Sun Microsystems nor we can transfer the license without the consent of the other party. EMPLOYEES As of December 31, 2000, we had 152 full-time employees, including 68 in sales and marketing, 51 in research and development, 12 in professional services and 21 in general and administrative functions. Our relationships with our employees are generally good. From time to time, we also employ independent contractors to support our sales and marketing, research and development, professional services and administrative organizations. 12 14 EXECUTIVE OFFICERS The following table sets forth specific information regarding our executive officers as of February 28, 2001:
NAME AGE POSITION ---- --- -------- Christopher T. Keene.... 40 Chairman of the Board of Directors and Chief Executive Officer James H. Barton......... 37 Vice President of Strategic Technology and Chief Technology Officer Derek Henninger......... 38 Vice President of Engineering Mark Palmer............. 51 Senior Vice President of Worldwide Field Operations Christine Russell....... 51 Chief Financial Officer and Secretary
Each executive officer serves at the sole discretion of the Board of Directors. Christopher T. Keene co-founded Persistence and has served as Chief Executive Officer and a director since June 1991 and as Chairman of the Board since April 1999. From June 1991 to April 1999, Mr. Keene also served as President. Before founding Persistence, Mr. Keene was a Manager at McKinsey & Co., a management consulting firm, from July 1987 to June 1991. Mr. Keene holds a B.S. degree in Mathematical Sciences with honors from Stanford University and an M.B.A. degree from The Wharton School at the University of Pennsylvania. James H. Barton has served as Vice President of Strategic Technology and Chief Technology Officer since February 2000, as Director of Strategic Technology from November 1999 to February 2000, and as Senior Field Engineer from October 1997, when he joined Persistence, to November 1999. From June 1996 to October 1997, Mr. Barton was Director of Internet Products and Services for Applied Reasoning Systems, an information technology company. From July 1994 to June 1996, he was a Senior Systems Engineer with ParcPlace Systems, a pioneering company in distributed object technology. Previously, he held field engineering positions at information technology companies Object Design, Rational Software, and IBM. Mr. Barton holds a B.S. degree in Electrical Engineering from Tennessee Technological University, an M.S. degree in Computer Engineering from Carnegie Mellon University, and an M.B.A. degree from the University of Maryland. Derek Henninger co-founded Persistence and has served as Vice President of Engineering since June 1991. Previously, Mr. Henninger worked as a senior software engineer in the Data Interpretation Division of Metaphor Corporation, a software and hardware company, from September 1990 to June 1991. Mr. Henninger holds a B.A. degree in Economics and a B.S. degree in Computer Science and Mathematics from the University of California at Davis. Mark Palmer joined Persistence in June 2000 as Senior Vice President of Worldwide Field Operations. He leads the company's global sales organization. From April 1999 through June 2000 Mr. Palmer was on a personal sabbatical. From May 1994 to April 1999, Mr. Palmer has served as President and Chief Executive Officer of TriMark Technologies, a company that designed insurance industry software. Earlier in his career, Mr. Palmer managed sales operations at Sun Microsystems, a leading hardware and software company, where he helped reengineer an alternate distribution channel. Mr. Palmer held senior level sales and executive management positions in various software companies including Inforex and Data General Corporation. Christine Russell joined Persistence in October 1997 and has served as Chief Financial Officer and Secretary since December 1997. Previously, she served as Chief Financial Officer for Cygnus Solutions, an open source platform software company, from October 1995 to October 1997. From April 1992 to October 1995, Ms. Russell served as Chief Financial Officer of Valence Technology, a developer of lithium polymer batteries. Previously, she served as Chief Financial Officer at Covalent Technologies, Inc., a vertical software company, as Vice President of Finance of Stellar Systems, Inc. a security software and hardware company, and as Corporate Controller of Shugart Corporation, a subsidiary of Xerox. She holds a B.A. degree in English Literature and an M.B.A. degree from Santa Clara University. 13 15 ITEM 2. PROPERTIES. We are headquartered in San Mateo, California, where we lease approximately 22,000 square feet of office space under a lease expiring on June 30, 2002. We have an engineering staff facility in San Diego, where we lease approximately 6,000 square feet of office space under a lease expiring on August 31, 2004. We also maintain sales offices in various U.S. states, the United Kingdom, Germany, Hong Kong and Shanghai. We believe that our existing facilities are adequate to meet our current and foreseeable requirements or that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS. We are not currently subject to any material legal proceedings. We may, however, from time to time become a party to various legal proceedings that arise in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None 14 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK. Our Common Stock has been traded on the Nasdaq National Market under the symbol PRSW since the effective date of our initial public offering on June 24, 1999. Prior to the initial public offering, no public market existed for our Common Stock. The price per share reflected in the table below represents the range of low and high closing sale prices for our Common Stock as reported in the Nasdaq National Market for the periods indicated.
HIGH LOW ------ ------ For The Year Ended December 31, 1999: Second Quarter from June 24, 1999........................ $13.81 $11.00 Third Quarter............................................ $28.88 $12.63 Fourth Quarter........................................... $26.06 $ 8.25 For The Year Ended December 31, 2000: First Quarter............................................ $23.63 $15.81 Second Quarter........................................... $21.38 $10.13 Third Quarter............................................ $20.75 $ 9.91 Fourth Quarter........................................... $12.00 $ 3.38
We had 177 stockholders of record as of February 28, 2001, including several holders who are nominees for an undetermined number of beneficial owners. DIVIDEND POLICY. We have never paid dividends on our common stock or preferred stock. We currently intend to retain any future earnings to fund the development of our business. Therefore, we do not currently anticipate declaring or paying dividends in the foreseeable future. In addition, our line of credit agreement prohibits us from paying dividends. USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. Our registration statement on Form S-1, SEC File No. 333-76867, for our initial public offering of common stock became effective on June 24, 1999. We registered and sold an aggregate of 3,450,000 shares of common stock under the registration statement at a per share price of $11.00. Our underwriters were BancBoston Robertson Stephens, U.S. Bancorp Piper Jaffray, and Soundview Technology Group. Offering proceeds, net of aggregate underwriting commissions and discounts of $2.7 million and other offering transaction expenses of $1.1 million, were $34.1 million. None of the underwriting commissions and discounts or other offering transaction expenses were direct or indirect payments to our directors, officers, or holders of 10% or more of our stock. From June 24, 1999 through December 31, 2000, we have used the net offering proceeds as follows: Working capital expenditures................................ $12.6 million Acquiring property and equipment............................ 2.2 million Acquiring technologies...................................... 2.9 million ------------- 17.7 million Investing in short-term, investment grade, interest-bearing securities................................................ 16.4 million ------------- $34.1 million =============
Each of the above amounts represents our best estimate of our use of the net proceeds. None of the net offering proceeds were paid directly or indirectly to our directors, officers, or holders of 10% or more of our stock. 15 17 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2000, 1999 and 1998, and the consolidated balance sheet data at December 31, 2000, and 1999, are derived from audited consolidated financial statements included elsewhere in this report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 1997 and 1996, and the consolidated balance sheet data as of December 31, 1998, 1997 and 1996 are derived from audited financial statements not included in this report on Form 10-K.
YEARS ENDED DECEMBER 31, --------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: License.......................................... $17,684 $10,890 $ 7,478 $3,546 $2,603 Service.......................................... 7,593 3,553 2,682 1,867 1,171 ------- ------- ------- ------ ------ Total revenues........................... $25,277 $14,443 $10,160 $5,413 $3,774 Loss from operations............................... (17,857) (12,165) (4,090) (4,686) (3,345) Net loss........................................... (16,726) (11,306) (4,089) (4,674) (3,311) ======= ======= ======= ====== ====== Basic and diluted net loss per share(1)............ $ (0.87) $ (0.86) $ (0.59) $(0.73) $(0.54) ======= ======= ======= ====== ====== Shares used in basic and diluted net loss per share calculation...................................... 19,330 13,091 6,879 6,366 6,135 ======= ======= ======= ====== ====== Pro forma basic and diluted net loss per share(2)......................................... $ (0.68) $ (0.31) ======= ======= Shares used in pro forma basic and diluted net loss per share calculation............................ 16,674 13,183 ======= =======
AS OF DECEMBER 31, -------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------ ------ ------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments... $19,490 $29,652 $4,938 $2,610 $4,535 Working capital..................................... 17,289 29,582 3,384 1,604 4,437 Total assets........................................ 33,641 39,092 7,064 5,447 6,478 Long-term obligations............................... 932 354 714 419 528 Total stockholders' equity.......................... 22,556 32,018 3,422 2,057 4,697
- --------------- (1) Basic net loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase). Diluted net loss per common share was the same as basic net loss per common share for all periods presented since the effect of any potentially dilutive securities is excluded as they are anti-dilutive because of the Company's net losses. (2) Upon the initial public offering, all outstanding shares of convertible preferred stock were converted into an equal number of shares of common stock. The pro forma basic and diluted net loss per share calculation includes the weighted average number of shares of outstanding convertible preferred stock as if they were outstanding shares of common stock. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements as of December 31, 2000 and 1999 16 18 and for each of the years ended December 31, 2000, 1999 and 1998, included elsewhere in this annual report on Form 10-K. In addition, this Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this annual report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "believes, "plans," "expects," "future," "intends," and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled "Additional Factors That May Affect Future Results" and those appearing elsewhere in this annual report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. OVERVIEW Persistence is a leading provider of transactional application servers and dynamic Web content acceleration servers -- software that processes transactions between users and back-end computer systems in electronic commerce systems. We were incorporated and began operations in 1991. Our first products incorporated patented object-to-relational mapping and caching technologies, which have since become the foundation for our PowerTier product family. From 1992 to 1996, we introduced a variety of enhancements to these products, including a patented data transformation technology for mapping objects to database tables, and caching capabilities. In 1996, we developed our PowerTier transactional application server, which integrates all of the previously released Persistence products with new shared transactional caching technologies, which enable multiple users to simultaneously access the same cached data. We first shipped our PowerTier for C++ transactional application server in 1997. Sales of PowerTier for C++ accounted for the majority of our revenues in 1997, 1998, and 1999, during which years we added a professional services staff to enable our customers to implement PowerTier more rapidly. We were one of the first companies to adopt and implement the EJB specification. In 1998, we introduced PowerTier for EJB, which customers have frequently purchased together with PowerTier for C++. Our most recent version of PowerTier for EJB is currently in use by several major customers and was commercially released in March 2000. We currently plan to continue to focus product development efforts on enhancements to both the PowerTier for C++ and the PowerTier for EJB products. Our revenues, which consist of software license revenues and service revenues, totaled $25.3 million in 2000, $14.4 million in 1999, and $10.2 million in 1998. License revenues consist of licenses of our software products, which generally are priced based on the number of users or servers. Service revenues consist of professional services consulting, customer support and training. Because we only commenced selling application servers in 1997, we have a limited operating history in the application server market. We expect that, as a percentage of total revenues, sales of PowerTier for EJB transaction servers will increase and sales of PowerTier for C++ will decrease in the future. We market our software and services primarily through our direct sales organizations in the United States, the United Kingdom, Germany, Hong Kong and Shanghai. Revenues from licenses and services to customers outside the United States were $7.2 million in 2000, $4.1 million in 1999 and $2.9 million in 1998 which represented approximately 28% of total revenues in each of these years. Our future success will depend, in part, on our successful development of international markets for our products. Historically, we have received a substantial portion of our revenues from product sales to a limited number of customers. Sales of products to our top five customers accounted for 40% of total revenues in 2000, 35% of total revenues in 1999, and 55% of total revenues in 1998. In addition, the identity of our top five customers has changed from year to year. In the future, it is likely that a relatively few large customers could continue to account for a relatively large proportion of our revenues. 17 19 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 OEM partners and other resellers. We recognize revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition," as amended by Statements of Position 98-4 and 98-9. Future implementation guidance relating to these standards or any future standards may result in unanticipated changes in our revenue recognition practices, and these changes could affect our future revenues and earnings. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulleting ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on the recognition, presentation and disclosure of revenue in the financial statements. SAB No. 101 outlines basic criteria that must be met to recognized revenue and provides guidance for disclosure related to revenue recognition policies. The Company was required to implement SAB No. 101 in the fourth quarter of the year ended December 31, 2000. The provisions of SAB No. 101 did not have a material impact on the Company's consolidated financial position or results of operations. We recognize license revenues upon shipment of the software if collection of the resulting receivable is probable, an executed agreement has been signed, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. Undelivered elements in these arrangements typically consist of services. