-----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, JrW1PuKfzKn6GGERlBBAo3/Rdgn2FFcm2QgxeHY/N5atLt0lOEs8N4KbGe61tJ5Z z0ZxayovBka4KF3tZ1yMrQ== 0000891618-99-002519.txt : 19990603 0000891618-99-002519.hdr.sgml : 19990603 ACCESSION NUMBER: 0000891618-99-002519 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990602 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-76867 FILM NUMBER: 99639087 BUSINESS ADDRESS: STREET 1: 1720 SOUTH AMPHLETT BLVD., 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503417733 S-1/A 1 AMENDMENT #1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1999 REGISTRATION NO. 333-76867 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PERSISTENCE SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 94-3138935 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR SAN MATEO, CALIFORNIA 94402 (650) 372-3600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ CHRISTOPHER T. KEENE CHIEF EXECUTIVE OFFICER PERSISTENCE SOFTWARE, INC. 1720 SOUTH AMPHLETT BLVD., THIRD FLOOR SAN MATEO, CALIFORNIA 94402 (650) 372-3600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: MARK A. MEDEARIS CURTIS L. MO LAUREL FINCH JUDY G. HAMEL DANIEL W. BURKE BROBECK, PHLEGER & HARRISON LLP KRISTEN A. LAMB TWO EMBARCADERO PLACE VENTURE LAW GROUP 2200 GENG ROAD A PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94303 2800 SAND HILL ROAD MENLO PARK, CALIFORNIA 94025
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Common stock, par value $0.001 per share...................... 3,450,000 $11.00 $37,950,000 $10,550(3) - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares of common stock issuable upon exercise of the underwriters' over-allotment option. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) and Rule 457(o) under the Securities Act. (3) $11,509 was previously paid in connection with the registration statement filed April 23, 1999. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This Registration Statement contains two prospectus cover pages and two Underwriting sections. The first cover page and Underwriting section will be used in connection with the offering in the United States and Canada. The second cover page and Underwriting section will be used in connection with the offering outside the United States and Canada. In all other respects, the prospectuses used for these two purposes will be identical. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JUNE 2, 1999 3,000,000 SHARES PERSISTENCE LOGO PERSISTENCE SOFTWARE, INC. COMMON STOCK We are offering 3,000,000 shares of our common stock. This is our initial public offering, and no public market currently exists for our shares. We have applied to have the shares we are offering approved for quotation on the Nasdaq National Market under the symbol "PRSW." We anticipate that the initial public offering price will be between $9.00 and $11.00 per share. ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. -------------------------
PER SHARE TOTAL --------- ------------ Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Persistence..................................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of our common stock to cover over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 1999. ------------------------- BANCBOSTON ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY SOUNDVIEW TECHNOLOGY GROUP The date of this prospectus is , 1999 4 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JUNE 2, 1999 3,000,000 SHARES PERSISTENCE LOGO PERSISTENCE SOFTWARE, INC. COMMON STOCK We are offering 3,000,000 shares of our common stock. This is our initial public offering, and no public market currently exists for our shares. We have applied to have the shares we are offering approved for quotation on the Nasdaq National Market under the symbol "PRSW." We anticipate that the initial public offering price will be between $9.00 and $11.00 per share. ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. -------------------------
PER SHARE TOTAL --------- ------------ Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Persistence..................................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of our common stock to cover over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 1999. ------------------------- BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED U.S. BANCORP PIPER JAFFRAY SOUNDVIEW TECHNOLOGY GROUP The date of this prospectus is , 1999 5 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO THE "COMPANY," "PERSISTENCE," "WE," "US," AND "OUR" REFER TO PERSISTENCE SOFTWARE, INC., AND OUR SUBSIDIARY. ------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 4 Special Note Regarding Forward-Looking Statements........... 16 Use of Proceeds............................................. 17 Dividend Policy............................................. 17 Capitalization.............................................. 18 Dilution.................................................... 19 Selected Consolidated Financial Data........................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Business.................................................... 33 Management.................................................. 46 Certain Transactions........................................ 57 Principal Stockholders...................................... 60 Description of Capital Stock................................ 62 Shares Eligible for Future Sale............................. 65 Underwriting................................................ 67 Legal Matters............................................... 69 Experts..................................................... 69 Where You Can Find More Information......................... 69 Index to Consolidated Financial Statements.................. F-1
------------------------- 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." "PowerSync" and "Command Center" are also trademarks of ours. This prospectus also makes reference to trademarks and trade names of other companies that belong to them. i 6 PROSPECTUS SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and the consolidated financial statements and notes, before deciding to invest in shares of our common stock. PERSISTENCE SOFTWARE, INC. Persistence is a leading provider of transactional application server software products, which move data and processing out of back-end computer systems and closer to users. Our software supports the Internet infrastructure that enables the next generation of high-volume, high-performance electronic commerce applications. As the Internet has evolved into a global communications medium, companies in many industries have begun to extend their business over the Internet to conduct electronic commerce with customers, suppliers and partners. While creating new business opportunities, the growth of electronic commerce has also created tremendous technological challenges. In particular, this growth has placed stress on the underlying application server infrastructure which processes these electronic commerce transactions. The first generation of web application servers that emerged were typically designed to handle simple information publishing, not to accommodate the high transaction volumes and performance requirements that characterize electronic commerce today. Even casual users of the Internet are familiar with the effects of these infrastructure limitations, such as poor performance and system failures. Our PowerTier family of products consists of transactional application servers specifically designed to enable the next generation of high performance electronic commerce applications. Our products, PowerTier for EJB and PowerTier for C++, address the scalability, availability and adaptability problems that frequently occur when delivering business solutions over the Internet. PowerTier is one of the few application servers that implements Sun Microsystems' full Enterprise JavaBeans, or EJB, standard to enable businesses to deploy high performance, scalable Java applications. The PowerTier platform incorporates our patented caching technology, which speeds transaction processing by moving data and processing out of back-end computer systems and closer to users. We believe the PowerTier family of products offers performance that is orders of magnitude faster than traditional application server software that does not take advantage of caching technology. Our products offer customers launching sophisticated electronic commerce applications the following benefits: - real-time response times for up to thousands of concurrent users and transactions; - scalability and reliability to prevent system crashes and downtime; - dramatic reductions in time-to-market for building and deploying electronic commerce applications; - the ability to extend transaction processing across organizational boundaries; and - support of open Internet standards. Our strategy is to provide the leading software platform for the deployment of high performance electronic commerce applications. Key elements of our strategy include: - capturing additional market share in the emerging business-to-business electronic commerce market; - extending our technology leadership in standards-based platforms for the next generation of electronic commerce; - expanding our product platform to offer complementary solutions; - increasing our partnerships with systems integrators; 1 7 - leveraging our installed customer base; and - strengthening our international presence. Our customers use PowerTier as the platform for a broad range of electronic commerce applications, from real-time electronic trading and supply chain management to Internet network management, application outsourcing and customer relationship management. We believe our PowerTier products are particularly well-suited for business-to-business electronic commerce applications requiring communications among multiple servers in multi-party, multi-step transactions. Our major customers include AT&T, Boeing, Cisco, FedEx, IBM, Instinet, Lucent, Morgan Stanley Dean Witter, Norwest, Perkin-Elmer and SuperValu. We market and sell our products primarily through a direct sales force in the United States, United Kingdom and Germany, as well as through distributors. Our current stockholders include Cisco, Intel, Reuters and Morgan Stanley Dean Witter. We were incorporated in May 1991 as Fulcrum Innovations, Inc. and subsequently changed our name to Persistence Software, Inc. Our principal executive offices are located at 1720 South Amphlett Blvd., Third Floor, San Mateo, California 94402. Our telephone number at that location is (650) 372-3600. Information contained on our website at http://www.persistence.com does not constitute part of this prospectus. THE OFFERING Common stock offered............... 3,000,000 shares Common stock to be outstanding after the offering................. 18,447,941 shares Use of proceeds.................... Working capital and general corporate purposes, funding product development and expanding our sales and marketing organization. Proposed Nasdaq National Market symbol............................. PRSW This table is based on shares outstanding as of March 31, 1999 and excludes shares that may be issued on exercise of the following options and warrants: - 1,388,036 shares subject to outstanding options at a weighted average exercise price of $0.64; - 80,556 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.90 per share; and - an aggregate of 4,495,033 shares available for future issuance under our stock plans. 2 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------- ------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- --------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: License................................... $ 2,603 $ 3,546 $ 7,478 $ 1,004 $ 2,116 Service................................... 1,171 1,867 2,682 706 747 ------- ------- ------- ------- ------- Total revenues.................... $ 3,774 $ 5,413 $10,160 $ 1,710 $ 2,863 ------- ------- ------- ------- ------- Loss from operations........................ (3,345) (4,686) (4,090) (1,708) (1,963) Net loss.................................... (3,311) (4,674) (4,089) (1,704) (1,915) Basic and diluted net loss per share........ $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27) ======= ======= ======= ======= ======= Shares used in basic and diluted net loss per share calculation..................... 6,135 6,366 6,879 6,733 7,044 ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per share..................................... $ (0.31) $ (0.13) ======= ======= Shares used in pro forma basic and diluted net loss per share calculation............ 13,183 14,320 ======= =======
MARCH 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- --------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $ 7,386 $ 7,386 $34,386 Working capital..................................... 6,285 6,285 33,285 Total assets........................................ 10,455 10,455 37,455 Long-term obligations............................... 683 683 683 Total stockholders' equity.......................... 6,309 6,309 33,309
- ------------------------- See notes 1 and 6 of notes to consolidated financial statements for an explanation of the method used to determine the number of shares used to compute the net loss per share and pro forma net loss per share amounts. The pro forma column in the consolidated balance sheet data reflects the automatic conversion of each outstanding share of preferred stock into one share of common stock immediately before the completion of the offering. The pro forma as adjusted numbers in the table above are adjusted to give effect to receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $10.00 per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Except as otherwise indicated, all information in this prospectus is based on the following assumptions: (a) the conversion of each outstanding share of preferred stock into one share of common stock immediately before the completion of this offering, (b) no exercise of the underwriters' overallotment option, (c) our reincorporation in Delaware before the effectiveness of this offering and (d) the filing of our amended and restated certificate of incorporation upon completion of this offering. 3 9 RISK FACTORS You should carefully consider the following risks in addition to the remainder of this prospectus before purchasing our common stock. The risks and uncertainties described below are intended to be the ones that are specific to our company and are not the only ones that we face. Additional risks and uncertainties that generally apply to businesses in our industry or to companies that are going public may also impair our business. WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET. Because we only commenced selling application servers in 1997, we have a limited operating history in the application server market. You should consider our prospectus in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in the rapidly changing software industry. These risks include: - our substantial dependence for revenue from our PowerTier for C++ product, which was first introduced in 1997 and has achieved only limited market acceptance; - our need to successfully sell our PowerTier for EJB product, which was first introduced in 1998 and has achieved only limited market acceptance; - our need to expand our distribution capability through both a direct sales organization and third party distributors and systems integrators; - our unproven ability to anticipate and respond to technological and competitive developments in the rapidly changing market for application servers; - our unproven ability to compete in a highly competitive market; - uncertainty as to the growth rate in the electronic commerce market and, in particular, the business-to-business electronic commerce market; - our dependence on Enterprise JavaBeans, commonly known as EJB, becoming a widely accepted standard in the transactional application server market; and - our dependence upon key personnel. BECAUSE WE HAVE A HISTORY OF LOSSES, WE MAY NEVER BECOME OR REMAIN PROFITABLE. Our revenues may not continue to grow and we may not be able to achieve or maintain profitability in the future. We have incurred net losses each year since 1996. In particular, we incurred losses of $3.3 million in 1996, $4.7 million in 1997, $4.1 million in 1998 and $1.9 million in the three months ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately $14.7 million. In addition, while we are unable to predict accurately our future product development, sales and marketing and administrative expenses, we currently expect these expenses to increase. Thus, we will need to increase our revenues to become profitable. Because our product market is new and evolving, we cannot accurately predict either the future growth rate, if any, or the ultimate size of the market for our products. WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK, AND WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. Since inception, we have generally had negative cash flow from operations and have financed our business primarily through private sales of preferred stock. We expect to 4 10 continue to have negative cash flow from operations for the next several quarters. Although we believe that the net proceeds from this offering, together with our current cash balances, will be sufficient to meet our anticipated operating cash needs for the next 18 months, we may need to raise additional funds prior to that time. If we raise additional funds through the issuance of debt securities, these securities would probably have rights senior to the common stock. In addition, 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. Any failure to obtain additional financing could require us to reduce the scope of our planned product development or marketing efforts. 