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. We recognize revenues from customer training, support and consulting services as the services are performed. We generally recognize support revenues ratably over the term of the support contract. If support or professional services are included in an arrangement that includes a license agreement, amounts related to support or professional services are allocated based on vendor-specific objective evidence. Vendor-specific objective evidence for support and professional services is based on the price when such elements are sold separately, or, when not sold separately, the price established by management having the relevant authority to make such decision. Arrangements that require significant modification or customization of software are recognized under the percentage of completion method. Since inception, we have incurred substantial research and development costs and have invested heavily in the expansion of our sales, marketing and professional services organizations to build an infrastructure to support our long-term growth strategy. The number of our employees increased from 127 as of December 31, 1999 to 152 as of December 31, 2000, representing an increase of 20%. We have incurred net losses in each quarter since 1996 and, as of December 31, 2000, had an accumulated deficit of $40.8 million. We are currently targeting that sales and marketing expenses, research and development expenses, and general and administrative expenses, will remain relatively flat during 2001. We expect to incur net losses during 2001, and potentially thereafter. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicative of future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. We may not achieve or maintain profitability in the future. Our success depends significantly upon broad market acceptance of our PowerTier for EJB application server. Because Sun Microsystems controls the EJB standard, we need to maintain a good working relationship with them to develop future versions of PowerTier for EJB, as well as additional products using the EJB standard. Our performance will also depend on the level of capital spending in our target market of customers and on the growth and widespread adoption of the market for business-to-business electronic commerce over the Internet. 18 20 RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 Revenues Our revenues were $25.3 million for 2000 and $14.4 million for 1999 representing an increase of 75%. International revenues were $7.2 million for 2000 and $4.1 million for 1999, representing an increase of 76%. For 2000, sales to Salomon Smith Barney accounted for 16% of total revenues and sales to our top five customers accounted for 40% of total revenues. For 1999, sales of products and services to Cisco (a stockholder) accounted for 13% of our total revenues, and sales of products and services to our top five customers accounted for 35% of total revenues. License Revenues. License revenues were $17.7 million for 2000 and $10.9 million for 1999, representing an increase of 62%. License revenues represented 70% of total revenues for 2000 and 75% of total revenues for 1999. The increase in software license revenues was primarily due to an increase in sales of our PowerTier for EJB application server and the increased size and productivity of our sales team. Service Revenues. Our service revenues were $7.6 million for 2000 and $3.6 million for 1999, representing an increase of 114%. The increase in service revenues was primarily due to an increase in customer support fees related to increased sales of our PowerTier platform and a doubling of our professional services fees. Service revenues represented 30% of total revenues for 2000 and 25% of total revenues for 1999. Cost of Revenues Cost of License Revenues. Cost of license revenues consists of packaging, documentation and associated shipping costs. Our cost of license revenues was $304,000 for 2000 and $170,000 for 1999. As a percentage of license revenues, cost of license revenues remained flat at 2% for each of 2000 and 1999. Cost of Service Revenues. Cost of service revenues consists of personnel and other costs related to professional services, technical support and training. Our cost of service revenues was $3.6 million for 2000 and $2.6 million for 1999, representing an increase of 36%. This increase was primarily due to: increased staffing of $106,000; increased travel expenses of $436,000; increased occupancy costs of $250,000; and increased prospect seminars of $217,000. As a percentage of service revenues, cost of service revenues were 47% for 2000 and 74% for 1999. This decrease was due to our support staff's ability to support an increased installed base without as substantial an increase in headcount, and greater utilization of our professional services staff. Cost of service revenues as a percentage of service revenues may vary between periods due to our use of third party professional services. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, travel and entertainment, and promotional expenses. Our sales and marketing expenses were $22.8 million for 2000 and $14.1 million for 1999, representing an increase of 62%. This increase was primarily due to our investment in our sales and marketing infrastructure, which included: an increase of $1.6 million to compensate, recruit and hire sales people and sales engineers; an increase in sales commissions of $2.4 million; an increase in advertising and promotional events of $1.7 million; an increase travel expenses of $1.1 million; and additional sales office and occupancy costs of $1.7 million. Sales and marketing expenses represented 90% of total revenues for 2000 and 97% of total revenues for 1999. We presently are targeting that 2001 sales and marketing expense levels will remain relatively flat as compared with 2000 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 outside software developers. Our research and development expenses were $8.1 million for 2000 and $6.4 million for 1999, representing an increase of 28%. This increase was primarily related to: an increase in employee software developers and related personnel for product development of $1.1 million, and increased occupancy costs of $771,000. Research and development expenses for 1999 also include a one-time $303,000 compensation 19 21 charge associated with the issuance of common stock to an investor at a price which was less than the deemed fair value for accounting purposes. Research and development expenses represented 32% of total revenues for 2000 and 44% of total revenues for 1999. We presently are targeting that 2001 research and development expense levels will remain relatively flat as compared with 2000 expense levels. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance, administrative and general management personnel. Our general and administrative expenses were $5.4 million for 2000 and $2.8 million for 1999, representing an increase of 93%. This increase was primarily the result of: the hiring of additional finance and administrative personnel of $1.2 million, additional professional services of $1.3 million, including corporate and patent prosecution legal costs; increased depreciation of $696,000; and an increase in bad debt reserves of $448,000 due to increasing sales levels. This increase was primarily offset by a decrease in occupancy costs of $1.2 million. General and administrative expenses represented 21% of total revenues for 2000 and 20% of total revenues for 1999. We presently are targeting that 2001 general and administrative expense levels will remain relatively flat as compared with 2000 expense levels. Amortization of Purchased Intangibles. Amortization of purchased intangibles was $2.9 million for 2000 and $576,000 for 1999. The increase in amortization was due to the increased level of purchased intangibles, primarily resulting from our acquisition of additional purchased technology during 2000. Interest and Other Income (Expense). Interest and other income (expense) consists primarily of earnings on our cash, cash equivalents and short-term investment balances, offset by interest expense related to obligations under capital leases and other borrowings, and, in 2000, various miscellaneous state and foreign taxes, and other expenses. Interest and other income (expense) was $1.1 million for 2000 and $859,000 for 1999, representing an increase of 32%. We expect that interest and other income (expense) will decrease as we continue to use our net proceeds from our initial public offering. Stock-Based Compensation. Some options granted and common stock issued during the years ended December 31, 2000, 1999, 1998 and 1997 have been considered to be compensatory, as the estimated fair value for accounting purposes was greater than the stock price as determined by the board of directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of December 31, 2000 was $592,000, net of amortization. Deferred stock compensation is being amortized ratably over the vesting periods of these securities. Amortization expense was $416,000 in 2000 and $971,000 in 1999. We expect to record amortization expense related to these securities of approximately $332,000 in 2001. Provision for Income Taxes. Since inception, we have incurred net operating losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of December 31, 2000, we had $34.0 million of federal and $7.8 million of state net operating loss carryforwards available to offset future taxable income. The federal net operating loss carryforwards expire through 2020, while the state net operating loss carryforwards expire through 2005. The net operating loss carryforwards for state tax purposes are substantially less than for federal tax purposes, primarily because only 50% of state net operating loss carryforwards can be utilized to offset future state taxable income. The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in situations where changes occur in the stock ownership of a company. If we should be acquired or otherwise have an ownership change, as defined in the Tax Reform Act of 1986, our utilization of these carryforwards could be restricted. As of December 31, 2000, the Company also had research and development tax credit carryforwards of $980,000 and $766,000 available to offset future federal and state income taxes, respectively. The federal credit carryforward expires in 2015, while the state credit carryforward has no expiration. We have placed a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the net deferred tax assets and the level of the valuation allowance. If and when we determine that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. 20 22 YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES Our revenues were $14.4 million for 1999 and $10.2 million for 1998, representing an increase of 42%. International revenues were $4.1 million for 1999 and $2.9 million for 1998, representing an increase of 41%. In 1999, sales of products to Cisco (a stockholder) accounted for 13% of total revenues, and sales of products to our top five customers represented 35% of total revenues. In 1998, sales of software licenses to Cisco accounted for 14% of total revenues, and sales of software licenses to Instinet accounted for 17% of total revenues. Sales of products to our top five customers represented 55% of total revenues in 1998. License Revenues. License revenues were $10.9 million for 1999 and $7.5 million for 1998, representing an increase of 46%. License revenues represented 75% of total revenues for the 1999 and 74% of total revenues for 1998. The increase in software license revenues was primarily due to sales of our then new PowerTier for EJB application server and the increased size and productivity of our sales team. Service Revenues. Our service revenues were $3.6 million for 1999 and $2.7 million for 1998, representing an increase of 32%. The increase in service revenues was primarily due to an increase in customer support fees related to increased sales of our PowerTier platform. Service revenues represented 25% of total revenues for 1999 and 26% of total revenues 1998. COST OF REVENUES Cost of License Revenues. Our cost of license revenues was $170,000 for 1999 and $239,000 for 1998. As a percentage of license revenues, cost of license revenues were 2% for 1999 and 3% for 1998. This decrease was primarily attributable to lower packaging and document distribution costs as a result of a change to electronic distribution of these materials. Cost of Service Revenues. Our cost of service revenues was $2.6 million for 1999 and $1.4 million for 1998, representing an increase of 92%. This increase was primarily due to increased staffing in our support organization to support a greater installed base of customers. As a percentage of service revenues, cost of service revenues were 74% for 1999 and 51% for 1998. OPERATING EXPENSES Sales and Marketing. Our sales and marketing expenses were $14.1 million for 1999 and $7.2 million for 1998, representing an increase of 96%. This increase was primarily due to: our investment in our sales and marketing infrastructure, which included significant personnel-related costs to recruit and hire sales people and sales engineers and their compensation of $3.4 million; increased advertising and marketing costs of $1.2 million; additional sales office costs of $1.0 million; and increased travel and entertainment costs of $889,000. Sales and marketing expenses represented 97% of total revenues for 1999 and 71% of total revenues for 1998. Research and Development. Our research and development expenses were $6.4 million for 1999 and $4.2 million for 1998, representing an increase of 50%. This increase was primarily related to: an increase in employee and consultant software developers and related personnel for product development of $1.8 million; and an increase in occupancy costs of $324,000. Research and development expenses for 1999 also include a one-time $303,000 compensation charge associated with the issuance of common stock to an investor at a price which was less than the deemed fair value for accounting purposes. Research and development expenses represented 44% of total revenues for 1999 and 42% of total revenues for 1998. General and Administrative. Our general and administrative expenses were $2.8 million for 1999 and $1.2 million for 1998, representing an increase of 128%. This increase was primarily the result of: the hiring of additional finance and administrative personnel of $1.0 million, insurance costs and other costs associated with being a public company of $215,000; and bad-debt write-off of $467,000. Those increases were primarily offset by a decrease in occupancy costs of $345,000. General and administrative expenses represented 20% of total revenues for 1999 (16% without the bad-debt write off) and 12% of total revenues for 1998. 21 23 Interest and Other Income (Expense). Interest and other income (expense) was $859,000 for 1999 and $1,000 for 1998. This increase was earned on the net proceeds received from our initial public offering of common stock on June 24, 1999. Stock-Based Compensation. Some options granted and common stock issued during the years ended December 31, 1999, 1998 and 1997 have been considered to be compensatory, as the estimated fair value for accounting purposes was greater than the stock price as determined by the board of directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of December 31, 1999 was $1.2 million, net of amortization. Deferred stock compensation is being amortized ratably over the vesting periods of these securities. Amortization expense was $971,000 in 1999 and $331,000 in 1998. Provision for Income Taxes. Since inception, we have incurred net operating losses for federal and state tax purposes and have not recognized any tax provision or benefit. 22 24 QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited consolidated statement of operations data for each of the twelve quarters in the three-year period ended December 31, 2000, as well as this data expressed as a percentage of our total revenues for the periods indicated. This data has been derived from our unaudited consolidated financial statements, which have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information when read in conjunction with the consolidated financial statements and notes thereto. Our quarterly results have been in the past and may in the future be subject to significant fluctuations. As a result, we believe that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future period.
QUARTER ENDED ------------------------------------------------------------------- MAR.31, JUN.30, SEP.30, DEC.31, MAR.31, JUN.30, SEP.30, 1998 1998 1998 1998 1999 1999 1999 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues: License....................... $1,004 $ 1,447 $2,250 $2,777 $2,116 $ 3,463 $ 1,747 Service....................... 706 604 643 729 747 784 878 ------- ------- ------ ------ ------- ------- ------- Total revenues.............. 1,710 2,051 2,893 3,506 2,863 4,247 2,625 ------- ------- ------ ------ ------- ------- ------- Cost of revenues: License....................... 56 63 93 27 42 56 19 Service....................... 326 345 334 367 580 695 490 ------- ------- ------ ------ ------- ------- ------- Total cost of revenues...... 382 408 427 394 622 751 509 ------- ------- ------ ------ ------- ------- ------- Gross profit................... 1,328 1,643 2,466 3,112 2,241 3,496 2,116 ------- ------- ------ ------ ------- ------- ------- Operating expenses: Sales and marketing........... 1,687 1,449 1,885 2,147 2,015 2,956 4,057 Research and development...... 1,038 1,072 1,032 1,092 1,806 1,305 1,533 General and administrative.... 311 272 290 364 383 538 1,146 Amortization of purchased intangibles................. -- -- -- -- -- 63 188 ------- ------- ------ ------ ------- ------- ------- Total operating expenses.... 3,036 2,793 3,207 3,603 4,204 4,862 6,924 ------- ------- ------ ------ ------- ------- ------- Loss from operations........... (1,708) (1,150) (741) (491) (1,963) (1,366) (4,808) Interest income (expense), net........................... 4 (20) (20) 37 48 42 410 ------- ------- ------ ------ ------- ------- ------- Net loss....................... $(1,704) $(1,170) $ (761) $ (454) $(1,915) $(1,324) $(4,398) ======= ======= ====== ====== ======= ======= ======= Shares used in calculating basic and diluted net loss per share......................... 6,733 6,797 6,797 6,591 7,044 7,860 18,449 ======= ======= ====== ====== ======= ======= ======= Basic and diluted net loss per share......................... $(0.25) $ (0.17) $(0.11) $(0.07) $(0.27) $ (0.17) $ (0.24) ======= ======= ====== ====== ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License....................... 58.7% 70.6% 77.8% 79.2% 73.9% 81.5% 66.6% Service....................... 41.3 29.4 22.2 20.8 26.1 18.5 33.4 ------- ------- ------ ------ ------- ------- ------- Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ------- ------- ------ ------ ------- ------- ------- Cost of revenues: License....................... 3.3 3.1 3.2 0.8 1.5 1.3 0.7 Service....................... 19.0 16.8 11.5 10.5 20.3 16.4 18.7 ------- ------- ------ ------ ------- ------- ------- Total cost of revenues...... 22.3 19.9 14.8 11.2 21.7 17.7 19.4 ------- ------- ------ ------ ------- ------- ------- Gross margin................... 77.7 80.1 85.2 88.8 78.3 82.3 80.6 ------- ------- ------ ------ ------- ------- ------- Operating expenses: Sales and marketing........... 98.7 70.6 65.2 61.2 70.4 69.6 154.6 Research and development...... 60.7 52.3 35.7 31.1 63.1 30.7 58.4 General and administrative.... 18.2 13.3 10.0 10.4 13.4 12.7 43.7 Amortization of purchased Intangibles................. -- -- -- -- -- 1.5 7.2 ------- ------- ------ ------ ------- ------- ------- Total operating expenses.... 177.5 136.2 110.9 102.8 146.8 114.5 263.8 ------- ------- ------ ------ ------- ------- ------- Loss from operations........... (99.9) (56.1) (25.6) (14.0) (68.6) (32.2) (183.2) Interest income (expense), net........................... 0.2 (1.0) (0.7) 1.1 1.7 1.0 15.6 ------- ------- ------ ------ ------- ------- ------- Net loss....................... (99.6)% (57.0)% (26.3)% (12.9)% (66.9)% (31.2)% (167.5)% ======= ======= ====== ====== ======= ======= ======= QUARTER ENDED ----------------------------------------------- DEC.31, MAR.31, JUN.30, SEP.30, DEC.31, 1999 2000 2000 2000 2000 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues: License....................... $ 3,564 $2,881 $ 4,402 $ 5,356 $ 5,045 Service....................... 1,144 1,329 1,556 1,728 2,980 ------- ------- ------- ------- ------- Total revenues.............. 4,708 4,210 5,958 7,084 8,025 ------- ------- ------- ------- ------- Cost of revenues: License....................... 53 50 16 207 31 Service....................... 868 715 902 857 1,118 ------- ------- ------- ------- ------- Total cost of revenues...... 921 765 918 1,064 1,149 ------- ------- ------- ------- ------- Gross profit................... 3,787 3,445 5,040 6,020 6,876 ------- ------- ------- ------- ------- Operating expenses: Sales and marketing........... 5,024 5,998 5,255 5,234 6,268 Research and development...... 1,713 2,013 2,213 2,042 1,859 General and administrative.... 753 867 1,492 1,649 1,423 Amortization of purchased intangibles................. 325 496 771 799 859 ------- ------- ------- ------- ------- Total operating expenses.... 7,815 9,374 9,731 9,724 10,409 ------- ------- ------- ------- ------- Loss from operations........... (4,028) (5,929) (4,691) (3,704) (3,533) Interest income (expense), net........................... 358 367 290 299 175 ------- ------- ------- ------- ------- Net loss....................... $(3,670) $(5,562) $(4,401) $(3,405) $(3,358) ======= ======= ======= ======= ======= Shares used in calculating basic and diluted net loss per share......................... 18,739 18,968 19,148 19,418 19,667 ======= ======= ======= ======= ======= Basic and diluted net loss per share......................... $ (0.20) $(0.29) $ (0.23) $ (0.18) $ (0.17) ======= ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License....................... 75.7% 68.4% 73.9% 75.6% 62.9% Service....................... 24.3 31.6 26.1 24.4 37.1 ------- ------- ------- ------- ------- Total revenues.............. 100.0 100.0 100.0 100.0 100.0 ------- ------- ------- ------- ------- Cost of revenues: License....................... 1.1 1.2 0.3 2.9 0.4 Service....................... 18.4 17.0 15.1 12.1 13.9 ------- ------- ------- ------- ------- Total cost of revenues...... 19.6 18.2 15.4 15.0 14.3 ------- ------- ------- ------- ------- Gross margin................... 80.4 81.8 84.6 85.0 85.7 ------- ------- ------- ------- ------- Operating expenses: Sales and marketing........... 106.7 142.5 88.2 73.9 78.1 Research and development...... 38.0 47.8 37.1 28.8 23.2 General and administrative.... 16.0 20.6 25.0 23.3 17.7 Amortization of purchased Intangibles................. 5.2 11.8 12.9 11.3 10.7 ------- ------- ------- ------- ------- Total operating expenses.... 166.0 222.7 163.3 137.3 129.7 ------- ------- ------- ------- ------- Loss from operations........... (85.6) (140.8) (78.7) (52.3) (44.0) Interest income (expense), net........................... 7.6 8.7 4.9 4.2 2.2 ------- ------- ------- ------- ------- Net loss....................... (78.0)% (132.4)% (73.9)% (48.1)% (41.8)% ======= ======= ======= ======= =======
23 25 Our quarterly operating results have fluctuated significantly in the past, and may continue to fluctuate in the future, as a result of a number of factors, many of which are outside our control. These factors include: - our ability to close relatively large sales on schedule; - delays or deferrals of customer orders or deployments; - delays in shipment of scheduled software releases; - demand for and market acceptance of our PowerTier products and other products we introduce, including Dynamai; - the possible loss of sales people; - introduction of new products or services by us or our competitors; - annual or quarterly budget cycles of our customers; - the level of product and price competition in the application server market; - our lengthy sales cycle; - our success in expanding our direct sales force and indirect distribution channels; - the mix of direct sales versus indirect distribution channel sales; - the mix of products and services licensed or sold; - the mix of domestic and international sales; and - our success in penetrating international markets and general economic conditions in these markets. The typical sales cycle of our products is long and unpredictable, and is affected by seasonal fluctuations as a result of our customers' fiscal year budgeting cycles and slow summer purchasing patterns in Europe. We typically receive a substantial portion of our orders in the last two weeks of each quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. Our license revenues in the first quarter of 2000 were lower than those in the fourth quarter of 1999 and our license revenues in the first quarter of 1999 were lower than those in the fourth quarter of 1998. In the future, we expect this trend to continue, with the fourth quarter of each year accounting for the greatest percentage of total revenues for the year and with an absolute decline in revenues from the fourth quarter to the first quarter of the next year. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our business primarily through our initial public offering of common stock in June 1999, which totaled $34.1 million in aggregate net proceeds, and private sales of convertible preferred stock, which totaled $19.9 million in aggregate net proceeds. We have also financed our business through a loan in the principal amount of $800,000, borrowings of $533,000 under an equipment financing facility and capitalized leases. As of December 31, 2000, we had $19.5 million of cash, cash equivalents and short-term investments and $17.3 million of working capital. Net cash used for operating activities was $11.7 million for 2000, $10.9 million for 1999 and $3.0 million in 1998. For each of 2000, 1999, and 1998, cash used for operating activities was attributable primarily to net losses and increases in accounts receivable. Those increases were primarily offset by depreciation and amortization, amortization of deferred stock compensation, accrued liabilities and deferred revenues. Net cash used for investing activities was $108,000 for 2000, $10.0 million for 1999, and $436,000 for 1998. For each of the periods, cash used in investing activities reflected investments in property and 24 26 equipment. For 2000, cash used in investing activities also consisted of purchased intangibles offset by decreases in short-term investments. For 1999, cash used in investing activities also primarily consisted of purchases of short-term investments and purchased intangibles. Net cash provided by financing activities was $3.6 million for 2000, $38.2 million for 1999, and $5.7 million for 1998. Cash provided by financing activities during these periods was primarily attributable to proceeds from the issuance of preferred and common stock. For 2000, cash was also provided from borrowings under an equipment financing facility, offset by repayments of loan agreements. For 1998, cash was also provided from borrowings under a term loan of $800,000 and partially offset by repayments of a capital lease obligations. We have credit facilities with Comerica Bank. Under those credit facilities, the Company has a $5.0 million revolving line of credit facility available through October 31, 2001, an $800,000 equipment term loan, and a second equipment financing facility for an amount up to $1 million under which drawdowns are available through April 31, 2001. As of December 31, 2000 we had no borrowings outstanding under the revolving line of credit facility. As of December 31, 2000, we had a promissory note in favor of Comerica related to our first equipment term loan, under which $333,000 out of an original $800,000 was outstanding. We are required to make principal payments of $22,222 per month plus interest of 7.75% per annum on the unpaid principal balance, payable in 18 monthly installments. As of December 31, 2000 we had $533,000 outstanding under the second equipment financing facility. Under this facility, all borrowings outstanding on May 1, 2001 will automatically convert to a 30-month term loan having equal monthly payments of principal and interest. Borrowings under the equipment financing facility will bear interest at the bank's base rate plus 0.50%. The bank's credit facilities require the Company, among other things, to maintain a minimum tangible net worth of $10 million and a minimum quick ratio (current assets not including inventory less current liabilities) of 2 to 1. As of both June 30, 2000 and September 30, 2000, the Company's tangible net worth fell below the minimum tangible net worth ratio then in effect, and the bank waived both of those previous events. As of December 31, 2000, we were in compliance with our debt covenants. Borrowings under the facilities are collateralized by substantially all of the Company's assets Although we have no material commitments for capital expenditures, we anticipate an increase, possibly substantial, in capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel. We also may increase our capital expenditures as we expand into additional international markets. We believe that our current cash, cash equivalents and short-term investments, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through at least 2001. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we may not be able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued accounting statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for us beginning in 2001. We believe the impact of adopting the standard will not be material to our financial position, results of operations or cash flows. 25 27 In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on the recognition, presentation and disclosure of revenue in the financial statements. SAB No. 101 outlines basic criteria that must be met to recognized revenue and provides guidance for disclosure related to revenue recognition policies. The Company was required to implement SAB No. 101 in the fourth quarter of the year ended December 31, 2000. The provisions of SAB No. 101 did not have a material impact on the Company's consolidated financial position or results of operations. In March 2000, the FASB issued FASB interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB Opinion No 2. 25." FIN 44, effective July 1, 2000, clarifies the application of APB No. 25 for matters including: the definition of an employee for purposes of APB No. 25; the criteria for determining whether a plan qualifies as a non-compensatory plan; the accounting consequence of various modifications to the terms of a previously fixed stock option or award; and the accounting for an exchange of stock compensation awards in a business combination. The adoption of FIN No. 44 did not have a material impact on the Company's consolidated financial position or results of operations. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS You should carefully consider the following risks in addition to the other information contained in this annual report on Form 10-K. The risks and uncertainties described below are intended to be the ones that are specific to our company or industry and that we deem to be material, but are not the only ones that we face. WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET. Because we only commenced selling application servers in 1997, we have a limited operating history in the application server market. We thus face the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in the rapidly changing software industry. These risks include: - the timing and magnitude of capital expenditures by our customers and prospective customers; - our substantial dependence for revenue from our PowerTier for C++ product, which was first introduced in 1997 and has achieved only limited market acceptance; - our substantial dependence for revenue from our PowerTier for EJB product, which was first introduced in 1998 and has achieved only limited market acceptance; - our need to expand our distribution capability through various sales channels, including a direct sales organization, original equipment manufacturers, third party distributors and systems integrators; - our unproven ability to anticipate and respond to technological and competitive developments in the rapidly changing market for application servers; - our unproven ability to compete in a highly competitive market; - uncertainty as to the growth rate in the electronic commerce market and, in particular, the business-to-business electronic commerce market; - our need to achieve market acceptance for our new product introductions, including Dynamai; - our dependence on Enterprise JavaBeans, commonly known as EJB, becoming a widely accepted standard in the transactional application server market; and - our dependence upon key personnel. 