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 for C++ and PowerTier for EJB products; - the possible loss of sales people; - introduction of new products or services by us or our competitors; - annual or quarterly budget cycles of our customers; - the level of product and price competition in the application server market; - our lengthy sales cycle; - our success in expanding our direct sales force and indirect distribution channels; - the mix of direct sales versus indirect distribution channel sales; - the mix of products and services licensed or sold; - the mix of domestic and international sales; and - our success in penetrating international markets and general economic conditions in these markets. We typically receive a substantial portion of our orders in the last two weeks of each fiscal quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. 5 11 OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO IT IS DIFFICULT TO FORECAST OUR REVENUES. Any delay in sales of our products or services could cause our quarterly revenues and operating results to fluctuate. The typical sales cycle of our products is long and unpredictable and requires both a significant capital investment decision by our customers and our education of potential customers regarding the use and benefits of our products. Our sales cycle is generally between three and nine months. A successful sales cycle typically includes presentations to both business and technical decision makers, as well as a limited pilot program to establish technical fit. Our products typically are purchased as part of a significant enhancement to a customer's information technology system. The implementation of our products involves a significant commitment of resources by prospective customers. Accordingly, a purchase decision for a potential customer typically requires the approval of several senior decision makers. Our sales cycle is affected by the business conditions of each prospective customer. Due to the relative importance of many of our product sales, a lost or delayed sale could adversely affect our quarterly operating results. Our sales cycle is affected by seasonal fluctuations as a result of our customers' fiscal year budgeting cycles and slow summer purchasing patterns in Europe. Also, our revenues are typically higher in the fourth quarter than in other quarters of the year. 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 1998, sales of products and services to Cisco accounted for 14% of our total revenues, sales of products and services to Instinet accounted for 17% of our total revenues, and sales of products and services to our top five customers accounted for 55% of total revenues. In 1997, sales of products and services to Lucent accounted for 11% of our total revenues, and sales of products and services to our top five customers accounted for 15% of our total revenues. In addition, the identity of our top five customers has changed from year to year. If we lose a significant customer, or fail to increase product sales to an existing customer as planned, we may not be able to replace the lost revenues with sales to other customers. In addition, because our marketing strategy is to concentrate on selling products to industry leaders, any loss of a customer could harm our reputation within the industry and make it harder for us to sell our products to other companies in that industry. The loss of, or a reduction in sales to, one or more significant customers would likely result in a decrease in our revenues. WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER. We are focusing significant marketing efforts on our PowerTier for EJB application server, which is based on three relatively new technologies, none of which have been widely adopted by companies. These three technologies are a distributed object computing architecture, Sun Microsystems' Java programming language and Enterprise JavaBeans, or EJB. Distributed object computing combines the use of software modules, or objects, communicating across a computer network to software applications, such as our PowerTier application server. EJB is the Java programming standard for use in an application server. In 1998, we launched our PowerTier for EJB product, which is a transactional application server that uses Java and conforms to the EJB standard. Sun Microsystems released the EJB standard in 1998, and thus far EJB has had limited market acceptance. We expect a 6 12 substantial portion of our future revenues will come from sales of products based on the EJB standard. Thus, our success depends significantly upon broad market acceptance of distributed object computing in general, and Java application servers in particular. If EJB does not become a widespread programming standard for application servers, our revenues and business could suffer. IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS. The market for our products and services is characterized by rapid technological change, dynamic customer demands and frequent new product introductions and enhancements. Customer requirements for products can change rapidly as a result of innovation in software applications and hardware configurations and the emergence or adoption of new industry standards, including Internet technology standards. We need to increase our research and development investment to maintain our technological leadership. Our future success depends on our ability to continue to enhance our current products and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments. For example, as Sun Microsystems introduces new EJB specifications, we will need to introduce new versions of PowerTier for EJB designed to support these new specifications to remain competitive. If we do not bring enhancements and new versions of our products to market in a timely manner, our market share and revenues could decrease and our reputation could suffer. If we fail to anticipate or respond adequately to changes in technology and customer needs, or if there are any significant delays in product development or introduction, our revenues and business could suffer. BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY FAILURE TO BUILD AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES. We must expand our direct sales team to generate increased revenue. In 1998, we hired several new salespeople, replacing most of our preexisting sales force. In order to meet our future sales goals, we will need to hire many more salespeople within the next two years for both our domestic and international sales efforts. In the past, newly hired employees have required training and approximately six to nine months experience to achieve full productivity. Because our entire sales team is relatively new, we cannot be certain that they will meet our sales goals. In addition, our recently hired employees may not become productive, and we may not be able to hire enough qualified individuals in the future. BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES CHANNEL THROUGH SYSTEMS INTEGRATORS AND OTHER THIRD PARTIES, ANY FAILURE TO DEVELOP THIS CHANNEL MAY RESULT IN LOWER REVENUES. To date, we have sold our products primarily through our direct sales force, but our ability to achieve significant revenue growth in the future will depend in large part on our success in establishing and leveraging relationships with systems integrators and other third parties. It may be difficult for us to establish these relationships, and, even if we establish these relationships, we will then depend on the systems integrators' and other third parties' sales efforts. In addition, because these relationships are nonexclusive, systems integrators may choose to use application servers or other alternative solutions offered by our competitors, and not our products. If we fail to successfully build our third-party 7 13 distribution channels or if our systems integrator and other third party partners do not perform as expected, our business could be harmed. BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES. Because our products are often incorporated into multi-million dollar enterprise projects, we depend on the successful and timely completion of these enormous projects to fully deploy our products and achieve our revenue goals. These enterprise projects often take many years to complete and can be delayed by a variety of factors, including general or industry-specific economic downturns, our customers' budget constraints, year 2000 problems or other customer-specific delays, problems with other system components or delays caused by the systems integrators who may be managing the system deployment. If our customers cannot successfully implement large-scale deployments, or they determine for any reason that our products cannot accommodate large-scale deployments or that our products are not appropriate for widespread use, our business could suffer. In addition, if a systems integrator fails to complete a project utilizing our product for a customer in a timely manner, our revenues or business reputation could suffer. BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB APPLICATION SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR THEIR OWN PRODUCTS. Our success depends on achieving widespread market acceptance of our PowerTier for EJB application server. Because Sun Microsystems controls the EJB standard, we need to maintain a good working relationship with Sun Microsystems to develop future versions of PowerTier for EJB, as well as additional products using EJB, that will gain market acceptance. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell some competing products that would, in the absence of this license agreement, infringe our patents. Because Sun Microsystems controls the EJB standard, it could develop the EJB standard in a more proprietary way to favor a product offered by one of its subsidiaries, NetDynamics or KIVA Software, or a third party, which could make it much harder for us to compete in the EJB application server market. MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD ACCEPTANCE. Microsoft has established a competing standard for distributed computing, COM, which includes an application server product. If this standard gains widespread market acceptance over the EJB or CORBA standards, on which our products are based, our business would suffer. Because of Microsoft's resources and commanding position with respect to other markets and technologies, Microsoft's entry into the application server market may cause our potential customers to delay purchasing decisions. We expect that Microsoft's presence in the application server market will increase competitive pressure in this market. 8 14 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; - quality of support and service; - security; - company reputation; and - price. Our competitors include both publicly and privately-held enterprises, including BEA Systems (WebLogic), Gemstone Systems, IBM (WebSphere), Inprise, Iona Technologies, Oracle (OAS) and Sun Microsystems (NetDynamics). Many customers may not be willing to purchase our PowerTier platform because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors have preexisting customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. Moreover, there are other very large and established companies, including Microsoft and Netscape, who offer alternative solutions and are thus indirect competitors. Further, dozens of companies have announced their intention to support EJB and may compete against us in the future. These competitors and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. In addition, in the PowerTier for C++ market, many potential customers build their own custom application servers, so we effectively compete against our potential customers' internal information technology departments. IF THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVER THE INTERNET DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR REVENUES COULD DECLINE. Our performance and future success will depend on the growth and widespread adoption of the market for business-to-business electronic commerce over the Internet. If business-to-business electronic commerce does not develop in the manner currently envisioned, our business could be materially and adversely affected. Moreover, critical issues concerning the commercial use of the Internet, including security, cost, accessibility and quality of network service, remain unresolved and may negatively affect the growth of the Internet as a platform for conducting business-to-business electronic commerce. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased activity or due to increased government regulation and taxation of Internet commerce. 9 15 OUR FAILURE TO MANAGE GROWTH COULD IMPAIR OUR BUSINESS. Achieving our planned revenue growth and other financial objectives will place significant demands on our management and other resources. We anticipate increasing our headcount significantly over the next two years. Our ability to manage this growth effectively will require us to continue to develop and improve our operational, financial and other internal systems and controls, as well as our business development capabilities, and to train, motivate and manage our employees. If we are unable to manage our growth effectively, we may not be able to retain key personnel and the quality of our services and products may suffer. OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY EMPLOYEES. Our future success depends on the ability of our management to operate effectively, both individually and as a group. We are substantially dependent upon the continued service of our existing executive personnel, especially Christopher T. Keene, our Chief Executive Officer and Chairman of the Board. We do not have a key person life insurance policy covering Mr. Keene or any other officer or key employee. Our success will depend in large part upon our ability to attract and retain highly-skilled employees, particularly sales personnel and software engineers. There is significant competition for skilled employees, especially for people who have experience in both the software and Internet industries. If we are not successful in attracting and retaining these skilled employees, our sales and product development efforts would suffer. In addition, if one or more of our key employees resigns to join a competitor or to form a competing company, the loss of that employee and any resulting loss of existing or potential customers to a competitor could harm our business. If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR SOFTWARE MAY BE DELAYED. Complex software products often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Our products have in the past contained and may in the future contain errors and defects, which may be serious or difficult to correct and which may cause delays in subsequent product releases. Delays in shipment of scheduled software releases or serious defects or errors could result in lost revenues or a delay in market acceptance, which could have a material adverse effect on our revenues and reputation. WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS. Because our customers use our products for important business applications, errors, defects or other performance problems could result in financial or other damages to our customers. They could pursue claims for damages, which, if successful, could result in our having to make substantial payments. Although our purchase agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions. A product liability claim brought against us, even if meritless, would likely be time consuming and costly for us to litigate or settle. 10 16 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 29% of our revenues came from sales of products and services outside the United States in the year ended December 31, 1998. Approximately 22% of our revenues came from sales of products and services outside the United States during the three months ended March 31, 1999. We expect international revenues to continue to represent a significant portion of our total revenues. To date, almost all of our international revenues have resulted from our direct sales efforts. In international markets, however, we expect that we will depend more heavily on third party distributors to sell our products in the future. The success of our international strategy will depend on our ability to develop and maintain productive relationships with these third parties. The failure to develop key international markets for our products could cause a reduction in our revenues. Additional risks related to our international expansion and operation include: - difficulties of staffing and managing foreign operations; - our dependence on the sales efforts of our third party distributors; - longer payment cycles typically associated with international sales; - tariffs and other trade barriers; - failure to comply with a wide variety of complex foreign laws and changing regulations; - exposure to political instability and economic downturns; - failure to localize our products for foreign markets; - restrictions on the export of technologies; - potentially adverse tax consequences; - reduced protection of intellectual property rights in some countries; and - currency fluctuations. We sell products outside the United States in U.S. dollars. We do not currently engage in any hedging transactions to reduce our exposure to currency fluctuations as a result of our foreign operations. We are not currently ISO 9000 compliant, nor are we attempting to meet all foreign technical standards that may apply to our products. Our failure to develop our international sales channel as planned could cause a decline in our revenues. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION MAY BE IMPAIRED. Our success may depend on our ability to protect our proprietary rights to the technologies used in our products, and yet the measures we are taking to protect these rights may not be adequate. If we are not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products, which could harm our business. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure and other contractual restrictions to protect our proprietary technology, but these legal means afford only limited protection. 11 17 Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Further, litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs and diversion of management attention and resources. WE MAY BE SUED FOR VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As the number of competitors in the application server market grows and the functionality of products in different market segments overlaps, the possibility of an intellectual property claim against us increases. For example, we may inadvertently infringe a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware, which will cause us to be infringing when it is issued in the future. To address these patent infringement or other intellectual property claims, we may have to enter into royalty or licensing agreements on disadvantageous commercial terms. Alternatively, we may be unable to obtain a necessary license. A successful claim against us, and our failure to license the infringed or similar technology, would harm our business. In addition, any infringement or other intellectual property claims, with or without merit, which are brought against us could be time consuming and expensive to litigate or settle and could divert management attention from administering our core business. WE FACE RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE, INCLUDING THE RISK THAT OUR PRODUCTS OR INTERNAL SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT AND THE RISK THAT OUR CUSTOMERS MAY DELAY THE PURCHASE OF OUR POWERTIER PLATFORM AS A RESULT OF THEIR OWN YEAR 2000 CONCERNS. We have designed and tested the most current versions of our products to be year 2000 compliant. However, we have not tested our products on all platforms or all versions of operating systems that we currently support. Despite this testing, our products may contain undetected errors or defects associated with year 2000 date functions that may be expensive for us to remedy. Because our products are generally incorporated into a large enterprise-wide system enhancement, we may face claims based on year 2000 issues arising from the integration of multiple products, including ours, within an overall system. Some commentators have stated that a significant amount of litigation will arise out of year 2000 issues, and we are aware of a growing number of lawsuits against other software vendors. We may experience serious unanticipated problems and material costs caused by undetected errors or defects in the technology used in our internal systems relating to the year 2000 transition. These systems include the hardware and third-party software products that our research and development staff use in their daily activities, as well as our management information systems. The most likely worst case scenarios include: - hardware or software failures that would prevent our research and development staff from effectively performing their duties; - corruption of data contained in our internal information systems; and - the failure of infrastructure services provided by government agencies and other third parties, including public utilities and Internet service providers. 12 18 Finally, our potential customers may cease or delay the purchase and installation of new complex systems, such as systems incorporating our PowerTier application server, or may defer an enterprise-wide deployment of our PowerTier platform, as a result of, and during, their own internal year 2000 testing. Any resulting delay or decrease in orders for our products could cause our revenues to decline, either on a quarterly or absolute basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. If our current stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall. In addition, these sales of common stock after the offering could impede our ability to raise funds at an advantageous price through the sale of securities. After this offering, we will have outstanding 18,447,941 shares of common stock. The 3,000,000 shares sold in this offering will be immediately available for sale in the public market. Beginning 90 days after the effective date of this prospectus, approximately 147,790 shares will be eligible for sale. Beginning 180 days after the effective date, approximately 14,434,150 shares will be eligible for sale, 7,014,673 of which will be subject to volume and other restrictions under Rule 144. The remaining 866,001 shares will be eligible for sale upon the expiration of various one-year holding periods during the six months following 180 days after the effective date, subject to volume and other restrictions under Rule 144. OUR STOCK PRICE MAY BE VOLATILE. Before this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. If you purchase shares in this offering, you will pay a price that was not established in a competitive market, but was rather a price that we negotiated with the underwriters. After the offering, the market price of our common stock is likely to be highly volatile and may rise or fall as a result of many factors, such as: - variations in our quarterly results; - announcements of technological innovations by us or our competitors; - introductions of new products by us or our competitors; - acquisitions or strategic alliances by us or our competitors; - hiring or departure of key personnel; - the gain or loss of a significant customer or order; - changes in estimates of our financial performance or changes in recommendations by securities analysts; - market conditions in the software industry and in our customers' industries; and - adoption of new accounting standards affecting the software industry. The stock market in general has experienced extreme price and volume fluctuations, which could adversely affect the market price of our stock. In particular, the market prices of the common stock of many companies in the software and Internet industries have experienced this volatility, which has often been unrelated to these companies' operating performance. In the past, securities class action litigation has often been brought against a 13 19 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 AFTER THIS OFFERING. Immediately after this offering, our executive officers and directors, and entities affiliated with them, will continue to own approximately 60% of our outstanding common stock. Accordingly, these stockholders may, as a practical matter, continue to control the election of a majority of the directors and the determination of all corporate actions after this offering. This concentration of voting control could have the effect of delaying or preventing a merger or other change in control, even if it would benefit our other stockholders. 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. See "Management -- Board Composition" and "Description of Capital Stock -- Delaware Antitakeover Law and Provisions of our Certificate of Incorporation and Bylaws." 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 expect to expand our PowerTier platform to include object request broker 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; 14 20 - 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. YOU WILL PAY SUBSTANTIALLY MORE FOR YOUR SHARES THAN THE NET TANGIBLE BOOK VALUE PER SHARE OF THE SHARES YOU ACQUIRE. If you purchase shares of common stock in this offering, you could pay as much as $11.00 per share, which substantially exceeds $0.41, which is the net tangible book value per share of the shares you would acquire. Assuming that the offering price is $10.00, the stockholders who purchase shares in this offering will contribute 60% of the total amount of our funding to date, but will only own a total of 16% of our shares outstanding. This dilution is in large part because our earlier investors paid substantially less than the public offering price when they purchased their shares of common stock. You will experience additional dilution upon the exercise of outstanding stock options or warrants to purchase common stock. WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THIS OFFERING, AND THUS MAY USE THE PROCEEDS TO FUND OPERATING LOSSES, FOR ACQUISITIONS OR FOR OTHER CORPORATE PURPOSES. We have not designated any specific use for the net proceeds of this offering. As a result, our management and board of directors will have broad discretion in spending the proceeds of this offering. We currently expect to use the net proceeds primarily for working capital and general corporate purposes, funding product development and expanding our sales and marketing organization. In addition, we may use a portion of the net proceeds for further development of our product lines through acquisitions of products, technologies and businesses. 15 21 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus are forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," or the negative of these and other similar words. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 16 22 USE OF PROCEEDS Our net proceeds from the sale of the 3,000,000 shares of common stock we are offering are estimated to be $27,000,000 ($31,185,000 if the underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $10.00 per share, after deducting the estimated underwriting discount and commissions and the estimated offering expenses. We currently expect to use the net proceeds primarily for working capital and general corporate purposes, funding product development and expanding our sales and marketing organization. In addition, we may use a portion of the net proceeds for further development of our product lines through acquisitions of products, technologies and businesses, although we have no present commitments or agreements to make any major acquisitions. The amount of cash that we actually expend for working capital purposes will vary significantly depending on a number of factors, including future revenue growth, if any, and the amount of cash we generate from operations. Thus, management will have significant discretion in applying the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds in short-term, investment grade, interest-bearing securities. 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. 17 23 CAPITALIZATION The following table sets forth the following information: - the actual capitalization of Persistence as of March 31, 1999; - the pro forma capitalization of Persistence, after giving effect to the automatic conversion of all outstanding shares of preferred stock into 7,697,885 shares of common stock; - the pro forma as adjusted capitalization, after giving effect to the sale of shares of common stock at an assumed initial public offering price of $10.00 per share in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses that Persistence expects to pay in connection with this offering; and - the authorization of 75,000,000 shares of common stock and 5,000,000 shares of preferred stock upon our reincorporation in Delaware. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes to the consolidated financial statements included elsewhere in this prospectus.
MARCH 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Long-term obligations, less current portion................................... $ 683 $ 683 $ 683 -------- -------- -------- Stockholders' equity: Preferred stock, par value $0.001 per share; 7,900,000 shares authorized, actual, 7,697,885 shares issued and outstanding; 7,900,000 shares authorized, none issued or outstanding, pro forma; 5,000,000 shares authorized, none issued or outstanding, pro forma as adjusted........ 19,859 -- -- Common stock, par value $0.001 per share; 41,100,000 shares authorized, 7,750,056 shares issued and outstanding, actual; 41,100,000 shares authorized, 15,447,941 issued and outstanding, pro forma; 75,000,000 shares authorized, 18,447,941 shares issued and outstanding, pro forma as adjusted............................... 3,997 23,856 50,856 Deferred stock compensation................. (2,705) (2,705) (2,705) Notes receivable from stockholders.......... (161) (161) (161) Accumulated deficit......................... (14,681) (14,681) (14,681) -------- -------- -------- Total stockholders' equity........ 6,309 6,309 33,309 -------- -------- -------- Total capitalization.............. $ 6,992 $ 6,992 $ 33,992 ======== ======== ========
- --------------- This table excludes the following shares: - 1,388,036 shares issuable upon exercise of outstanding options at a weighted average exercise price of $0.64 per share as of March 31, 1999, - 80,556 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.90 per share as of March 31, 1999, and - an aggregate of 4,495,033 shares available for future issuance under our 1997 stock plan, 1999 directors' stock option plan and 1999 employee stock purchase plan as of March 31, 1999. See "Management -- Stock Plans" and notes 5 and 11 of notes to consolidated financial statements. 18 24 DILUTION The pro forma net tangible book value on March 31, 1999 was $6,309,000, or $0.41 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, after giving effect to the conversion of all outstanding shares of preferred stock into common stock immediately prior to the closing of this offering. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately following this offering. After giving effect to our sale of shares of common stock in this offering and after deducting the estimated underwriting discount and commissions and our estimated offering expenses, our pro forma net tangible book value as of March 31, 1999 would have been $33,309,000 or $1.81 per share of common stock. This represents an immediate increase in net tangible book value of $1.40 per share to existing stockholders and an immediate dilution of $8.19 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $10.00 Pro forma net tangible book value per share as of March 31, 1999............................................... 0.41 Increase per share attributable to new investors.......... 1.40 ----- Pro forma net tangible book value after the offering........ 1.81 ------ Dilution per share to new investors......................... $ 8.19 ======
The following table summarizes on a pro forma basis, as of March 31, 1999, the differences between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid. The information presented is based upon an assumed initial public offering price of $10.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses of this offering.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders..................... 15,447,941 84% $20,316,000 40% $ 1.32 New investors............................. 3,000,000 16 30,000,000 60 10.00 ---------- ----- ----------- ----- Totals.................................... 18,447,941 100.0% $50,316,000 100.0% ========== ===== =========== =====
This table excludes the following shares: - 1,388,036 shares issuable upon exercise of outstanding options at a weighted average exercise price of $0.64 per share as of March 31, 1999, - 80,556 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.90 per share as of March 31, 1999, and - an aggregate of 4,495,033 shares available for future issuance under our 1997 stock plan, 1999 directors' stock option plan and 1999 employee stock purchase plan as of March 31, 1999. See "Management -- Stock Plans" and notes 5 and 11 of notes to consolidated financial statements. If the underwriters' over-allotment option is exercised in full, the following will occur: - the number of shares of common stock held by existing stockholders will decrease to approximately 82% of the total number of shares of our common stock outstanding after this offering; and - the number of shares held by new investors will be increased to 3,450,000 or approximately 18% of the total number of shares of our common stock outstanding after this offering. 19 25 SELECTED CONSOLIDATED 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 prospectus. The consolidated statements of operations data for the years ended December 31, 1996, 1997 and 1998, and the consolidated balance sheet data at December 31, 1997 and 1998, are derived from audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 1994 and 1995, and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are derived from audited financial statements not included in this prospectus. The consolidated statements of operations data for the three-months ended March 31, 1998 and 1999 and the consolidated balance sheet data as of March 31, 1999 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. In our opinion, these unaudited statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information when read in conjunction with the consolidated financial statements and notes thereto.