26 28 BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME OR REMAIN PROFITABLE. Our revenues may not continue to grow, and we may not be able to achieve or maintain profitability in the future. We have incurred net losses each year since 1996. In particular, we incurred losses of $16.7 million in 2000, $11.3 million in 1999, $4.1 million in 1998 and $4.7 million in 1997. As of December 31, 2000, we had an accumulated deficit of $40.8 million. While we are currently targeting relatively flat sales and marketing, research and development, and general and administrative expenses for 2001, we will still need to increase our revenues to become profitable. Because our product market is new and evolving, we cannot accurately predict either the future growth rate, if any, or the ultimate size of the market for our products. WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH GENERATED BY OUR OPERATIONS. Since inception, we have generally had negative cash flow from operations. To date, we have financed our business primarily through sales of common stock and convertible preferred stock and not through cash generated by our operations. We expect to continue to have negative cash flow from operations. WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. Although we believe that our current cash, cash equivalents and short-term investment balances will be sufficient to meet our anticipated operating cash needs through at least 2001, we may need to raise additional funds prior to that time. We face several risks in connection with this possible need to raise additional capital: - the issuance of additional securities could result in: - debt securities with rights senior to the common stock; - dilution to existing stockholders as a result of issuing additional equity or convertible debt securities; - debt securities with restrictive covenants that could restrict our ability to run our business as desired; or - securities issued on disadvantageous financial terms. - the failure to procure needed funding could result in: - a dramatic reduction in scope in our planned product development or marketing efforts; or - an inability to respond to competitive pressures or take advantage of market opportunities, which could adversely affect our ability to achieve profitability or positive cash flow. THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our operating results have fluctuated significantly in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. In particular, the fourth quarter of each year has in the past tended to account for the greatest percentage of total revenues for the year, and we have often experienced an absolute decline in revenues from the fourth quarter to the first quarter of the next year. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following: - our ability to close relatively large sales on schedule; - delays or deferrals of customer orders or deployments; - delays in shipment of scheduled software releases; - demand for and market acceptance of our PowerTier products and other products we introduce; - the possible loss of sales people; 27 29 - introduction of new products or services by us or our competitors; - annual or quarterly budget cycles of our customers; - the level of product and price competition in the application server and web content acceleration server markets; - our lengthy sales cycle; - our success in expanding our various sales channels, including a direct sales force and indirect distribution channels; - the mix of direct sales versus indirect distribution channel sales; - the mix of products and services licensed or sold; - the mix of domestic and international sales; and - our success in penetrating international markets and general economic conditions in these markets. We typically receive a substantial portion of our orders in the last two weeks of each fiscal quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO IT IS DIFFICULT TO FORECAST OUR REVENUES. Any delay in sales of our products or services could cause our quarterly revenues and operating results to fluctuate. The typical sales cycle of our products is long and unpredictable and requires both a significant capital investment decision by our customers and our education of potential customers regarding the use and benefits of our products. Our sales cycle is generally between three and nine months. A successful sales cycle typically includes presentations to both business and technical decision makers, as well as a limited pilot program to establish technical fit. Our products typically are purchased as part of a significant enhancement to a customer's information technology system. The implementation of our products involves a significant commitment of resources by prospective customers. Accordingly, a purchase decision for a potential customer typically requires the approval of several senior decision makers. Our sales cycle is affected by the business conditions of each prospective customer, as well as the overall economic climate for internet-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 2000, sales of products and services to Salomon Smith Barney accounted for 16% of total revenues and sales to our top five customers accounted for 40% of total revenues. In 1999, sales of products and services to Cisco accounted for 13% of our total revenues, and sales of products and services to our top five customers accounted for 35% of total revenues. In 1998, sales of products and services to Cisco accounted for 14% of our total revenues, sales of products and services to Instinet accounted for 17% of our total revenues, and sales of products and services to our top five customers accounted for 55% of total revenues. In addition, the identity of our top five customers has changed from year to year. If we lose a significant customer, or fail to increase product sales to an existing customer as planned, we may not be able to replace the lost revenues with sales to other customers. In addition, because our marketing strategy is to concentrate on selling products to industry leaders, any loss of a customer could harm our reputation within 28 30 the industry and make it harder for us to sell our products to other companies in that industry. The loss of, or a reduction in sales to, one or more significant customers would likely result in a decrease in our revenues. WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER. We are focusing significant marketing efforts on our PowerTier for EJB application server, which is based on three relatively new technologies, 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 Enterprise JavaBeans, or EJB. Distributed object computing combines the use of software modules, or objects, communicating across a computer network to software applications, such as our PowerTier application server. EJB is the Java programming standard for use in an application server. In 1998, we launched our PowerTier for EJB product, which is a transactional application server that uses Java and conforms to the EJB standard. Sun Microsystems released the EJB standard in 1998, and thus far EJB has had limited market acceptance. Since our PowerTier for EJB product depends upon the specialized EJB standard, we face a limited market compared to competitors who may offer application servers based on more widely accepted standards, including the Java programming language. We expect a substantial portion of our future revenues will come from sales of products based on the EJB standard. Thus, our success depends significantly upon broad market acceptance of distributed object computing in general, and Java application servers in particular. If EJB does not become a widespread programming standard for application servers, our revenues and business could suffer. IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS. The market for our products and services is characterized by rapid technological change, dynamic customer demands and frequent new product introductions and enhancements. Customer requirements for products can change rapidly as a result of innovation in software applications and hardware configurations and the emergence or adoption of new industry standards, including Internet technology standards. We may need to increase our research and development investment to maintain our technological leadership. Our future success depends on our ability to continue to enhance our current products and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments. For example, as Sun Microsystems introduces new EJB specifications, we will need to introduce new versions of PowerTier for EJB designed to support these new specifications to remain competitive. If we do not bring enhancements and new versions of our products to market in a timely manner, our market share and revenues could decrease and our reputation could suffer. If we fail to anticipate or respond adequately to changes in technology and customer needs, or if there are any significant delays in product development or introduction, our revenues and business could suffer. BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES. We must have a strong direct sales team to generate increased revenue. In the last several years, we have experienced significant turnover in our sales team, and in early 2001, we substantially reorganized our sales team. In order to meet our future sales goals, we may continue to need to hire more salespeople for both our domestic and international sales efforts. In the past, newly hired employees have required training and approximately six to nine months experience to achieve full productivity. Like many companies in the software industry, we are likely to continue to experience turnover in our sales force, and thus a number of our sales people at any given time may be relatively new and may not meet our sales goals. In addition, our recently hired employees may not become productive, and we may not be able to hire enough qualified individuals in the future. 29 31 BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES CHANNEL THROUGH 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 significant revenue growth in the future will depend in large part on our success in establishing and leveraging relationships with OEM partners and other resellers. 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 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 enormous projects to fully deploy our products and achieve our revenue goals. These enterprise projects often take many years to complete and can be delayed by a variety of factors, including general or industry-specific economic downturns, our customers' budget constraints, other customer-specific delays, problems with other system components or delays caused by the systems integrators who may be managing the system deployment. If our customers cannot successfully implement large-scale deployments, or they determine for any reason that our products cannot accommodate large-scale deployments or that our products are not appropriate for widespread use, our business could suffer. In addition, if a systems integrator fails to complete a project utilizing our product for a customer in a timely manner, our revenues or business reputation could suffer. BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB APPLICATION SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR THEIR OWN PRODUCTS. Our success depends on achieving widespread market acceptance of our PowerTier for EJB application server. Because Sun Microsystems controls the EJB standard, we need to maintain a good working relationship with Sun Microsystems to develop future versions of PowerTier for EJB, as well as additional products using EJB, that will gain market acceptance. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents, and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell some competing products that would, in the absence of this license agreement, infringe our patents. Because Sun Microsystems controls the EJB standard, it could develop the EJB standard in a more proprietary way to favor a product offered by its subsidiary, iPlanet, or a third party, which could make it much harder for us to compete in the EJB application server market. MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD ACCEPTANCE. Microsoft has established a competing standard for distributed computing, COM, which includes an application server product. If this standard gains widespread market acceptance over the EJB or CORBA standards, on which our products are based, our business would suffer. Because of Microsoft's resources and commanding position with respect to other markets and technologies, Microsoft's entry into the application server market may cause our potential customers to delay purchasing decisions. We expect that Microsoft's presence in the application server market will increase competitive pressure in this market. 30 32 WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE. The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors in our market are: - performance, including scalability, integrity and availability; - ability to provide a complete software platform; - flexibility; - use of standards-based technology; - ease of integration with customers' existing enterprise systems; - ease and speed of implementation; - quality of support and service; - security; - company reputation; and - price. Our competitors for both PowerTier and Dynamai include both publicly and privately-held enterprises, including BEA Systems (WebLogic), Secant Technologies, IBM (WebSphere), Oracle (OAS) and i-Planet (Sun Microsystems). Many customers may not be willing to purchase our PowerTier platform because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors have preexisting customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. In addition, some competitors offer products that are less complex than our PowerTier products and require less customization to implement with potential customers' existing systems. Thus, potential customers engaged in simpler business-to-business e-commerce transactions may prefer these "plug-and-play" products to our more complex offerings. Moreover, there are other very large and established companies, including Microsoft, who offer alternative solutions and are thus indirect competitors. Further, dozens of companies have already supported, or have announced their intention to support EJB, and may compete against us in the future. These competitors and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. In addition, in the PowerTier for C++ market, many potential customers build their own custom application servers, so we effectively compete against our potential customers' internal information technology departments. In the Dynamai market, similar dynamic Web content acceleration technology is available from a variety of sources, including but not limited to internal development, application server vendors such as Oracle, electronic commerce software vendors such as Intershop and ATG, content delivery networks such as Akamai and epicRealm, and emerging software and hardware appliance vendors such as Chutney and Cachier, who are directly targeting Dynamai's market. IF THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVER THE INTERNET DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR REVENUES COULD DECLINE. Our performance and future success will depend on the growth and widespread adoption of the market for business-to-business electronic commerce over the Internet. If business-to-business electronic commerce does not develop in the manner currently envisioned, our business could be harmed. Moreover, critical issues concerning the commercial use of the Internet, including security, cost, accessibility and quality of network service, remain unresolved and may negatively affect the growth of the Internet as a platform for conducting business-to-business electronic commerce. In addition, the Internet could lose its viability due to delays in the 31 33 development or adoption of new standards and protocols to handle increased activity or due to increased government regulation and taxation of Internet commerce. OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS. Achieving our planned revenue growth and other financial objectives will place significant demands on our management and other resources. Our ability to manage our resources effectively will require us to continue to develop and improve our operational, financial and other internal systems and controls, as well as our business development capabilities, and to train, motivate and manage our employees. If we are unable to manage our resources effectively, we may not be able to retain key personnel and the quality of our services and products may suffer. OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY EMPLOYEES. Our future success depends on the ability of our management to operate effectively, both individually and as a group. We are substantially dependent upon the continued service of our existing executive personnel, especially Christopher T. Keene, our Chief Executive Officer and Chairman of the Board. We do not have a key person life insurance policy covering Mr. Keene or any other officer or key employee. Our success will depend in large part upon our ability to attract and retain highly-skilled employees, particularly sales personnel and software engineers. There is significant competition for skilled employees, especially for people who have experience in both the software and Internet industries. We have experienced significant turnover among sales personnel in recent years, which makes retention more challenging. 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 28% of our revenues came from sales of products and services outside of the United States during each of 2000, 1999, and 1998. We expect international revenues to continue to represent a significant portion of our total revenues. To date, almost all of our international revenues have resulted from 32 34 our direct sales efforts. In international markets, however, we expect that we will depend more heavily on third party distributors to sell our products in the future. The success of our international strategy will depend on our ability to develop and maintain productive relationships with these third parties. The failure to develop key international markets for our products could cause a reduction in our revenues. Additional risks related to our international expansion and operation include: - difficulties of staffing and managing foreign operations; - our dependence on the sales efforts of our third party distributors; - longer payment cycles typically associated with international sales; - tariffs and other trade barriers; - failure to comply with a wide variety of complex foreign laws and changing regulations; - exposure to political instability and economic downturns; - failure to localize our products for foreign markets; - restrictions on the export of technologies; - potentially adverse tax consequences; - reduced protection of intellectual property rights in some countries; and - currency fluctuations. We sell products outside the United States in U.S. dollars. We do not currently engage in any hedging transactions to reduce our exposure to currency fluctuations as a result of our foreign operations. We are not currently ISO 9000 compliant, nor are we attempting to meet all foreign technical standards that may apply to our products. Our failure to develop our international sales channel as planned could cause a decline in our revenues. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION MAY BE IMPAIRED. Our success 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, which could harm our business. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure and other contractual restrictions to protect our proprietary technology, but these legal means afford only limited protection. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. We have in the past brought lawsuits to protect our intellectual property rights. Further litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs and diversion of management attention and resources. WE MAY BE SUED FOR PATENT INFRINGEMENT. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As the number of competitors in the application server and web content acceleration server markets grow and the functionality of products in different market segments overlaps, the possibility of an intellectual property claim against us increases. For example, we may inadvertently infringe a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware, which will cause us to be infringing when it is issued in the future. To address these patent infringement or other intellectual property claims, we may have to enter into royalty or licensing agreements on disadvantageous commercial terms. Alternatively, we may be unable to obtain a necessary license. A successful claim against us, and our failure to license the infringed or similar technology, 33 35 would harm our business. In addition, any infringement or other intellectual property claims, with or without merit, which are brought against us could be time consuming and expensive to litigate or settle and could divert management attention from administering our core business. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. If our current stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall. In addition, these sales of common stock could impede our ability to raise funds at an advantageous price through the sale of securities. As of December 31, 2000, we had 19.9 million shares of common stock outstanding. Virtually all of our shares, other than shares held by affiliates, are freely tradeable. In addition, shares held by affiliates are tradeable, subject to the volume and other restrictions of Rule 144. OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE. Our common stock has only been available in the public market since June 24, 1999. An active public market for our common stock has not completely developed. To date, the market price of our common stock has been highly volatile and may rise or fall in the future as a result of many factors, such as: - variations in our quarterly results; - announcements of technological innovations by us or our competitors; - introductions of new products by us or our competitors; - acquisitions or strategic alliances by us or our competitors; - hiring or departure of key personnel; - the gain or loss of a significant customer or order; - changes in estimates of our financial performance or changes in recommendations by securities analysts; - market conditions and expectations regarding capital spending in the software industry and in our customers' industries; and - 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 has often been unrelated to these companies' operating performance. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its stock. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could harm our business. OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL. As of February 28, 2001, executive officers and directors, and entities affiliated with them, owned approximately 28% of our outstanding common stock. Accordingly, these stockholders may, as a practical matter, continue to control the election of a majority of the directors and the determination of all corporate actions. This concentration of voting control could have the effect of delaying or preventing a merger or other change in control, even if it would benefit our other stockholders. 34 36 THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A TAKEOVER. Provisions in our certificate of incorporation, bylaws and Delaware law may discourage, delay or prevent a merger or other change in control that a stockholder may consider favorable. These provisions may also discourage proxy contests or make it more difficult for stockholders to take corporate action. These provisions include the following: - establishing a classified board in which only a portion of the total board members will be elected at each annual meeting; - authorizing the board to issue preferred stock; - prohibiting cumulative voting in the election of directors; - limiting the persons who may call special meetings of stockholders; - prohibiting stockholder action by written consent; and - establishing advance notice requirements for nominations for election of the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE OUR STOCKHOLDERS. As part of our business strategy, we expect to review acquisition prospects that we believe would be advantageous to the development of our business. For example, we have acquired object request broker technology and servlet engine technology. While we have no current agreements or negotiations underway with respect to any major acquisitions, we may make acquisitions of businesses, products or technologies in the future. If we make any acquisitions, we could take any or all of the following actions, any of which could materially and adversely affect our financial results and the price of our common stock: - issue equity securities that would dilute existing stockholders' percentage ownership; - incur substantial debt; - assume contingent liabilities; or - take substantial charges in connection with the amortization of goodwill and other intangible assets. Acquisitions also entail numerous risks, including: - difficulties in assimilating acquired operations, products and personnel with our pre-existing business; - unanticipated costs; - diversion of management's attention from other business concerns; - adverse effects on existing business relationships with suppliers and customers; - risks of entering markets in which we have limited or no prior experience; and - potential loss of key employees from either our preexisting business or the acquired organization. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business. 35 37 WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THE COMPANY'S INITIAL PUBLIC OFFERING OF COMMON STOCK, AND THUS MAY USE THE REMAINING NET PROCEEDS TO FUND OPERATING LOSSES, FOR ACQUISITIONS OR FOR OTHER CORPORATE PURPOSES. We have not designated any specific use for the net proceeds of our initial public offering of common stock. As a result, our management and board of directors has broad discretion in spending the remaining net proceeds of that offering. We currently expect to use the remaining net proceeds primarily for working capital and general corporate purposes, funding product development and funding our sales and marketing organization. In addition, we may use a portion of the remaining net proceeds for further development of our product lines through acquisitions of products, technologies and businesses. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Sensitivity. Our operating results are sensitive to changes in the general level of U.S. interest rates, particularly because most of our cash equivalents are invested in short-term debt instruments. If market interest rates were to change immediately and uniformly by ten percent from levels at December 31, 2000, the fair value of our cash equivalents would change by approximately $80,000. Foreign Currency Fluctuations. We have not had any significant transactions in foreign currencies, nor did we have any significant balances that are due or payable in foreign currencies at December 31, 2000. Therefore, a hypothetical ten percent change in foreign currency rates would have an insignificant impact on our financial position or results of operations. We do not hedge any of our foreign currency exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a) for an index to the consolidated financial statements and supplementary data that are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 36 38 PART III The Company's Proxy Statement for its 2001 Annual Meeting of Stockholders, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference in this Form 10-K pursuant to General Instruction G(3) of Form 10-K and will provide the information required under Part III (Items 10-13), except for the information with respect to the Company's executive officers, which is included in "Item 1. Business -- Executive Officers." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements and Report of Deloitte & Touche LLP (pages F-1 through F-18): Audited Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) Financial Statement Schedule (pages S-1 through S-3) Audited Consolidated Financial Statement Schedule: Independent Auditors' Report Schedule II -- Consolidated Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2000, 1999 and 1998 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K) 37 39 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.2* Amended and Restated Certificate of Incorporation of Persistence. 3.4 Amended and Restated Bylaws of Persistence, as amended on July 31, 2000. 4.1* Specimen Stock Certificate. 10.1* Form of Common Stock Purchase Agreement between Persistence and each of Christopher T. Keene and Derek P. Henninger. 10.2* Fifth Amended and Restated Investor Rights Agreement dated February 19, 1999 among Persistence and certain investors. 10.4* Form of Change of Control Agreement between Persistence and each of James H. Barton, Mark Palmer and Christine Russell. 10.5* 1994 Stock Purchase Plan (as amended) and Form of Common Stock Purchase Agreement. 10.6* 1997 Stock Plan (as amended) and Forms of Stock Option Agreement and Common Stock Purchase Agreement. 10.7* 1999 Employee Stock Purchase Plan and Form of Subscription Agreement. 10.8* 1999 Directors' Stock Option Plan and Form of Option Agreement. 10.9* Lease dated June 12, 1991 between Persistence and Great American Bank (as amended). 10.10*+ Settlement and License Agreement dated March 23, 1998 between Persistence and Sun Microsystems, Inc. 10.11* Form of Indemnification Agreement between Persistence and officers and directors. 21.1* List of subsidiaries. 23.1 Independent Auditors' Consent.
- --------------- * Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Commission File No. 333-76867) + Confidential treatment requested as to portions of this exhibit. (b) Reports on Form 8-K None. 38 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K for the fiscal year ended December 31, 2000 to be signed on its behalf by the undersigned, thereunto duly authorized. PERSISTENCE SOFTWARE, INC. By: /s/ CHRISTOPHER T. KEENE ------------------------------------ Christopher T. Keene Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ CHRISTINE RUSSELL ------------------------------------ Christine Russell Chief Financial Officer (Principal Financial and Accounting Officer) Date: April 2, 2001 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christine Russell his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CHRISTOPHER T. KEENE Chairman of the Board and Chief April 2, 2001 - ----------------------------------------------------- Executive Officer (Principal Christopher T. Keene Executive Officer) /s/ CHRISTINE RUSSELL Chief Financial Officer April 2, 2001 - ----------------------------------------------------- (Principal Financial and Christine Russell Accounting Officer) /s/ GREGORY ENNIS Director March 29, 2001 - ----------------------------------------------------- Gregory Ennis Director - ----------------------------------------------------- Sanjay Vaswani /s/ JOSEPH P. ROEBUCK Director March 30, 2001 - ----------------------------------------------------- Joseph P. Roebuck /s/ JEFFREY T. WEBBER Director March 30, 2001 - ----------------------------------------------------- Jeffrey T. Webber
39 41 PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Audited Consolidated Financial Statements: Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets at December 31, 2000 and 1999................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998....................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 42 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Persistence Software, Inc.: We have audited the accompanying consolidated balance sheets of Persistence Software, Inc. and subsidiary (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Jose, California January 30, 2001 (February 28, 2001 as to the table in Note 4) F-2 43 PERSISTENCE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS) ASSETS
DECEMBER 31, -------------------- 2000 1999 -------- -------- Current assets: Cash and cash equivalents................................. $ 14,103 $ 22,300 Short-term investments.................................... 5,387 7,352 Accounts receivable, net of allowances of $1,228 and $332, respectively........................................... 7,121 5,685 Prepaid expenses and other current assets................. 831 965 -------- -------- Total current assets.............................. 27,442 36,302 Property and equipment, net................................. 1,777 1,051 Purchased intangibles, net of amortization of $2,984 and $576, respectively........................................ 4,310 1,669 Other assets................................................ 112 70 -------- -------- Total assets...................................... $ 33,641 $ 39,092 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,657 $ 1,370 Accrued compensation and related benefits................. 2,787 1,804 Other accrued liabilities................................. 1,731 1,194 Deferred revenues......................................... 2,682 2,015 Current portion of long-term obligations.................. 1,296 337 -------- -------- Total current liabilities......................... 10,153 6,720 Long-term obligations....................................... 932 354 -------- -------- Total liabilities................................. 11,085 7,074 -------- -------- Commitments (Note 4) Stockholders' equity: Preferred stock, $0.001 par value; authorized -- 5,000,000 shares; designated and outstanding --none.............. -- -- Common stock, $0.001 par value; authorized -- 75,000,000 shares; outstanding -- 2000, 19,878,712 shares; 1999, 19,269,704 shares...................................... 63,994 57,467 Deferred stock compensation............................... (592) (1,206) Notes receivable from stockholders........................ (94) (161) Accumulated deficit....................................... (40,798) (24,072) Accumulated other comprehensive loss...................... -- (10) Cumulative Translation Adjustment......................... 46 -- -------- -------- Total stockholders' equity........................ 22,556 32,018 -------- -------- Total liabilities and stockholders' equity........ $ 33,641 $ 39,092 ======== ========
See notes to consolidated financial statements. F-3 44 PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 -------- -------- ------- Revenues: License................................................... $ 17,684 $ 10,890 $ 7,478 Service................................................... 7,593 3,553 2,682 -------- -------- ------- Total revenues.................................... 25,277 14,443 10,160 -------- -------- ------- Cost of revenues: License................................................... 304 170 239 Service................................................... 3,592 2,633 1,372 -------- -------- ------- Total cost of revenues............................ 3,896 2,803 1,611 -------- -------- ------- Gross profit................................................ 21,381 11,640 8,549 Operating expenses: Sales and marketing....................................... 22,755 14,052 7,168 Research and development.................................. 8,127 6,357 4,234 General and administrative................................ 5,431 2,820 1,237 Amortization of purchased intangibles..................... 2,925 576 -- -------- -------- ------- Total operating expenses.......................... 39,238 23,805 12,639 -------- -------- ------- Loss from operations........................................ (17,857) (12,165) (4,090) Interest and other income (expense): Interest income........................................... 1,401 975 116 Interest expense.......................................... (60) (116) (115) Other, net................................................ (210) -- -- -------- -------- ------- Total interest and other income (expense)......... 1,131 859 1 -------- -------- ------- Net loss.................................................... $(16,726) $(11,306) $(4,089) ======== ======== ======= Basic and diluted net loss per share........................ $ (0.87) $ (0.86) $ (0.59) ======== ======== ======= Shares used in calculating basic and diluted net loss per share..................................................... 19,330 13,091 6,879 ======== ======== =======
See notes to consolidated financial statements. F-4 45 PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES ACCUMULATED PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE OTHER --------------------- -------------------- STOCK FROM ACCUMULATED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS DEFICIT LOSS ---------- -------- ---------- ------- ------------ ------------ ----------- ------------- Balances, January 1, 1998................... 5,809,872 $ 10,610 7,652,741 $ 592 $ (287) $(181) $ (8,677) Net loss................. (4,089) Sale of Series C preferred stock........ 1,112,312 5,107 Issuance of common stock.................. 4,754 1 Repurchase of common stock.................. (23,081) (5) Collection of notes receivable from stockholders........... 20 Compensatory stock arrangements........... 2,266 (2,266) Amortization of deferred stock compensation..... 331 ---------- -------- ---------- ------- ------- ----- -------- ---- Balances, December 31, 1998................... 6,922,184 15,717 7,634,414 2,854 (2,222) (161) (12,766) Net loss................. (11,306) Change in unrealized gain (loss) on investments............ $(10) Comprehensive loss....... Sale of Series D preferred stock........ 775,701 4,142 Conversion of preferred stock to common stock.................. (7,697,885) (19,859) 7,697,885 19,859 Issuance of common stock.................. 3,937,405 34,799 Compensatory stock arrangements........... (45) 45 Amortization of deferred stock compensation..... 971 ---------- -------- ---------- ------- ------- ----- -------- ---- Balances, December 31, 1999................... -- -- 19,269,704 57,467 (1,206) (161) (24,072) (10) Net loss................. (16,726) Change in unrealized gain (loss) on investments............ 10 Cumulative translation adjustment............. Comprehensive loss....... Issuance of common stock.................. 609,008 6,725 Collection of notes receivable from stockholders........... 67 Compensatory stock arrangements........... (198) 198 Amortization of deferred stock compensation..... 416 ---------- -------- ---------- ------- ------- ----- -------- ---- Balances, December 31, 2000................... -- $ -- 19,878,712 $63,994 $ (592) $ (94) $(40,798) $ -- ========== ======== ========== ======= ======= ===== ======== ==== CUMULATIVE TOTAL TRANSLATION COMPREHENSIVE ADJUSTMENT TOTAL LOSS ----------- -------- ------------- Balances, January 1, 1998................... $ 2,057 Net loss................. (4,089) Sale of Series C preferred stock........ 5,107 Issuance of common stock.................. 1 Repurchase of common stock.................. (5) Collection of notes receivable from stockholders........... 20 Compensatory stock arrangements........... -- Amortization of deferred stock compensation..... 331 --- -------- Balances, December 31, 1998................... -- 3,422 Net loss................. (11,306) $(11,306) Change in unrealized gain (loss) on investments............ (10) (10) -------- Comprehensive loss....... $(11,316) ======== Sale of Series D preferred stock........ 4,142 Conversion of preferred stock to common stock.................. -- Issuance of common stock.................. 34,799 Compensatory stock arrangements........... -- Amortization of deferred stock compensation..... 971 --- -------- Balances, December 31, 1999................... -- 32,018 Net loss................. (16,726) $(16,726) Change in unrealized gain (loss) on investments............ 10 10 Cumulative translation adjustment............. $46 46 46 -------- Comprehensive loss....... $(16,670) ======== Issuance of common stock.................. 6,725 Collection of notes receivable from stockholders........... 67 Compensatory stock arrangements........... -- Amortization of deferred stock compensation..... 416 --- -------- Balances, December 31, 2000................... $46 $ 22,556 === ========
See notes to consolidated financial statements. F-5 46 PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 -------- -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(16,726) $(11,306) $(4,089) Adjustments to reconcile net loss to net cash used in operating activities: Allowance for doubtful accounts........................ 896 285 (28) Depreciation and amortization.......................... 3,842 1,135 556 Amortization of deferred stock compensation............ 416 971 331 Changes in operating assets and liabilities: Accounts receivable.................................. (2,332) (4,211) 145 Prepaid expenses and other current assets............ (265) (1,000) (66) Accounts payable..................................... 287 774 (205) Accrued compensation and related benefits............ 983 1,292 (16) Other accrued liabilities............................ 537 1,040 90 Deferred revenues.................................... 667 217 413 Deferred rent........................................ -- (64) (96) -------- -------- ------- Net cash used in operating activities............. (11,695) (10,867) (2,965) -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Short-term investments.................................... 1,965 (7,362) -- Property and equipment additions.......................... (1,422) (919) (442) Purchased intangibles additions........................... (619) (1,663) -- Deposits and other........................................ (32) (41) 6 -------- -------- ------- Net cash used in investing activities............. (108) (9,985) (436) -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of convertible preferred stock, net.................. -- 4,142 5,107 Sale of common stock, net of repurchases.................. 3,465 34,440 1 Repurchase of common stock................................ (1) (1) (5) Repayment of notes receivable from stockholders........... 67 -- 20 Repayment of capital lease obligations.................... (77) (167) (194) Repayment of obligations incurred to acquire purchased intangibles............................................ (160) -- -- Borrowing under loan agreement............................ 533 -- 800 Repayment under loan agreement............................ (267) (200) -- -------- -------- ------- Net cash provided by financing activities......... 3,560 38,214 5,729 -------- -------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............................................... 46 -- -- -------- -------- ------- CASH AND CASH EQUIVALENTS: Net increase (decrease)................................... (8,197) 17,362 2,328 Beginning of year......................................... 22,300 4,938 2,610 -------- -------- ------- End of year............................................... $ 14,103 $ 22,300 $ 4,938 ======== ======== ======= NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of property and equipment under capital leases................................................. $ 73 $ -- $ -- ======== ======== ======= Long-term obligations incurred to acquire purchased intangibles............................................ $ 1,435 $ -- $ -- ======== ======== ======= Common stock issued for purchased intangibles............. $ 3,063 $ 360 $ -- ======== ======== ======= Conversion of convertible preferred stock into common stock.................................................. $ -- $ 19,859 $ -- ======== ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- CASH PAID DURING THE YEAR FOR: Interest.................................................. $ 60 $ 114 $ 115 ======== ======== ======= Income taxes.............................................. $ 132 $ 3 $ 1 ======== ======== =======
See notes to consolidated financial statements. F-6 47 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Business -- Persistence is a leading provider of transaction application servers and dynamic Web content acceleration servers -- software that processes transactions between users and back-end computer systems in electronic commerce systems. Persistence's PowerTier application server software caches corporate application data to speed business transactions, while the Company's Dynamai application-aware software is designed to cache dynamic Web content to speed Internet transactions. Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation. Cash Equivalents -- The Company considers all highly liquid debt instruments purchased with remaining maturities of less than three months to be cash equivalents. Short-term Investments -- Short-term investments consist primarily of highly liquid debt instruments purchased with remaining maturity dates of greater than 90 days but less than 12 months. Management determines the classification of debt and equity securities at the time of purchase and reevaluates the classification at each balance sheet date. Debt securities are classified as available-for-sale when the Company generally has the ability and intent to hold such securities to maturity, but, in certain circumstances, may potentially dispose of such securities prior to their maturity. Securities available-for-sale are reported at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. All available- for-sale securities are classified as current assets. At December 31, 2000 and 1999, short-term investments consisted of corporate debt securities (commercial paper) and U.S. government debt securities with maturities of less than one year. Short-term investments include the following available-for-sale securities at December 31, 1999 (in thousands):
UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN THOUSANDS) Money market funds....................... $ 1,682 -- -- $ 1,682 Commercial paper......................... 13,107 $ 1 -- 13,108 U.S. government agencies................. 14,105 -- $(11) 14,094 ------- ---- ---- ------- Total available-for-sale securities................... $28,894 $ 1 $(11) $28,884 ======= ==== ==== ======= Included in cash equivalents............. $21,532 Included in short-term investments....... 7,352 ------- Total available-for sale-securities.............. $28,884 =======
F-7 48 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Short-term investments include the following available-for-sale securities at December 31, 2000 (in thousands):
UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN THOUSANDS) Money market funds....................... $ 1,863 $ 1,863 Commercial paper......................... 7,888 7,888 U.S. government agencies................. 6,615 6,615 ------- ---- ---- ------- Total available-for-sale securities................... $16,366 $ -- $ -- $16,366 ======= ==== ==== ======= Included in cash equivalents............. $10,979 Included in short-term investments....... 5,387 ------- Total available-for-sale securities................... $16,366 =======
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives of three years. Leasehold improvements are amortized over the shorter of the lease term or their useful life. Purchased intangibles are stated at cost. Amortization is computed using the straight-line method over the estimated useful lives of two to three years. Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of -- The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Software Development Costs -- Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Computer Software To Be Sold, Leased or Otherwise Marketed. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date. Notes Receivable from Stockholders -- The notes receivable from stockholders were issued in exchange for common stock, bear interest at 5.93% per annum, and are due in December 2001. The notes are full-recourse. Revenue Recognition -- Revenue consists primarily of fees for licenses of the Company's software products, maintenance and customer support. License Revenue -- Revenue from software licenses is recognized upon shipment of the software if collection of the resulting receivable is probable, an executed agreement has been signed, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. Such undelivered elements in these arrangements typically consist of services. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. F-8 49 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Service Revenue -- Revenue from customer training, support and consulting services is recognized as the services are performed. Support revenue is recognized ratably over the term of the support contract. If support or professional services are included in an arrangement that includes a license agreement, amounts related to support or professional services are allocated based on vendor-specific objective evidence. Vendor-specific objective evidence for support and professional services is based on the price when such elements are sold separately, or, when not sold separately, the price established by management having the relevant authority. Arrangements which require significant modification or customization of software are recognized under the percentage of completion method. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on the recognition, presentation and disclosure of revenue in the financial statements. SAB No. 101 outlines basic criteria that must be met to recognized revenue and provides guidance for disclosure related to revenue recognition policies. The Company was required to implement SAB No. 101 in the fourth quarter of the year ended December 31, 2000. The provisions of SAB No. 101 did not have a material impact on the Company's consolidated financial position or results of operations. Income Taxes -- Income taxes are provided using an asset and liability approach which requires recognition of deferred tax liabilities and assets, net of valuation allowances, for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities and net operating loss and tax credit carryforwards. Foreign Currency Transactions -- The functional currency of the Company's foreign subsidiary is the British Pound Sterling. Accordingly, all monetary assets and liabilities are translated at the current exchange rate at the end of the year, nonmonetary assets and liabilities are translated at historical rates and net sales and expenses are translated at average exchange rates in effect during the period. Translation gains and losses, which are included in balance sheet and in other comprehensive income (loss) in the accompanying consolidated statements of changes in stockholders' equity, have not been significant. Stock Compensation -- The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no accounting recognition is given to employee stock options granted with an exercise price equal to fair market value of the underlying stock on the grant date. Upon exercise, the net proceeds and any related tax benefit are credited to stockholders' equity. In March 2000, the FASB issued FASB interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB Opinion No. 25." FIN 44, effective July 1, 2000, clarifies the application of APB No. 25 for matters including: the definition of an employee for purposes of APB No. 25; the criteria for determining whether a plan qualifies as a non-compensatory plan; the accounting consequence of various modifications to the terms of a previously fixed stock option or award; and the accounting for an exchange of stock compensation awards in a business combination. The adoption of FIN No. 44 did not have a material impact on the Company's consolidated financial position or results of operations. Net Loss per Common Share -- Basic net loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase). Diluted net loss per common share was the same as basic net loss per common share for all periods presented. This result is due to the exclusion of all potentially dilutive securities, which are actually anti-dilutive because of the Company's net losses. Concentration of Credit Risk -- Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade F-9 50 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 receivables. The risk associated with cash and cash equivalents and short-term investments is mitigated by using only high-quality financial institutions and investing in high-grade debt securities The Company primarily sells its products to companies in the United States and Europe. The Company does not require collateral or other security to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial condition. The Company maintains allowances for potential credit losses. Financial Instruments -- The Company's financial instruments include cash and equivalents, short-term investments, notes receivable from stockholders and long-term debt. At December 31, 2000 and 1999, the fair value of these financial instruments approximated their financial statement carrying amounts, because the financial instruments are either short-term or reflect interest rates consistent with market rates. Significant Estimates -- The preparation of financial statements in conformity with accounting principle as generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain Risks and Uncertainties -- The Company operates in the software industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a significant negative effect on the Company in terms of its future financial position, results of operations and cash flows: ability to obtain additional financing; regulatory changes; fundamental changes in the technology underlying software products; market acceptance of the Company's products under development; development of sales channels; loss of significant customers; adverse changes in international market conditions; litigation or other claims against the Company; the hiring, training and retention of key employees; successful and timely completion of product development efforts; and new product introductions by competitors. We have incurred net losses each year since 1996 including losses of $16.7 million in 2000, $11.3 million in 1999, and $4.1 million in 1998. As of December 31, 2000, we had an accumulated deficit of $40.8 million. We believe our cash and cash equivalents and short-term investments of $19.4 million are sufficient to meet our anticipated cash needs for working capital and capital expenditures through at least 2001. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to raise additional financing or reduce the scope of our planned product development and marketing efforts. Comprehensive Income -- The Company had no comprehensive income items, other than net loss for the year ended December 31, 1998, a $10,000 unrealized loss in the market value of short-term investments for 1999, and a $10,000 unrealized gain in the market value of short term investments along with a $46,000 cumulative translation adjustment for 2000. Segments of an Enterprise -- The Company currently operates in one reportable segment and the chief operating decision maker is the Company's Chief Executive Officer. Other Recently Issued Accounting Standards -- In June 1998, the Financial Relations Accounting Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal year ending December 31, 2001. We have completed our evaluation of the impact of adopting SFAS No. 133 and believe that the impact of adopting the standard will not be material to our financial position, results of operations or cash flows. F-10 51 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Reclassifications -- Certain reclassifications have been made to the prior year financial statement presentations to conform to the current year presentation. 2. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, ------------------ 2000 1999 ------- ------- (IN THOUSANDS) Equipment................................................ $ 3,467 $ 2,291 Software................................................. 1,079 892 Leasehold improvements................................... 218 89 ------- ------- 4,764 3,272 Accumulated depreciation and amortization................ (2,987) (2,221) ------- ------- $ 1,777 $ 1,051 ======= =======