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License............................................ $ 978 $ 3,053 $ 2,603 $ 3,546 $ 7,478 $ 1,004 $ 2,116 Service............................................ 318 954 1,171 1,867 2,682 706 747 ------- ------- ------- ------- ------- ------- ------- Total revenues................................... 1,296 4,007 3,774 5,413 10,160 1,710 2,863 ------- ------- ------- ------- ------- ------- ------- Cost of revenues: License............................................ 32 16 139 342 239 56 42 Service............................................ 60 142 221 729 1,372 326 580 ------- ------- ------- ------- ------- ------- ------- Total cost of revenues........................... 92 158 360 1,071 1,611 382 622 ------- ------- ------- ------- ------- ------- ------- Gross profit......................................... 1,204 3,849 3,414 4,342 8,549 1,328 2,241 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Sales and marketing................................ 1,092 2,011 3,798 4,712 7,168 1,687 2,015 Research and development........................... 542 1,129 1,976 2,954 4,234 1,038 1,806 General and administrative......................... 361 590 985 1,362 1,237 311 383 ------- ------- ------- ------- ------- ------- ------- Total operating expenses......................... 1,995 3,730 6,759 9,028 12,639 3,036 4,204 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations........................ (791) 119 (3,345) (4,686) (4,090) (1,708) (1,963) Interest income (expense), net....................... 12 (1) 34 12 1 4 48 ------- ------- ------- ------- ------- ------- ------- Net income (loss).................................... $ (779) $ 118 $(3,311) $(4,674) $(4,089) $(1,704) $(1,915) ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share: Basic.............................................. $ (0.15) $ 0.02 $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27) ======= ======= ======= ======= ======= ======= ======= Diluted............................................ $ (0.15) $ 0.02 $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27) ======= ======= ======= ======= ======= ======= ======= Shares used in computing net income (loss) per share: Basic.............................................. 5,196 5,360 6,135 6,366 6,879 6,733 7,044 ======= ======= ======= ======= ======= ======= ======= Diluted............................................ 5,196 5,365 6,135 6,366 6,879 6,733 7,044 ======= ======= ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per share....... $ (0.31) $ (0.13) ======= ======= Shares used in pro forma basic and diluted net loss per share.......................................... 13,183 14,320 ======= =======
DECEMBER 31, ------------------------------------------ MARCH 31, 1994 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ --------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 368 $ 370 $4,535 $2,610 $4,938 $ 7,386 Working capital............................................. 207 264 4,437 1,604 3,384 6,285 Total assets................................................ 821 1,424 6,478 5,447 7,604 10,455 Long-term obligations, net of current portion............... 24 121 528 419 714 683 Total stockholders' equity.................................. 422 592 4,697 2,057 3,422 6,309
20 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of our prospectus includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as "anticipates," "believes," "expects," "future," "intends" and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. For a description of these risks, see "Risk Factors." OVERVIEW We are a leading provider of transactional application server software products that comprise the Internet software infrastructure for high volume, high performance electronic commerce applications. We were incorporated and began operations in 1991. Our first products incorporated patented object-to-relational mapping and caching technologies, which have since become the foundation for our PowerTier product family. From 1992 to 1996, we introduced a variety of enhancements to these products, including a patented data transformation technology for mapping objects to database tables, and caching capabilities. In 1996, we developed our PowerTier transactional application server, which integrates all of these previously released Persistence products with new shared transactional caching technologies, which 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 and 1998, during which years we added a professional services staff to enable our customers to implement PowerTier more rapidly. We were one of the first companies to adopt and implement the EJB specification. In 1998, we introduced PowerTier for EJB, which customers have frequently purchased together with PowerTier for C++. Our next version of PowerTier for EJB is currently in use by several major customers and is expected to be commercially released later in 1999. We currently plan to continue to focus product development efforts on enhancements to both the PowerTier for C++ and the PowerTier for EJB products. Our revenues, which consist of software license revenues and service revenues, totaled $3.8 million in 1996, $5.4 million in 1997, $10.2 million in 1998 and $2.9 million in the three months ended March 31, 1999. License revenues consist of licenses of our software products, which generally are priced based on the number of users or servers. Service revenues consist of professional services consulting, customer support and training. Because we only commenced selling application servers in 1997, we have a limited operating history in the application server market. We expect that, in the near term, the majority of our revenues will be derived from PowerTier for C++ transactional server and related services. In the longer term, we expect that PowerTier for EJB will increase as a component of our total revenues. We market our software and services primarily through our direct sales organizations in the United States, the United Kingdom and Germany. Revenues from PowerTier licenses and services to customers outside the United States represented approximately $566,000, or 15% of total revenues, in 1996, $639,000, or 12% of total revenues, in 1997, $2.9 million, or 29% of total revenues, in 1998, and $626,000, or 22% of total revenues, in the three months ended March 31, 1999. Our future success will depend, in part, on our successful development of international markets for our products. 21 27 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 15% of total revenues in 1997 and 55% of total revenues in 1998. In the future, we expect to have relatively few large customers continue to account for a relatively large proportion of our revenues. To date, we have sold our products primarily through our direct sales force, and we will need to hire many more sales people within the next two years in order to meet our sales goals. In addition, our ability to achieve significant revenue growth will depend in large part on our success in establishing and leveraging relationships with systems integrators and other third parties. For 1997 and prior years, we recognized revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 91-1. Commencing in 1998, we began recognizing revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition," or SOP 97-2, as amended by Statements of Position 98-4 and 98-9. Our adoption of these new standards has not to date had any material effect on our revenue recognition. Further implementation guidelines relating to these standards may result in unanticipated changes in our revenue recognition practices, and these changes could affect our future revenues and earnings. We recognize license revenues upon shipment of the software if collection of the resulting receivable is probable, an executed agreement has been signed, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. Undelivered elements in these arrangements typically consist of services. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. We recognize revenues from customer training, support and consulting services as the services are performed. We generally recognize support revenues ratably over the term of the support contract. If support or professional services are included in an arrangement that includes a license agreement, amounts related to support or professional services are allocated based on vendor-specific objective evidence. Vendor-specific objective evidence for support and professional services is based on the price when such elements are sold separately, or, when not sold separately, the price established by management having the relevant authority. Arrangements which require significant modification or customization of software are recognized under the percentage of completion method. Since inception, we have incurred substantial research and development costs and have invested heavily in the expansion of our sales, marketing and professional services organizations to build an infrastructure to support our long-term growth strategy. The number of our full-time employees increased from 64 as of December 31, 1997 to 77 as of December 31, 1998, representing an increase of 20%. As a result of investments in our infrastructure, we have incurred net losses in each fiscal quarter since 1996 and, as of March 31, 1999, had an accumulated deficit of $14.7 million. We anticipate that our operating expenses will increase substantially for the foreseeable future as we expand our product development, sales and marketing and other staff. In addition, we expect to incur substantial expenses associated with sales personnel, referral fees, marketing programs and increased administrative expenses associated with being a public company. Accordingly, we expect to incur net losses for the foreseeable future. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicative of future performance. Our 22 28 prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. Although we have experienced significant revenue growth recently, this trend may not continue. We may not achieve or maintain profitability in the future. Our success depends significantly upon broad market acceptance of our PowerTier for EJB application server. Because Sun Microsystems controls the EJB standard, we need to maintain a good working relationship with them to develop future versions of PowerTier for EJB, as well as additional products using the EJB standard. Our performance will also depend on the growth and widespread adoption of the market for business-to-business electronic commerce over the Internet. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1999 Revenues Our revenues were $1.7 million for the three months ended March 31, 1998 and $2.9 million for the three months ended March 31, 1999, representing an increase of 67%. International revenues were $390,000 for the three months ended March 31, 1998 and $626,000 for the three months ended March 31, 1999. License Revenues. License revenues were $1.0 million for the three months ended March 31, 1998 and $2.1 million for the three months ended March 31, 1999, representing an increase of 111%. License revenues represented 59% of total revenues for the three months ended March 31, 1998 and 74% of total revenues for the three months ended March 31, 1999. The increase in software license revenues was primarily due to sales of our new PowerTier for EJB application server and the increased size and productivity of our sales team. Service Revenues. Our service revenues were $706,000 for the three months ended March 31, 1998 and $747,000 for the three months ended March 31, 1999, representing an increase of 6%. The dollar increase in service revenues was primarily due to an increase in customer support fees related to increased sales of our PowerTier platform. Service revenues represented 41% of total revenues for the three months ended March 31, 1998 and 26% of total revenues for the three months ended March 31, 1999. This decrease as a proportion of total revenues was primarily attributed to an increase in sales of our new PowerTier for EJB platform. Cost of Revenues Cost of License Revenues. Cost of license revenues consists of packaging, documentation and associated shipping costs. Our cost of license revenues was $56,000 for the three months ended March 31, 1998 and $42,000 for the three months ended March 31, 1999. As a percentage of license revenues, cost of license revenues were 6% for the three months ended March 31, 1998 and 2% for the three months ended March 31, 1999. This decrease was primarily attributable to lower packaging and document distribution costs as a result of a change to electronic distribution of these materials. Cost of Service Revenues. Cost of service revenues consists of personnel and other costs related to professional services, technical support and training. Our cost of service revenues was $326,000 for the three months ended March 31, 1998 and $580,000 for the three months ended March 31, 1999, representing an increase of 78%. This increase was primarily due to increased staffing in our professional services organization to support a greater installed base of customers. As a percentage of service revenues, cost of service 23 29 revenues were 46% for the three months ended March 31, 1998 and 78% for the three months ended March 31, 1999. In particular, cost of service revenues as a percentage of service revenues may vary between periods due to our use of third party professional services. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, travel and entertainment, and promotional expenses. Our sales and marketing expenses were $1.7 million for the three months ended March 31, 1998 and $2.0 million for the three months ended March 31, 1999, representing an increase of 19%. This increase was primarily due to our investment in our sales and marketing infrastructure, which included significant personnel-related costs to recruit and hire sales people and sales engineers, sales commissions and trade show expenses. Sales and marketing expenses represented 99% of total revenues for the three months ended March 31, 1998 and 70% of total revenues for the three months ended March 31, 1999. We believe that a significant increase in our sales and marketing efforts is essential for us to maintain our market position and further increase acceptance of our products. Accordingly, we anticipate we will continue to invest significantly in sales and marketing for the foreseeable future, and sales and marketing expenses will increase in future periods. Research and Development. Research and development expenses consist primarily of salaries and benefits for software developers, product managers and quality assurance personnel and payments to outside software developers. Our research and development expenses were $1.0 million for the three months ended March 31, 1998 and $1.8 million for the three months ended March 31, 1999, representing an increase of 74%. This increase was primarily related to an increase in employee and consultant software developers and program management and documentation personnel hired to support product development. We also recognized a one-time $303,000 compensation charge 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 61% of total revenues for the three months ended March 31, 1998 and 63% of total revenues for the three months ended March 31, 1999. We believe that a significant increase in our research and development investment is essential for us to maintain our market position, to continue to expand our product line and to enhance our technology. Accordingly, we anticipate that we will continue to invest significantly in product research and development for the foreseeable future, and research and development expenses are likely to increase in future periods. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance, administrative and general management personnel. Our general and administrative expenses were $311,000 for the three months ended March 31, 1998 and $383,000 for the three months ended March 31, 1999, representing an increase of 23%. This increase was primarily the result of the hiring of additional finance and administrative personnel. General and administrative expenses represented 18% of total revenues for the three months ended March 31, 1998 and 13% of total revenues for the three months ended March 31, 1999. We believe that our general and administrative expenses will continue to increase as a result of the expenses associated with being a public company, including annual and other public reporting costs, directors' and officers' liability insurance, investor relations programs and accounting and legal expenses. 24 30 Net Interest Income. Net interest income was $4,000 for the three months ended March 31, 1998 and $48,000 for the three months ended March 31, 1999, representing an increase of $44,000. Net interest income consists primarily of earnings on our cash and cash equivalent balances. Stock-Based Compensation. Some options granted and common stock issued during the years ended December 31, 1997 and 1998 and during the three months ended March 31, 1999 have been considered to be compensatory, as the estimated fair value for accounting purposes was greater than the stock price as determined by the board of directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of March 31, 1999 amounted to $2.7 million, net of amortization. Deferred stock compensation is being amortized ratably over the vesting periods of these securities. Amortization expense was $25,000 in the three months ended March 31, 1998 and $504,000 in the three months ended March 31, 1999. YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Revenues Our revenues were $3.8 million in 1996, $5.4 million in 1997 and $10.2 million in 1998, representing increases of 88% from 1997 to 1998 and 43% from 1996 to 1997. Revenues derived from international operations were $566,000 in 1996, $639,000 in 1997 and $2.9 million in 1998. 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. In 1997, sales of products to Lucent accounted for 11% of total revenues. License Revenues. Our license revenues were $2.6 million in 1996, $3.5 million in 1997 and $7.5 million in 1998, representing increases of 111% from 1997 to 1998 and 36% from 1996 to 1997. License revenues represented 69% of total revenues in 1996, 66% of total revenues in 1997 and 74% of total revenues in 1998. The increase in license revenues from 1997 to 1998 was attributable primarily to an increase in the size and productivity of our sales force, including the introduction of our direct sales team in Europe, and the release of our PowerTier for EJB product. The increase in revenues from 1996 to 1997 was primarily due to the introduction of our PowerTier product family. Service Revenues. Our service revenues were $1.2 million in 1996, $1.9 million in 1997 and $2.7 million in 1998, representing increases of 44% from 1997 to 1998 and 59% from 1996 to 1997. Service revenues represented 31% of total revenues in 1996, 34% of total revenues in 1997 and 26% of total revenues in 1998. The increase in service revenues between 1997 and 1998 was primarily due to an increase in customer support fees related to an increase in our installed base of PowerTier customers, and, to a lesser extent, an increase in professional services fees. The increase in service revenues between 1996 and 1997 was primarily due to an increase in both professional services and customer support fees. Cost of Revenues Cost of License Revenues. Cost of license revenues was $139,000 in 1996, $342,000 in 1997 and $239,000 in 1998, representing a decrease of 30% from 1997 to 1998 and an increase of 146% from 1996 to 1997. Cost of license revenues as a percentage of license revenues was 5% in 1996, 10% in 1997 and 3% for 1998. The decrease in cost of license revenues from 1997 to 1998 was attributable primarily due to lower packaging and document distribution costs. The increase in cost of license revenues from 1996 to 1997 was attributable primarily to a higher level of printed documentation. 25 31 Cost of Service Revenues. Cost of service revenues was $221,000 in 1996, $729,000 in 1997 and $1.4 million in 1998, representing increases of 88% from 1997 to 1998 and 230% from 1996 to 1997. Cost of service revenues as a percentage of service revenues was 19% in 1996, 39% in 1997 and 51% for 1998. The increases during these periods were due to increased staffing in our professional services and support organizations. Operating Expenses Sales and Marketing. Sales and marketing expenses were $3.8 million in 1996, $4.7 million in 1997 and $7.2 million in 1998, representing increases of 52% from 1997 to 1998 and 24% from 1996 to 1997. Sales and marketing expenses represented 101% of total revenues in 1996, 87% of total revenues in 1997 and 71% of total revenues for 1998. The dollar increases during these periods primarily reflected our investment in our sales and marketing infrastructure, which included significant personnel-related expenses such as salaries, benefits and commissions, and, to a lesser extent, travel and entertainment expenses, trade shows and other marketing expenses. Research and Development. Research and development expenses were $2.0 million in 1996, $3.0 million in 1997 and $4.2 million in 1998, representing increases of 43% from 1997 to 1998 and 50% from 1996 to 1997. Research and development expenses represented 52% of total revenues in 1996, 55% of total revenues in 1997 and 42% of total revenues in 1998. The dollar increases during these periods were primarily related to the increase in headcount to support product development and, to a lesser extent, an increase in average compensation. General and Administrative. General and administrative expenses were $1.0 million in 1996, $1.4 million in 1997 and $1.2 million in 1998, representing a decrease of 9% from 1997 to 1998 and an increase of 38% from 1996 to 1997. General and administrative expenses represented 26% of total revenues in 1996, 25% of total revenues in 1997 and 12% of total revenues in 1998. The dollar decrease in general and administrative expenses from 1997 to 1998 was attributable primarily to a decrease in consulting fees, offset in part by an increase in headcount and average compensation. The dollar increase in general and administrative expenses from 1996 to 1997 was attributable primarily to an increase in headcount, and legal and accounting expenses. Net Interest Income. Net interest income was $34,000 in 1996, $12,000 in 1997 and $1,000 in 1998. Net interest income consists primarily of earnings on our cash and cash equivalent balances, offset by interest expense related to obligations under capital leases and other borrowings. The decrease in net interest income from 1997 to 1998 was due to an increase in interest expense related to obligations under capital leases and an equipment loan. The decrease in interest income from 1996 to 1997 was due to a lower level of average cash and cash equivalent balances. Stock-Based Compensation. We recorded no stock-based compensation expense for 1996 and 1997. As of December 31, 1998, total deferred stock compensation associated with equity transactions amounted to $2.2 million, net of amortization. Amortization expense was $331,000 in 1998. We expect to record amortization expense related to these securities of approximately $1.1 million in 1999, $800,000 in 2000 and $800,000 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, 1998, we had $10.8 million of federal and $3.6 million of state net operating loss carryforwards available to offset future taxable income. The federal net 26 32 operating loss carryforwards expire through 2018, while the state net operating loss carryforwards expire through 2003. 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, 1998, the Company also had research and development tax credit carryforwards of $570,000 and $320,000 available to offset future federal and state income taxes. The federal credit carryforward expires in 2018, 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. 27 33 QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited consolidated statement of operations data for the nine quarters in the 27-month period ended March 31, 1999, 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 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, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, 1997 1997 1997 1997 1998 1998 1998 1998 1999 -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License...................... $ 659 $ 1,044 $ 696 $ 1,147 $ 1,004 $ 1,447 $2,250 $2,777 $ 2,116 Service...................... 271 315 414 867 706 604 643 729 747 ------- ------- ------- ------- ------- ------- ------ ------ ------- Total revenues............. 930 1,359 1,110 2,014 1,710 2,051 2,893 3,506 2,863 ------- ------- ------- ------- ------- ------- ------ ------ ------- Cost of revenues: License...................... 39 67 120 116 56 63 93 27 42 Service...................... 59 123 164 383 326 345 334 367 580 ------- ------- ------- ------- ------- ------- ------ ------ ------- Total cost of revenues... 98 190 284 499 382 408 427 394 622 ------- ------- ------- ------- ------- ------- ------ ------ ------- Gross profit................... 832 1,169 826 1,515 1,328 1,643 2,466 3,112 2,241 ------- ------- ------- ------- ------- ------- ------ ------ ------- Operating expenses: Sales and marketing.......... 1,069 1,257 1,116 1,270 1,687 1,449 1,885 2,147 2,015 Research and development..... 558 724 722 950 1,038 1,072 1,032 1,092 1,806 General and administrative... 257 336 306 463 311 272 290 364 383 ------- ------- ------- ------- ------- ------- ------ ------ ------- Total operating expenses... 1,884 2,317 2,144 2,683 3,036 2,793 3,207 3,603 4,204 ------- ------- ------- ------- ------- ------- ------ ------ ------- Loss from operations........... (1,052) (1,148) (1,318) (1,168) (1,708) (1,150) (741) (491) (1,963) Interest income (expense), net.......................... 9 6 -- (3) 4 (20) (20) 37 48 ------- ------- ------- ------- ------- ------- ------ ------ ------- Net loss....................... $(1,043) $(1,142) $(1,318) $(1,171) $(1,704) $(1,170) $ (761) $ (454) $(1,915) ======= ======= ======= ======= ======= ======= ====== ====== ======= AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License...................... 70.9% 76.8% 62.7% 57.0% 58.7% 70.6% 77.8% 79.2% 73.9% Service...................... 29.1 23.2 37.3 43.0 41.3 29.4 22.2 20.8 26.1 ------- ------- ------- ------- ------- ------- ------ ------ ------- Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ------- ------- ------- ------- ------- ------- ------ ------ ------- Cost of revenues: License...................... 4.2 4.9 10.8 5.8 3.3 3.1 3.2 0.8 1.5 Service...................... 6.3 9.1 14.8 19.0 19.0 16.8 11.5 10.4 20.2 ------- ------- ------- ------- ------- ------- ------ ------ ------- Total cost of revenues..... 10.5 14.0 25.6 24.8 22.3 19.9 14.7 11.2 21.7 ------- ------- ------- ------- ------- ------- ------ ------ ------- Gross margin................... 89.5 86.0 74.4 75.2 77.7 80.1 85.3 88.8 78.3 ------- ------- ------- ------- ------- ------- ------ ------ ------- Operating expenses: Sales and marketing.......... 114.9 92.5 100.5 63.1 98.7 70.6 65.2 61.2 70.4 Research and development..... 60.1 53.3 65.0 47.2 60.7 52.3 35.7 31.1 63.1 General and administrative... 27.6 24.7 27.6 22.9 18.1 13.3 10.0 10.5 13.4 ------- ------- ------- ------- ------- ------- ------ ------ ------- Total operating expenses... 202.6 170.5 193.1 133.2 177.5 136.2 110.9 102.8 146.9 ------- ------- ------- ------- ------- ------- ------ ------ ------- Loss from operations........... (113.1) (84.5) (118.7) (58.0) (99.8) (56.1) (25.6) (14.0) (68.6) Interest income (expense), net.......................... 0.9 0.5 -- (0.1) 0.2 (0.9) (0.7) 1.1 1.7 ------- ------- ------- ------- ------- ------- ------ ------ ------- Net loss....................... (112.2)% (84.0)% (118.7)% (58.1)% (99.6)% (57.0)% (26.3)% (12.9)% (66.9)% ======= ======= ======= ======= ======= ======= ====== ====== =======
28 34 Our quarterly operating results have fluctuated significantly in the past, and may continue to fluctuate in the future, as a result of a number of factors, many of which are outside our control. These factors include: - our ability to close relatively large sales on schedule; - delays or deferrals of customer orders or deployments; - delays in shipment of scheduled software releases; - demand for and market acceptance of our PowerTier for C++ and PowerTier for EJB products; - the possible loss of sales people; - introduction of new products or services by us or our competitors; - annual or quarterly budget cycles of our customers; - the level of product and price competition in the application server market; - 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 1998 were lower than those in the fourth quarter of 1997 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 private sales of convertible preferred stock, which totaled $19.9 million in aggregate net proceeds through March 31, 1999. We have also financed our business through a loan in the principal amount of $800,000 and capitalized leases. As of March 31, 1999, we had $7.4 million of cash and cash equivalents and $6.3 million of working capital. Net cash used for operating activities was $3.1 million in 1996, $3.1 million in 1997, $3.0 million in 1998, and $1.7 million for the three months ended March 31, 1999. For 29 35 each of 1996, 1997 and 1998, and for the three months ended March 31, 1999, cash used for operating activities was attributable primarily to net losses and increases in accounts receivable, offset by depreciation and amortization of deferred stock compensation and deferred revenues. Net cash used for investing activities was $9,000 for 1996, $589,000 for 1997, $436,000 for 1998, and $96,000 for the three months ended March 31, 1999. For each of the periods, cash used in investing activities primarily reflected investments in property and equipment and deposits. Net cash provided by financing activities was $7.3 million for 1996, $1.8 million for 1997, $5.7 million for 1998, and $4.3 million for the three months ended March 31, 1999. Cash provided by financing activities during these periods was primarily attributable to proceeds from the issuance of preferred stock and, in 1998, borrowings under a term loan, primarily offset by repayments of a capital lease obligations. In February 1998, we entered into a loan agreement with Comerica Bank for an amount up to $2,000,000. As of March 31, 1999 we had no borrowings outstanding under this loan. As of March 31, 1999, we had an $800,000 promissory note in favor of Comerica. We are required to make principal payments of $22,222 per month plus interest of 7.75% per annum on the unpaid principal balance, payable in 36 monthly installments beginning April 1, 1999. The promissory note is collateralized by substantially all of our assets, including our patents and intellectual property. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel. We also may increase our capital expenditures as we expand into additional international markets. We believe that the net proceeds from this offering, together with our current cash, cash equivalents and short-term investments, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 18 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we may not be able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business. YEAR 2000 COMPLIANCE Many currently installed computer systems are unable to distinguish between twentieth century dates and twenty-first century dates. These systems were developed using two digits rather than four to determine the applicable year. This error could result in software failures or the creation of erroneous results. We have conducted the first phases of a year 2000 readiness review for the current versions of our products. The review includes assessment, implementation, including remediation, upgrading and replacement of product versions, validation testing and contingency planning. 30 36 We have largely completed all phases of this plan, except for contingency planning, for the current versions of our products. As a result, we believe all current versions of our products to be "year 2000 compliant," as defined below, when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or with our products are also year 2000 compliant. We have not tested our products on all platforms or all versions of operating systems that we currently support. We have defined "year 2000 compliant" as the ability to: - correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; - function according to the product documentation provided for this date change, without changes in operation resulting from the advent of a new century, assuming correct configuration; - if the date elements in interfaces and data storage specify the century, store and provide output of date information in ways that are unambiguous as to century; and - recognize the year 2000 as a leap year. We have tested software obtained from third parties, including licensed software, shareware and freeware, that is incorporated into our products, and we are seeking assurances from our vendors that licensed software is year 2000 compliant. We plan to continue to test our current and future products by applying our year 2000 compliance criteria and to include any necessary modifications the compliance process reveals. Despite testing and assurances, our products may contain undetected errors or defects associated with year 2000 date functions. Any errors or defects in our products could result in the delay or loss of revenue, increased service costs and damage to our reputation. We are aware of lawsuits against software vendors involving year 2000 claims, and, despite testing our products, we may be sued by a customer on a year 2000 claim. Our internal systems include both our information technology, or IT, and non-IT systems. We have reviewed our material internal IT systems, including both our custom software and third-party software and hardware technology, but we have not performed an assessment of our non-IT systems. To the extent that we cannot test the technology provided by third party vendors, we are seeking assurances from vendors that their systems are year 2000 compliant. We are not currently aware of any material operational issues or costs associated with preparing our internal IT and non-IT systems for the year 2000. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal IT and non-IT systems. We do not currently have any information concerning the year 2000 compliance status of our customers. If our current or future customers fail to achieve year 2000 compliance or if they delay or divert technology expenditures, especially technology expenditures that were reserved for enterprise software systems, to address year 2000 compliance problems, our business could suffer. Through March 31, 1999, we have incurred nominal expenses relating to our year 2000 compliance activities and estimate that any additional costs will be nominal. However, we may experience material problems and costs that are not currently identified in our year 2000 plan. We have not yet fully developed a contingency plan to address situations that may result if we cannot achieve year 2000 readiness of our critical operations. The cost of 31 37 developing and implementing a contingency plan may itself be material. We intend to develop a contingency plan by the fourth quarter of 1999. Finally, we are also subject to external forces that might generally affect businesses, such as utility or transportation company year 2000 failures. 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 March 31, 1999, the fair value of our cash equivalents would change by an insignificant amount. Foreign Currency Fluctuations. We have not had any significant transactions in foreign currencies, nor do we have any significant balances that are due or payable in foreign currencies at March 31, 1999. Therefore, a hypothetical ten percent change in foreign currency rates would have an insignificant impact on our financial position or results of operations. We do not hedge any of our foreign currency exposure. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued accounting statement No. 130, Reporting Comprehensive Income, which requires an enterprise to report, by major components and as a single total, the change in its net assets during the period from nonowner sources. We had no comprehensive income items to report, other than net loss, for any of the periods presented. The FASB also issued accounting statement No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. We currently operate in one reportable segment. In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage, and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are currently evaluating the impact of SOP 98-1 on our financial statements and related disclosures. 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 2000. We are currently evaluating the impact of SFAS No. 133 on our financial statements and related disclosures. 32 38 BUSINESS COMPANY OVERVIEW We are a leading provider of transactional application server software products, which move data and processing out of back-end computer systems and closer to users. Our software supports the Internet infrastructure that enables the next generation of high-speed, high-volume electronic commerce applications. Our PowerTier products are designed to address the scalability, availability and adaptability demands of delivering business solutions over the Internet. Our PowerTier platform is one of the few application server solutions that implements the full Enterprise Java Beans, or EJB, standard to enable businesses to deploy high performance, scalable Java applications. We believe that our robust product architecture, which incorporates several patented technologies, is particularly well suited to meet the infrastructure requirements of business-to-business electronic commerce. Our major customers include AT&T, Boeing, Cisco, FedEx, IBM, Instinet, Lucent, Morgan Stanley Dean Witter, Norwest, Perkin-Elmer and SuperValu. 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 managing transactions between multiple companies. In addition, the growth of the business-to-business electronic commerce market is expected to outpace the growth of the business-to-consumer market. While Forrester Research estimates that the business-to-consumer market in the United States is expected to grow 33 39 from $7.8 billion in 1998 to $108 billion in 2003, they estimate that the business-to-business electronic commerce market in the United States will grow even more rapidly, from $43 billion to $1.3 trillion, in this same period. 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 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 and PowerTier for C++, address the 34 40 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 platform was designed specifically to accommodate high volume transaction processing and the data integrity requirements of distributed applications. The platform utilizes our patented caching technology. Caching is a process in which relational data is pulled out of back-end systems and into the PowerTier server cache, which allows the data to be shared and manipulated at the application server level. 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. 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 our PowerTier platform offers performance that is orders of magnitude faster than traditional non-caching application servers. 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. 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. 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 products provide one of the few application server solutions that implements the full EJB 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. As EJB and other emerging electronic commerce standards evolve, we intend to continue to be a leading adopter and contributor to these technologies. 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 35 41 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 the leading provider of transactional application server software products that comprise the Internet software infrastructure for high volume, high performance electronic commerce applications. To achieve this goal, we intend to: Capture Market Share in the Emerging Business-to-Business Electronic Commerce Market. We intend to become the market leader in providing software infrastructure to enable sophisticated business-to-business electronic commerce applications. To achieve this objective, we will continue to make significant investments in building our sales and marketing organizations. We plan to launch a variety of sales and marketing programs designed to capture market share. For example, we plan to use a seeding strategy to extend our market share by offering a development version of our software that may be downloaded over the Internet to provide wide dissemination of our product to developers. We also offer educational seminars on our products and the advantages of EJB. 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 market 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 significant 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 EJB, 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 acquired object request broker technology, which provides the communications link between the transactional application server and the client. The addition of these complementary technologies will enable us to offer a broader platform for our customers. Increase Partnerships With Systems Integrators. We intend to continue to develop and expand relationships with systems integrators. We believe these third parties can effectively market our products through their existing relationships with our target market customers. In addition, our PowerTier platform is often included as part of an enterprise-wide system deployment, in which the system integrator plays a leading role. 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 36 42 currently working with a number of systems integrators, including: Alta Software, Andersen Consulting, Cambridge Technology Partners, Component Systems, Computer Sciences Corporation, Electronic Data Systems, Genesis Development Corporation and Unisys. 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 will 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. We intend to continue to build our sales, marketing and services organizations in Europe to capitalize on these opportunities. Currently, we have established direct sales operations in the United Kingdom and Germany, and we intend to open an office in France. In addition to our direct sales operations, we also distribute our products throughout Europe with distributors and systems integrators. We intend to continue to build and extend these international third-party distributor and systems integrator relationships. PRODUCTS Our PowerTier platform is a family of transactional application server products that deliver real-time 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. 37 43
- -------------------------------------------------------------------------------------------------- PRODUCT FEATURES BENEFITS - -------------------------------------------------------------------------------------------------- POWERTIER FOR ENTERPRISE Shared transactional object cache Enables real-time scalability by JAVABEANS reducing database traffic Application server cache Allows cooperative processing synchronization across organizational boundaries Application server failover Delivers high availability by replicating information across clusters of application server caches Support for EJB 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 Allows cooperative processing synchronization 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 DEVELOPMENT Object-to-relational mapping Provides rapid development ENVIRONMENT services adaptability by automating time- consuming development tasks Integrates with leading Enables customer to choose best third-party developer tools. of class development tools Supports both Java/EJB development Flexibility in selection of and C++/CORBA development development language - -------------------------------------------------------------------------------------------------- POWERTIER COMMAND CENTER Monitors status and performance of Increases application remote application servers availability by simplifying detection and resolution of system problems Manages configuration for clusters Increases deployment of application servers adaptability by allowing instant reconfiguration of application servers to meet changing business requirements - --------------------------------------------------------------------------------------------------