3. LONG-TERM OBLIGATIONS Long-term obligations consist of:
DECEMBER 31, ---------------- 2000 1999 ------- ----- (IN THOUSANDS) Equipment term loan....................................... $ 333 $ 600 Equipment financing facility.............................. 533 -- Capital lease obligations (see Note 4).................... 87 91 Other long-term obligations............................... 1,275 -- ------- ----- 2,228 691 Less current portion...................................... (1,296) (337) ------- ----- $ 932 $ 354 ======= =====
In November 2000, the Company renewed its credit facilities with a bank. Under the renewed facilities, the Company continues to have available a $5 million revolving line of credit facility available through October 31, 2001 and a new $1 million equipment financing facility under which drawdowns are available through April 31, 2001 in addition to its outstanding $800,000 equipment term loan. As of December 31, 2000, the Company had no borrowings outstanding under its renewed $5 million line of credit facility. Under this facility, any outstanding borrowings will bear interest at either the bank's base rate (9.5% as of December 31, 2000) or LIBOR plus 2.0 basis points for a maximum of two LIBOR advances in $1 million minimum increments having 30, 60, or 90 day maturities. As of December 31, 2000, the Company had $533,000 outstanding under its new $1 million equipment financing facility with the bank. Under this facility, all borrowings outstanding on May 1, 2001 will automatically convert to a 30-month term loan having equal monthly payments of principal and interest. Borrowings under the equipment financing facility will bear interest at the bank's base rate plus 0.50%. As of December 31, 2000, the Company had $333,000 outstanding under its $800,000 equipment term loan, which bears interest at 7.75%. The Company is required to make equal principal payments of $22,000 per month plus interest on the unpaid balance, payable in monthly installments through March 2002. F-11 52 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 The bank's renewed credit facilities require the Company, among other things, to maintain a minimum tangible net worth of $10 million and a minimum quick ratio (current assets not including inventory less current liabilities) of 2 to 1. As of both June 30, 2000 and September 30, 2000, the Company's tangible net worth fell below the minimum tangible net worth ratio then in effect, and the bank waived both of those previous events. As of December 31, 2000, the Company was in compliance with its debt covenants. Borrowings under the facilities are collateralized by substantially all of the Company's assets. Other long-term obligations represent uncollaterialized non-interest-bearing amounts payable for the acquisition of various purchased intangibles that are generally due within two years. As of December 31, 2000, annual maturities under the equipment financing facility, the existing equipment term loan, and the other long-term obligations are as follows:
FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS) ------------------------------- -------------- 2001...................................................... $1,254 2002...................................................... 549 2003...................................................... 338 ------ Total............................................. $2,141 ======
4. LEASE COMMITMENTS Equipment with a net book value of $71,000 and nil at December 31, 2000 and 1999, respectively, (net of accumulated amortization of $694,000 and $692,000) has been leased under capital leases. The Company leases its principal facility under a noncancelable operating lease expiring on June 30, 2002. Rent expense was approximately $965,000, $953,000 and $337,000 in 2000, 1999 and 1998, respectively. Future minimum payments under the Company's leases at December 31, 2000(a) are:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 2001...................................................... $ 50 $1,411 2002...................................................... 27 775 2003...................................................... 23 384 2004...................................................... -- 223 2005...................................................... -- 75 ---- ------ Total........................................... 100 $2,868 ====== Amount representing interest.............................. (13) ---- Present value............................................. 87 Current portion........................................... (42) ---- Long-term portion......................................... $ 45 ====
- --------------- (a) The operating lease payment schedule above represents future minimum payments for each of the years presented based on information available as of February 28, 2001 as a result of the renegotiations of certain operating leases by the Company between January 1, 2001 and February 28, 2001. F-12 53 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 5. STOCKHOLDERS' EQUITY Convertible Preferred Stock With the closing of the initial public offering of common stock in June 1999, all shares of the Company's outstanding convertible preferred stock were converted to common stock on a share for share basis. Common Stock In February 1999, the Company entered into an agreement with a customer and Series D preferred stockholder, whereby such customer was to perform development work to achieve certain performance improvements related to the Company's PowerTier product. In connection with this agreement, the Company allowed such customer to purchase 90,300 shares of common stock at $1.65 per share in February 1999, which was less than the deemed fair value for accounting purposes. The Company has recorded a research and development expense of $303,000 in 1999 for the difference between the deemed fair value and the stock price of $1.65 per share. 1994 Stock Purchase Plan Under the 1994 Stock Purchase Plan (the Plan), the Company could sell common stock to employees of the Company at the fair market value as determined by the Board of Directors. Sales are to be made pursuant to restricted stock purchase agreements containing provisions established by the Board. No shares were issued under the Plan in 2000, 1999 and 1998. The Company has the right to repurchase these shares at the original issuance price upon termination of employment; this right expires ratably over four years. During 2000, 1999 and 1998, the Company repurchased 5,782, 10,084 and 23,081 shares, respectively, at prices ranging from $0.06 to $0.23 per share. At December 31, 2000, no shares were subject to repurchase and no shares were available for future grant. 1997 Stock Plan As of December 31, 2000, the Company has reserved 5,609,652 shares of common stock for issuance, at the discretion of the Board of Directors, to officers, directors, employees and consultants pursuant to its 1997 Stock Plan. This reserved amount was increased automatically on January 1, 2001 under the provisions of the Plan by 840,000 shares to 6,449,652 shares reserved. The Plan also provides for an automatic annual increase on the first day of 2002, 2003, 2004 and 2005 equal to the lesser of 840,000 shares, 4.9% of the outstanding common stock on the last day of the immediately preceding fiscal year, or such lesser number as determined by the Board of Directors. At December 31, 2000, 796,487 shares have been issued at $0.23 per share pursuant to restricted stock purchase agreements in which the Company has a right to repurchase these shares at original issuance price upon termination of employment; this right expires ratably over four years. At December 31, 2000, 184,167 shares were subject to repurchase. No shares were repurchased in 1999, 1998 or 1997. At December 31, 2000 4,138,158 shares are reserved for exercise of issued and outstanding options, and 285,406 shares are available for future grant. The shares available for future grant automatically increased by 840,000 shares on January 1, 2001 to 1,125,406 shares. Options granted under the 1997 Stock Plan generally vest over four years and expire ten years from the date of grant. Certain options were issued to a director in his capacity as a consultant in 1998 (See Note 8). F-13 54 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Additional information with respect to options under the 1997 Stock Plan is as follows:
WEIGHTED AVERAGE NUMBER OF OPTION PRICE OPTIONS PER SHARE ---------- ------------ Outstanding, January 1, 1998 (1,208 exercisable at a weighted average exercise price of $0.23)................................................. 410,375 $ 0.23 Granted (weighted average fair value of $2.49)............ 943,572 $ 0.54 Exercised................................................. (4,890) $ 0.23 Canceled.................................................. (134,860) $ 0.24 ---------- ------ Outstanding, December 31, 1998 (112,258 exercisable at a weighted average exercise price of $0.24).............................................. 1,214,197 $ 0.47 Granted (weighted average fair value of $4.14)............ 2,895,287 $11.39 Exercised................................................. (310,499) $ 0.60 Canceled.................................................. (555,510) $ 3.69 ---------- ------ Outstanding, December 31, 1999 (279,720 exercisable at a weighted average exercise price of $3.33).............................................. 3,243,475 $ 9.65 Granted (weighted average fair value of $10.95)........... 2,631,450 $13.48 Exercised................................................. (365,734) $ 7.02 Canceled.................................................. (1,656,439) $10.80 ---------- ------ Outstanding, December 31, 2000 (992,433 exercisable at a weighted average exercise price of $9.60).............................................. 3,852,752 $12.02 ========== ======
Additional information regarding options outstanding as of December 31, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------- WEIGHTED AVERAGE WEIGHTED REMAINING WEIGHTED AVERAGE RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE - ---------------- ----------- ---------------- -------------- ----------- -------- $ 0.01 to $ 0.50 308,452 7.28 $ 0.42 216,562 $ 0.42 $ 0.51 to $ 5.00 123,459 8.27 $ 1.78 57,560 $ 1.60 $ 5.01 to $10.00 781,779 9.51 $ 7.85 233,672 $ 9.39 $10.01 to $15.00 1,193,542 9.05 $13.17 342,584 $13.27 $15.01 to $20.00 1,276,020 8.55 $16.12 82,040 $16.40 $20.01 to $20.94 169,500 8.56 $20.94 60,015 $20.94 --------- ---- ------ ------- ------ $ 0.01 to $20.94........ 3,852,752 8.79 $12.02 992,433 $ 9.60 ========= ==== ====== ======= ======
1999 Directors' Stock Option Plan The Company's 1999 Directors' Stock Option Plan (the "Directors' Plan") became effective upon the closing of the Company's initial public offering in June 1999. Under the Directors' Plan, a total of 500,000 shares of common stock have been reserved for the grant of nonstatutory stock options to nonemployee directors of the Company. Options granted under the Director's Plan shall be immediately vested and expire in five years from the date of grant. No options were granted under the Director's Plan during 1999. During 2000, 44,000 options were granted under the Director's Plan at exercise prices ranging from $9.75 to $22.50 and all were outstanding at December 31, 2000. F-14 55 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 1999 Employee Stock Purchase Plan The Company's 1999 Employee Stock Purchase Plan (the "ESPP") became effective upon the closing of the Company's initial public offering in June 1999. Under the ESPP, eligible employees may purchase common stock through payroll deductions, which may not exceed 20% of any employee's compensation, nor more than 2,500 shares in any one purchase period. A total of 600,000 shares of common stock has been reserved for issuance under the ESPP. The ESPP allows for an automatic annual increase on the first day of 2000, 2001, 2002, 2003 and 2004 equal to the lessor of 250,000 shares or 1% of outstanding common stock on the last day of the immediately preceding fiscal year. As of December 31, 1999, no shares were issued under the ESPP. During 2000, 104,077 shares were issued under the ESPP at prices ranging from $9.35 to $14.56 per share and aggregate proceeds of $1,037,000. Deferred Stock Compensation In connection with grants of certain stock options and issuance of common stock in 2000, 1999, and, the Company recorded $85,000 (terminations of $283,000), $45,000 (terminations of $90,000), and $2,266,000, respectively, for the difference between the estimated fair value and the stock price as determined by the Board of Directors on the date of grant/issuance. This amount is being amortized to expense over the vesting period of the related stock/stock options (generally four years). Amortization of deferred stock compensation for the years ended December 31, 2000, 1999 and 1998 was $416,000, $971,000 and $331,000, respectively. Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net loss had the Company 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 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, 24 months following vesting; risk free interest rate, 5.1% in 2000, 5.4% in 1999 and 5.5% in 1998; volatility of 124% for 2000, 50% for 1999 after the Company's June 1999 initial public offering of common stock and none before that date, and none during 1998; 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 years ended December 31, 2000, 1999 and 1998, as discussed above) would have been approximately $27.0 million ($1.40 per basic and diluted share) in 2000, $13.0 million ($0.99 per basic and diluted share) in 1999 and $4.4 million ($0.63 per basic and diluted share) in 1998. F-15 56 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 6. NET LOSS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 -------- -------- ------- Net loss (numerator), basic and diluted............. $(16,726) $(11,306) $(4,089) Shares (denominator): Weighted average common shares outstanding........ 19,621 13,605 7,644 Weighted average common shares outstanding subject to repurchase.................................. (291) (514) (765) -------- -------- ------- Shares used in computation, basic and diluted..... 19,330 13,091 6,879 ======== ======== ======= Net loss per share, basic and diluted............... $ (0.87) $ (0.86) $ (0.59) ======== ======== =======
For the above mentioned periods, 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:
DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Convertible preferred stock.................... -- -- 6,992,184 Shares of common stock subject to repurchase... 184,167 398,066 629,864 Outstanding options............................ 3,852,752 3,243,475 1,214,197 Warrants....................................... -- -- 80,556 ---------- ---------- ---------- Total................................ 4,036,919 3,641,541 8,916,801 ========== ========== ========== Weighted average exercise price of options..... $ 12.02 $ 9.65 $ 0.47 ========== ========== ========== Weighted average exercise price of warrants.... $ -- $ -- $ 0.90 ========== ========== ==========
7. INCOME TAXES The Company's deferred income tax assets are comprised of the following at December 31:
2000 1999 -------- -------- (IN THOUSANDS) Net deferred tax assets: Net operating loss carryforwards.......................... $ 12,352 $ 7,941 Accruals deductible in different periods.................. 1,814 1,214 General business credits.................................. 1,478 1,582 Depreciation and amortization............................. 1,047 333 -------- -------- 16,691 11,070 Valuation allowance....................................... (16,691) (11,070) -------- -------- Total............................................. $ -- $ -- ======== ========
Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss and tax credit carryforwards. Due to the uncertainty surrounding the realization of the F-16 57 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 benefits of its favorable tax attributes in future tax returns, as of December 31, 2000 and 1999, the Company has fully reserved its net deferred tax assets of approximately $16.7 million and $11.1 million, respectively. The Company's effective rate differs from the expected benefit at the federal statutory tax rate at December 31 as follows:
2000 1999 1998 ----- ----- ----- Federal statutory tax rate.......................... (35.0)% (35.0)% (35.0)% State taxes, net of federal benefit................. (6.0) (6.0) (6.0) Stock compensation expense.......................... 1.0 3.4 2.8 Other............................................... 0.4 0.3 0.3 Valuation allowance................................. 39.6 37.3 37.9 ----- ----- ----- Effective tax rate.................................. --% --% --% ===== ===== =====
Substantially all of the Company's loss from operations for all periods presented is generated from domestic operations. At December 31, 2000, the Company has net operating loss (NOL) carryforwards of approximately $34.0 million and $7.8 million for federal and state income tax purposes, respectively. The federal NOL carryforwards expire through 2020, while the state NOL carryforwards expire through 2005. The net operating loss carryforwards available for state tax purposes are substantially less than for federal tax purposes, primarily because only 50% of state net operating losses can be utilized to offset future state taxable income. At December 31, 2000, the Company also has research and development credit carryforwards of approximately $980,000 and $788,000 available to offset future federal and state income taxes, respectively. The federal credit carryforward expires in 2015, while the state credit carryforward has no expiration. The extent to which the loss and credit carryforwards can be used to offset future taxable income and tax liabilities, respectively, may be limited, depending on the extent of ownership changes within any three-year period. 8. RELATED PARTY TRANSACTIONS During 1998, the Company recognized revenue of $168,000 and $1,450,000 from a Series B and a Series C preferred stockholder, respectively. At December 31, 1998, the Company had deferred revenue of $30,000 and $642,000 with the same Series B and Series C preferred stockholders, respectively. All of the deferred revenue was recognized in 1999. At December 31, 1998, the Company had accounts receivable of $101,000 from the Series B preferred stockholder. During 1999, the Company paid $69,000 to a director for consulting services. During 1998, the Company paid $18,000 to a director for consulting services, and in 1998 paid $20,500 to another director for consulting services. In July 1998, the Company granted a fully vested option to purchase up to 3,572 shares of common stock at $0.50 per share to a director in connection with consulting services rendered. Compensation expense of $9,000 was recorded for the difference between the exercise price and the deemed fair market value of the common stock on the date of grant. During 2000, the Company had insignificant transactions with related parties. See also Note 9 for information about significant revenues from common stockholders. F-17 58 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS The Company is engaged in the development and marketing of transactional application server software products and operates in one reportable segment under SFAS 131. Geographic Information
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------ ------------------------ ------------------------ LONG-LIVED LONG-LIVED LONG-LIVED REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS ----------- ---------- ----------- ---------- ----------- ---------- (IN THOUSANDS) United States................. $18,107 $1,632 $10,369 $1,004 $ 7,223 $673 Europe........................ 4,755 73 3,338 27 2,866 50 Rest of the world............. 2,415 72 736 20 71 -- ------- ------ ------- ------ ------- ---- $25,277 $1,777 $14,443 $1,051 $10,160 $723 ======= ====== ======= ====== ======= ====
- --------------- (1) Revenues are broken out geographically by the ship-to location of the customer. Significant Customers During 2000, one customer accounted for 16% of the Company's total revenues. During 1999, one customer (a common stockholder) accounted for 13% of the Company's total revenues. During 1998, one customer (a common stockholder) accounted for 14% of total revenues. Additionally, during 1998, another customer (also a common stockholder) accounted for 17% of total revenues. At December 31, 2000, one customer accounted for 19% of accounts receivable, and another customer accounted for 18% of accounts receivable. At December 31, 1999, one customer accounted for 11% of accounts receivable. 10. EMPLOYEE BENEFIT PLAN The Company has a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation (presently from 1% to 20% up to the maximum allowed under IRS rules). Company contributions are discretionary; no such Company contributions have been made since inception of this plan. F-18 59 PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE ---- Audited Consolidated Financial Statement Schedule: Independent Auditors' Report.............................. S-2 Schedule II -- Consolidated Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2000, 1999 and 1998.................................... S-3
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. S-1 60 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Persistence Software, Inc.: We have audited the consolidated financial statements of Persistence Software, Inc. and subsidiary (the "Company") as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, and have issued our report thereon dated January 30, 2001, (February 28, 2001 as to the table in Note 4). Our audits also included the consolidated financial statement schedule of the Company listed in the Index at Item 14(a)(2). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California January 30, 2001 S-2 61 SCHEDULE II PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BEGINNING CHARGED TO COST DEDUCTIONS/ BALANCE AT OF YEAR AND EXPENSES WRITE-OFFS END OF YEAR ---------- --------------- ----------- ----------- Year ended December 31, 1998 Allowance for doubtful accounts............................ $ 75,000 $ -- $ 28,000 $ 47,000 ======== ======== ======== ========== Year ended December 31, 1999 Allowance for doubtful accounts............................ $ 47,000 $467,000 $182,000 $ 332,000 ======== ======== ======== ========== Year ended December 31, 2000 Allowance for doubtful accounts............................ $332,000 $915,000 $ 19,000 $1,228,000 ======== ======== ======== ==========
S-3 EX-3.4 2 f70040ex3-4.txt EXHIBIT 3.4 1 EXHIBIT 3.4 BYLAWS OF PERSISTENCE SOFTWARE, INC. 2 TABLE OF CONTENTS
Page ARTICLE I - CORPORATE OFFICES......................................................3 1.1 Registered Office.....................................................3 1.2 Other Offices.........................................................3 ARTICLE II - MEETINGS OF STOCKHOLDERS..............................................3 2.1 Place Of Meetings.....................................................3 2.2 Annual Meeting........................................................1 2.3 Special Meeting.......................................................3 2.4 Notice of Shareholder's Meeting; Affidavit Of Notice..................3 2.5 Advance Notice of Stockholder Nominees................................3 2.6 Quorum................................................................4 2.7 Adjourned Meeting; Notice.............................................4 2.8 Conduct Of Business...................................................4 2.9 Voting................................................................5 2.10 Waiver Of Notice.....................................................5 2.11 Record Date For Stockholder Notice; Voting...........................5 2.12 Proxies..............................................................6 ARTICLE III - DIRECTOR.............................................................6 3.1 Powers................................................................6 3.2 Number Of Directors...................................................6 3.3 Election, Qualification And Term Of Office Of Directors...............6 3.4 Resignation And Vacancies.............................................6 3.5 Place Of Meetings; Meetings By Telephone..............................7 3.6 Regular Meetings......................................................8 3.7 Special Meetings; Notice..............................................8 3.8 Quorum................................................................8 3.9 Waiver Of Notice......................................................8 3.10 Board Action By Written Consent Without A Meeting....................9 3.11 Fees And Compensation Of Directors...................................9 3.12 Approval Of Loans To Officers........................................9 3.13 Removal Of Directors.................................................9 3.14 Chairman Of The Board Of Directors...................................10 ARTICLE IV - COMMITTEES............................................................10 4.1 Committees Of Directors...............................................10 4.2 Committee Minutes.....................................................10 4.3 Meetings And Action Of Committees.....................................11 ARTICLE V - OFFICERS...............................................................14 5.1 Officers..............................................................14
i 3 5.2 Appointment Of Officers...............................................14 5.3 Subordinate Officers..................................................14 5.4 Removal And Resignation Of Officers...................................14 5.5 Vacancies In Offices..................................................14 5.6 Chief Executive Officer...............................................15 5.7 President.............................................................15 5.8 Vice Presidents.......................................................15 5.9 Secretary.............................................................15 5.10 Chief Financial Officer..............................................16 5.11 Representation Of Shares Of Other Corporations.......................16 5.12 Authority And Duties Of Officers.....................................17 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS...17 6.1 Indemnification Of Directors And Officers.............................17 6.2 Indemnification Of Others.............................................17 6.3 Payment Of Expenses In Advance........................................17 6.4 Indemnity Not Exclusive...............................................18 6.5 Insurance.............................................................18 6.6 Conflicts.............................................................18 ARTICLE VII - RECORDS AND REPORTS..................................................19 7.1 Maintenance And Inspection Of Records.................................19 7.2 Inspection By Directors...............................................19 7.3 Annual Statement To Stockholders......................................19 ARTICLE VIII - GENERAL MATTERS.....................................................20 8.1 Checks................................................................20 8.2 Execution Of Corporate Contracts And Instruments......................20 8.3 Stock Certificates; Partly Paid Shares................................20 8.4 Special Designation On Certificates...................................21 8.5 Lost Certificates.....................................................21 8.6 Construction; Definitions.............................................21 8.7 Dividends.............................................................21 8.8 Fiscal Year...........................................................22 8.9 Seal..................................................................22 8.10 Transfer Of Stock....................................................22 8.11 Stock Transfer Agreements............................................22 8.12 Registered Stockholders..............................................22 ARTICLE IX - AMENDMENTS............................................................22
-ii- 4 BYLAWS OF PERSISTENCE SOFTWARE, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware, County of New Castle, 19801. The name of its registered agent at such address is The Corporation Trust Company. 1.2 OTHER OFFICES. The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING. (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. (b) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the corporation's notice with respect to such meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2. (c) In addition to the requirements of Section 2.5, for nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause 5 (iii) of paragraph (b) of this Section 2.2, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such business must be a proper matter for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not less than twenty (20) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days prior to or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the twentieth (20th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (B) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (d) Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.2. The chairman of the meeting shall determine whether a nomination or any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed nomination or business has not been properly brought before the meeting, the chairman shall declare that such proposed business or nomination shall not be presented for stockholder action at the meeting. (e) For purposes of this Section 2.2, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service. (f) Nothing in this Section 2.2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2.3 SPECIAL MEETING. -4- 6 (a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president. (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be selected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in Section 2.5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 2.5. 2.4 NOTICE OF STOCKHOLDER'S MEETINGS; AFFIDAVIT OF NOTICE. All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than sixty (60) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise -5- 7 required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. -6- 8 2.9 VOTING. (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). (b) Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -7- 9 2.12 PROXIES. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. The number of directors constituting the entire Board of Directors shall be eight (8). 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold -8- 10 office as provided in this section in the filling of other vacancies. A vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the quorum. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the certificate of incorporation or these Bylaws: (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in -9- 11 the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall -10- 12 constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 APPROVAL OF LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. -11- 13 No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS. The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (e) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES. -12- 14 Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. -13- 15 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS. In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the -14- 16 president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. -15- 17 The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the corporation, (b) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an -16- 18 employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation 6.5 INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -17- 19 ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, -18- 20 notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full -19- 21 or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. The directors of the corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. -20- 22 8.9 SEAL. The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -21- 23 CERTIFICATE OF ASSISTANT SECRETARY OF ADOPTION OF BYLAWS The undersigned hereby certifies that the undersigned is the duly elected, qualified, and acting Assistant Secretary of Persistence Software, Inc. and that the foregoing Bylaws were adopted as the Bylaws of the corporation on April 21, 1999 by the Board of Directors of the corporation and are contingent on and effective as of the closing date of the corporation's initial public offering of common stock. Executed this 21st day of April 1999. /s/ Mark A. Medearis ------------------------------------------ Mark A. Medearis, Assistant Secretary 24 CERTIFICATE OF AMENDMENT OF BYLAWS OF PERSISTENCE SOFTWARE, INC. The undersigned, being the duly acting and appointed Assistant Secretary of Persistence Software, Inc., a Delaware corporation, hereby certifies that the Bylaws of this corporation were amended at a meeting of the Board of Directors on July 13, 2000 to amend Section 3.2 of the Bylaws of the Company to read as follows: "The number of directors constituting the entire Board of Directors shall be seven (7)." Dated: July 13, 2000 /s/ Mark A. Medearis -------------------- Mark A. Medearis Assistant Secretary EX-23.1 3 f70040ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-53176 and 333-82543 of Persistence Software, Inc. on Form S-8 of our reports dated January 30, 2001 (February 28, 2001 as to the table in Note 4) appearing in this Annual Report on Form 10-K of Persistence Software, Inc. for the year ended December 31, 2000. DELOITTE & TOUCHE LLP San Jose, California March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----