PowerTier for EJB Our PowerTier for EJB application server platform incorporates our patented technologies into one of the few transactional application servers to deliver the full EJB version 1.0 standard. The EJB standard, as defined by the JavaSoft division of Sun Microsystems, is gaining rapid acceptance as a programming language for complex enterprise applications. EJB provides a consistent way to program and integrate services for companies building distributed business-to-business applications with the Java programming language. 38 44 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 runs on the Windows NT and Unix operating systems. The latest version of our PowerTier for EJB adds a new architecture, PowerSync, to enable enterprise scalability and interoperability. PowerSync is a cache replication architecture, which allows companies to deploy tens to hundreds of PowerTier servers, each with a mirror image of every other server's data. This PowerSync feature enables companies to address increasing demands on an application by easily adding additional servers, all operating with synchronized, high-performance PowerTier caching. This version of PowerTier for EJB is currently in use by several of our major customers and is scheduled for commercial release in 1999. [PowerTier Graphics] 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. 39 45 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 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. 40 46 - 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 and others. We believe that research and product development will be a key to our success as a leader in the transactional application server market. Our research and development expenditures totaled $2.0 million for 1996, $3.0 million for 1997, $4.2 million for 1998, and $1.8 million for the three months ended March 31, 1999. 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. INTERNET/COMMUNICATIONS AT&T* BellCore* BellSouth Bull Ingenerie (France Telecom) CellularOne Group Cisco Cross Keys Systems Globe ID Imind Lucent Motorola Netscape Nokia Scientific-Atlanta Sequel Systems Telstra (Australia) MANUFACTURING & DISTRIBUTION Asea Brown Boveri Power T&D Boeing IBM* Non-Stop Solutions Perkin-Elmer* Qualcomm SuperValu* Titan Systems Xerox FINANCIAL SERVICES Capital Group Capital One Financial CNP Assurances* Instinet* JP Morgan Morgan Stanley Dean Witter* Nike Securities Norwest* TRANSPORTATION & LOGISTICS Air Canada Air France FedEx* Sabre Group Holdings (American Airlines) Transquest Information (Delta Airlines)* OTHER Caldwell-Spartin Fermi National Accelerator Laboratory National Aeronautics and Space Administration * Denotes customers who have ordered at least $500,000 in products. In 1998, sales of products and services to Cisco accounted for 14% of our total revenues and sales of products and services to Instinet accounted for 17% of our total revenues. 41 47 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 major stockholders in our company. REAL-TIME ELECTRONIC TRADING NETWORK Instinet Corporation. Instinet is the world's largest electronic agency broker in equity securities. Today, trading in fixed income securities occurs almost exclusively over the telephone. Instinet plans to revolutionize 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 which, while still being tested and not yet generally available, 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. 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. APPLICATION OUTSOURCING OVER THE INTERNET PE Genscope. PE GenScope, recently incorporated into Celera Genomics, provides gene discovery and characterization services for drug discovery and development. Celera's 42 48 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. SALES AND MARKETING We sell our products through both a direct sales force and third party distributors. As of March 31, 1999, we had 32 people in our sales and marketing organization, of which 26 were in the United States and six were in our London and Munich 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 direct sales force and to establish additional sales offices domestically and internationally. 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 engage in a variety of marketing activities, including advertising, public relations, seminars, trade shows and web site management. In particular, we have made substantial marketing investments in education and training for the EJB and C++ markets. We trained over 2,000 developers in 1998 in the EJB standard. Our web site allows developers to download a demonstration version of our products. Systems integrators represent an important and growing referral channel for our direct sales effort. Systems integrators frequently have relationships with our target customers and often incorporate our PowerTier platform as part of a much larger enterprise-wide system enhancement. Currently we have relationships with global and regional systems integrators, including: - Alta Software - Andersen Consulting - Cambridge Technology Partners - Component Systems - Computer Sciences Corporation - Electronic Data Systems - Genesis Development Corporation - Unisys In international markets, we plan to expand our sales through indirect channels, such as distributors and original equipment manufacturers. As of March 31, 1999, we were represented by five international distributors, who sell our products in Europe, Asia and Latin America. 43 49 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; - quality of support and service; - security; - company reputation; and - price. Our competitors include both publicly and privately-held enterprises, including BEA Systems (WebLogic), Gemstone Systems, IBM (WebSphere), Inprise, Iona Technologies, Oracle (OAS) and Sun Microsystems (NetDynamics). Many customers may not be willing to purchase our PowerTier platform because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors have preexisting customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. Moreover, there are other very large and established companies, including Microsoft and Netscape, who offer alternative solutions and are thus indirect competitors. Further, dozens of companies have announced their intention to support EJB, and may compete against us in the future. These competitors and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. See also "Risk Factors -- 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" 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. 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 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 April 1999, we had three issued United States patents and one 44 50 pending United States patent application 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 March 31, 1999, we had 81 full-time employees, including 35 in research and development, 32 in sales and marketing, six in professional services and eight in general and administrative functions. From time to time, we also employ independent contractors to support our engineering, marketing, sales and support and administrative organizations. FACILITIES We are headquartered in San Mateo, California, where we lease approximately 17,000 square feet of office space under a lease expiring on June 30, 1999. We are currently negotiating an extension of this lease. We also maintain sales offices in California, Georgia, Illinois, New York, Texas and the United Kingdom and Germany. 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. LEGAL PROCEEDINGS We are not currently subject to any material legal proceedings. We may from time to time become a party to various legal proceedings arising in the ordinary course of business. 45 51 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth specific information regarding our executive officers and directors as of May 31, 1999:
NAME AGE POSITION - ---- --- -------- Christopher T. Keene................. 38 Chairman of the Board and Chief Executive Officer Laurence R. Hootnick(1).............. 57 President and Director Alan Cohen........................... 46 Senior Vice President of Sales and International Operations Mark Douglas......................... 35 Vice President and Chief Technology Officer Erik Frieberg........................ 33 Vice President of Corporate Marketing Barry Goss........................... 52 Vice President of Strategic Marketing Derek Henninger...................... 36 Vice President of Engineering Janet McGraw(2)...................... 33 Vice President of Product Management Christine Russell.................... 49 Chief Financial Officer and Secretary Gregory Ennis(3)(4).................. 33 Director Jack L. Hancock(4)................... 68 Director William J. Harding(3)................ 51 Director Larry E. Henninger(5)................ 66 Director Merritt Lutz......................... 56 Director Joseph P. Roebuck(6)................. 63 Director Jeffrey T. Webber.................... 46 Director
- ------------------------- (1) Mr. Hootnick was appointed President and director in April 1999. (2) Ms. McGraw was appointed Vice President of Product Management in April 1999. (3) Member of the Audit Committee. (4) Member of the Compensation Committee. (5) Mr. Henninger resigned as a director in April 1999. (6) Mr. Roebuck was appointed director in May 1999. 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. LAURENCE R. HOOTNICK joined Persistence as President and director in April 1999. From June 1996 to April 1999, Mr. Hootnick served as President and Chief Executive Officer of Consilium, Inc., a manufacturer of factory control software for integrated circuits. From December 1995 to May 1996, Mr. Hootnick served as Senior Vice President of Power Computing, a manufacturer of personal computers. From June 1995 to November 1995, he worked as a private investor and consultant. Previously, Mr. Hootnick was employed as Senior Vice President, Chief Operating Officer and director of NetManage, Inc., a developer of networking software, and as President and Chief Executive Officer of Maxtor, a manufacturer of hard disk drives. Mr. Hootnick holds a B.S. degree in Industrial Management from Massachusetts Institute of Technology and an M.B.A. degree from the University of Maryland. 46 52 ALAN COHEN joined Persistence as Vice President of Sales in December 1997 and was promoted to Senior Vice President of Sales and International Operations in December 1998. From May 1996 to December 1997, Mr. Cohen served as Vice President of Sales at Cygnus Solutions, a developer of open-source software. Previously, he was Vice President of Sales and Operations at Information Handling Services, an information technology company, from May 1994 to May 1996. From 1990 to 1994, Mr. Cohen was Director of Sales and Marketing at International Business Machines Corporation. Before working at IBM, he was Director of Marketing at CADAM, Inc., a Lockheed subsidiary. Mr. Cohen holds B.S. and M.S. degrees in Biology from the University of Connecticut. MARK DOUGLAS joined Persistence as Vice President and Chief Technology Officer in April 1998. From March 1997 to March 1998, Mr. Douglas was an independent consultant. From August 1993 to February 1997, Mr. Douglas served as President and Chief Executive Officer of CenterView Software, a developer of software tools, which was acquired by Informix Software, Inc. in February 1997. From August 1992 to 1993, Mr. Douglas was a management consultant with Ernst & Young. Previously, Mr. Douglas worked at Oracle Corporation, a leading relational database management software company, serving most recently as Senior Director of the Advanced Technology Division and previously as Director of Product Line Development and Marketing of the Applications Division. ERIK FRIEBERG joined Persistence as Director of Marketing in March 1998 and was promoted to Vice President of Corporate Marketing in October 1998. From December 1996 to March 1998, Mr. Frieberg was Director of Enterprise Marketing at KIVA Software, Inc. a manufacturer of application server software, which was acquired by Netscape Communications Corporation in December 1997. From December 1993 to December 1996, he was Director of Marketing at CenterView Software, a developer of software tools, which was acquired by Informix Software, Inc. Mr. Frieberg holds a B.S. degree in Industrial Engineering from Northwestern University and an M.M.S. degree from the Massachusetts Institute of Technology. BARRY GOSS joined Persistence in December 1997 as Vice President of Marketing, an office he held until October 1998, when he was appointed Vice President of Strategic Marketing. From May 1994 to December 1997, Mr. Goss was the founder and President of Congruent Concepts, a management consulting firm serving emerging growth companies. From December 1988 to May 1994, Mr. Goss served as Director of Marketing for Verity, Inc., a provider of content-based search engine software. Mr. Goss holds a B.S. degree in Engineering Sciences from the State University of New York at Stony Brook and an M.S. degree in Mechanical Engineering and Ph.D. in Applied Mechanics from the University of Connecticut. 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. JANET MCGRAW has served as Vice President of Product Management since April 1999. Previously, Ms. McGraw served as our Director of Product Strategy and Product Management from April 1998 to November 1998 and as Senior Director of Product Strategy and Product Management from November 1998 to April 1999. From February 1997 to March 1998, Ms. McGraw served as Director of Product Development for 47 53 Informix Software, Inc., a relational database software company. From April 1994 to January 1997, she served as Director of Product Management for CenterView Software, a developer of software tools. Previously, Ms. McGraw worked at Oracle Corporation, serving most recently as Senior Development Manager. Ms. McGraw holds a B.S. degree in Electrical Engineering and an M.S. degree in Electrical Engineering from Stanford University. 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. GREGORY ENNIS has served as a director since November 1996. Since July 1995, Mr. Ennis has been a Director of Thompson Clive Inc., which is the U.S. subsidiary of a London-based venture capital firm. From 1992 to July 1995, Mr. Ennis was an Associate of Thompson Clive Inc.. Previously, Mr. Ennis was a project analyst with Citibank in Frankfurt, Germany. Mr. Ennis holds an A.B. degree in Economics and Political Science from Stanford University and an M.B.A. degree from The Anderson School at the University of California at Los Angeles. JACK L. HANCOCK has served as a director since July 1998. Since December 1993, Mr. Hancock has been a private investor. From 1987 to December 1993, he held a variety of positions with Pacific Bell, serving most recently as Chief Information Officer and previously as Executive Vice President of Marketing and Sales and Executive Vice President of Product and Technical Support. Previously, Mr. Hancock was Executive Vice President for Information Systems, Strategic Planning and Human Resources at Wells Fargo & Company. Mr. Hancock currently serves as a director of Whittaker Corporation, a fluid control and fire safety systems company, Union Bank of California, a financial institution, and MGC Communications Corporation, Inc, an integrated communications services provider. Mr. Hancock holds a B.A. degree from West Virginia University and an M.B.A. degree from George Washington University. WILLIAM J. HARDING has served as a director since March 1996. Since October 1994, he has been a General Partner of Morgan Stanley Dean Witter Venture Partners, a venture capital firm. From 1985 to 1994, Dr. Harding served as General Partner of several venture capital partnerships affiliated with J.H. Whitney & Co. From 1976 to 1985, he held a variety of technical and business development positions at Amdahl Corporation, an enterprise computing company. Dr. Harding is also a director of ScanSoft, Inc., an image management software company, and several private companies. Dr. Harding holds a B.S. degree in Engineering Mathematics and an M.S. degree in Systems Engineering from the University of Arizona and a Ph.D degree in Engineering from Arizona State University. LARRY E. HENNINGER served as a director from February 1994 until April 1999, when he resigned as a member of the board of directors. Since 1981, Mr. Henninger has served as founder and President of Henninger & Associates, a consulting firm specializing in international and small business management and finance. Previously, Mr. Henninger was co-founder, Executive Vice President and Chief Financial Officer of Baron Data Systems, 48 54 a hardware and software company. Mr. Henninger holds a B.A. degree in Economics from Stanford University and an M.B.A. degree from Santa Clara University. MERRITT LUTZ has served as a director since July 1997. Since September 1997, Mr. Lutz has served as a senior advisor to Morgan Stanley Dean Witter & Co., a major financial services institution, with responsibility for strategic technology investments. Since 1995 he has served as the Chairman of MS Technology Holdings, Inc. and MSIT Holdings, Inc., both of which are technology investment arms of Morgan Stanley. In 1994, Mr. Lutz joined Morgan Stanley as Managing Director of the Application Products Group. Previously, Mr. Lutz was the President of Candle Corporation, a software company, for four years. Mr. Lutz also serves as a board member of SPSS Inc., a software company, and Interlink Electronics, a hardware manufacturer, as well as several private companies. Mr. Lutz holds B.A. and M.A. degrees from Michigan State University. JOSEPH P. ROEBUCK has served as director since May 1999. Since November 1998, Mr. Roebuck has served as Vice President of Strategic Sales for Sun Microsystems, Inc., a manufacturer of hardware and software systems. From October 1993 to October 1998, Mr. Roebuck served as Vice President of Worldwide Sales, Computer Systems Division at Sun Microsystems, Inc. Mr. Roebuck received an A.B. degree in Liberal Arts from Cornell University. JEFFREY T. WEBBER has served as a director since March 1995. Since 1991, Mr. Webber has been a founding partner of R.B. Webber & Company, a management consulting firm. Since 1997, Mr. Webber has been a General Partner of The Entrepreneurs' Fund, L.P., an early stage venture capital firm. From 1987 to January 1991, he was a partner at Edgar, Dunn & Company, a management consulting firm. He began his career at McKinsey & Company, Inc. Mr. Webber serves as a director of Sybase, Inc., an enterprise software company, and Sagent Technology, Inc., a datamart solutions company, as well as several private companies. Mr. Webber holds a B.A. degree in American Studies from Yale University. 49 55 BOARD COMPOSITION Our certificate of incorporation and bylaws currently provide for a board of directors consisting of eight members. Beginning at the first annual meeting of stockholders after the annual meeting of stockholders at which we have at least 800 stockholders, the board of directors will be divided into three classes, each serving staggered three-year terms: Class I, whose term will expire at the first annual meeting of stockholders after our first annual meeting of stockholders at which we have 800 stockholders; Class II, whose term will expire at the second annual meeting of stockholders after our first annual meeting of stockholders at which we have 800 stockholders; and Class III, whose term will expire at the third annual meeting of stockholders after our first annual meeting of stockholders at which we have 800 stockholders. As a result, only one class of directors will be elected at each annual meeting of stockholders of Persistence, with the other classes continuing for the remainder of their respective terms. Gregory Ennis and William Harding were elected to the board of directors pursuant to a voting agreement between us and our principal stockholders. This voting agreement will terminate upon completion of this offering. Our officers are appointed by the board of directors and serve at the discretion of the board of directors. BOARD COMPENSATION Our directors do not currently receive compensation for their services as members of the board of directors. Employee directors are eligible to participate in our 1997 stock plan and will be eligible to participate in our 1999 employee stock purchase plan. Nonemployee directors are eligible to participate in our 1997 stock plan and will be eligible to participate in our 1999 directors' stock option plan. See "Stock Plans." In April 1998, the board of directors granted Mr. Lutz an option to purchase 35,000 shares of common stock at $0.50 per share. The option becomes exercisable at the rate of 1/4th of the total number of shares on January 1, 1999 and 1/48th of the total shares per month thereafter. In July 1998, the Board granted Mr. Lutz a fully-vested option to purchase 3,572 shares of common stock at $0.50 per share in consideration of consulting services rendered by Mr. Lutz to us. In July 1998, the board of directors granted Mr. Hancock an option to purchase 35,000 shares of common stock at $0.50 per share in connection with his appointment as a director. The option becomes exercisable at the rate of 1/4th of the total number of shares on July 30, 1999 and 1/48th of the total shares per month thereafter. All these options were granted under the 1997 stock plan and have not been exercised. We engage R.B. Webber & Company, of which Mr. Webber is President, to perform market and business analyses for us on a project by project basis. Pursuant to this arrangement, we paid R.B. Webber & Company $18,700 in 1997 and $20,500 in 1998. BOARD COMMITTEES The compensation committee currently consists of Gregory Ennis and Jack Hancock. The functions of the compensation committee are to: - review and approve the compensation and benefits for our executive officers and grant stock options under our stock option plans; and - make recommendations to the board of directors regarding these matters. 50 56 The audit committee consists of Gregory Ennis and William Harding. The functions of the audit committee are to: - make recommendations to the board of directors regarding the selection of independent auditors; - review the results and scope of the audit and other services provided by our independent auditors; and - review and evaluate our audit and control functions. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the compensation committee of the board of directors are currently Gregory Ennis and Jack Hancock, neither of whom has ever been an officer or employee of Persistence. Before establishing the compensation committee in July 1998, the board of directors as a whole performed the functions delegated to the compensation committee. EXECUTIVE COMPENSATION The following table sets forth the compensation received for services rendered to us during the year ended December 31, 1998 by our Chief Executive Officer and four other most highly compensated executive officers who earned more than $100,000 during the year ended December 31, 1998. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS -------------------- ------------ SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1) - --------------------------- --------- -------- ------------ ------------------ Christopher Keene, Chairman of the Board and Chief Executive Officer........................ $151,670 $23,630 -- $180 Alan Cohen, Senior Vice President of Sales and International Operations..................... 140,000 108,750 -- 180 Barry Goss, Vice President of Strategic Marketing............ 133,640 62,750 -- 180 Christine Russell, Chief Financial Officer.............. 140,004 25,980 -- 180 Derek Henninger, Vice President of Engineering................. 138,337 27,230 -- 180
- ------------------------- (1) We paid $180 in connection with life insurance premiums for each executive officer listed in the table during the year ended December 31, 1998. CHANGE OF CONTROL AGREEMENTS We have entered into change of control agreements with Alan Cohen, Mark Douglas, Erik Frieberg, Barry Goss, Christine Russell and Laurence Hootnick, which provide that 51 57 100% of the stock options or restricted stock held by the officer shall immediately vest if he or she is terminated without cause or resigns for good reason within 12 months after a change of control transaction. OPTION GRANTS We did not grant any stock options to our Chief Executive Officer or four other most highly compensated executive officers during the year ended December 31, 1998. In February 1999, we granted Christine Russell and Alan Cohen each an option to purchase 20,000 shares of common stock at $1.65 per share. Each option becomes exercisable at the rate of 1/4th of the total number of shares on February 18, 2000 and 1/48th of the total per month thereafter. Both options were granted under the 1997 Stock Plan and have not been exercised. AGGREGATE OPTION EXERCISES AND HOLDINGS No options were held or exercised during the year ended December 31, 1998 by our Chief Executive Officer or our four other most highly compensated executive officers. In February 1999, we granted Christine Russell and Alan Cohen the options described above, none of which have been exercised. STOCK PLANS 1997 Stock Plan. Our 1997 stock plan provides for the grant of incentive stock options to employees, including employee directors, and of nonstatutory stock options and stock purchase rights to employees, directors (including employee directors) and consultants. The purposes of the 1997 stock plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants and to promote the success of our business. The 1997 stock plan was originally adopted by our board of directors in April 1997 and approved by our stockholders in July 1997. The 1997 stock plan has been amended a number of times, most recently in April 1999, when the board of directors reserved an additional 3,000,000 shares of common stock for issuance under the 1997 stock plan and made other changes. This latest amendment will be submitted for approval by our stockholders prior to completion of this offering. As of the date of this offering, a total of 5,609,652 shares of common stock has been reserved for issuance under the 1997 stock plan (not including 38,645 shares that may be returned to our 1994 stock purchase plan, described below, upon our repurchase of such shares from participants when they terminate employment), plus an automatic annual increase on the first day of each of our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 650,000 shares, 3.5% of our outstanding common stock on the last day of the immediately preceding fiscal year, or a lesser number of shares as determined by the board of directors. Unless terminated earlier by the board of directors, the 1997 stock plan will terminate in April 2007. As of March 31, 1999, options to purchase 1,388,036 shares of common stock were outstanding under the 1997 stock plan at a weighted average exercise price of $0.64 per share, 826,583 shares had been issued upon exercise of outstanding options or pursuant to restricted stock purchase agreements, and 395,033 shares remained available for future grant. The 1997 stock plan may be administered by the board of directors or a committee of the board, each known as the administrator. The administrator determines the terms of options and stock purchase rights granted under the 1997 stock plan, including the number of shares subject to the award, the exercise or purchase price, and the vesting or exercisability of the award and any other conditions to which the award is subject. In no 52 58 event, however, may an employee receive awards for more than 2,000,000 shares under the 1997 stock plan in any fiscal year. Incentive stock options granted under the 1997 stock plan must have an exercise price of at least 100% of the fair market value of the common stock on the date of grant. Prior to this offering, nonstatutory stock options and stock purchase rights granted under the 1997 stock plan were required to have an exercise or purchase price of at least 85% of the fair market value of the common stock on the date of grant, and grants to employees who were not officers must vest at least 20% per year. After the date of this offering, the exercise price of nonstatutory stock options and the purchase price of stock purchase rights will no longer be subject to these restrictions, although nonstatutory stock options and stock purchase rights granted to our Chief Executive Officer and our four other most highly compensated officers will generally equal at least 100% of the grant date fair market value. Payment of the exercise or purchase price may be made in cash or such other consideration as determined by the administrator. With respect to options granted under the 1997 stock plan, the administrator determines the term of options, which may not exceed 10 years (or 5 years in the case of an incentive stock option granted to a holder of more than 10% of the total voting power of all classes of our stock). Generally, an option granted under the 1997 stock plan is nontransferable other than by will or the laws of descent and distribution, and may be exercised during the lifetime of the optionee only by that optionee. However, the administrator may in its discretion provide for the limited transferability of nonstatutory stock options granted under the 1997 stock plan under circumstances specified in the 1997 stock plan. Stock issued pursuant to stock purchase rights granted under the 1997 stock plan is generally subject to a repurchase right exercisable by Persistence Software upon the termination of the holder's employment or consulting relationship with us for any reason (including death or disability). This repurchase right will lapse in accordance with the terms of the stock purchase right determined by the administrator at the time of grant. If we are acquired by another corporation, each outstanding option and stock purchase right may be assumed or an equivalent award substituted by our acquirer. However, if the acquirer does not agree to this assumption or substitution, then unvested shares and options terminate. The administrator has the authority to amend or terminate the 1997 plan, but no action may be taken that impairs the rights of any holder of an outstanding option or stock purchase right without the holder's consent. In addition, we must obtain stockholder approval of amendments to the plan as required by applicable law. 1994 Stock Purchase Plan. The 1994 stock purchase plan was originally adopted by our board of directors in July 1994 and approved by our stockholders in July 1994. It provides for the grant of stock purchase rights to employees and a total of 640,598 shares of common stock have been reserved for issuance under the 1994 stock purchase plan. As of March 31, 1999, 640,598 shares of common stock had been issued pursuant to restricted stock purchase agreements under the 1994 stock purchase plan. No shares remained available for future grant, and we do not intend to issue any further awards under this plan. Unless sooner terminated by the board of directors, the 1994 stock purchase plan will terminate in July 2004. Stock purchase rights granted under the 1994 stock purchase plan were required to have a purchase price of at least 85% of the fair market value of the shares as of the date of the offer. Recipients of stock purchase rights under the 1994 stock purchase plan execute a restricted stock purchase agreement granting us an option to repurchase the shares subject to the award at the recipient's original purchase price upon termination of the recipient's employment with us prior to vesting. The shares generally vest, and our repurchase right 53 59 lapses, over a four year period at the rate of one fourth of the total shares on the annual anniversary of the vesting commencement date and 1/48th of the total shares on the monthly anniversary of the vesting commencement date thereafter. Payment of the purchase price is permitted to be made in cash or other consideration as determined by the plan's administrator. Shares returned to the 1994 plan are automatically transferred to the 1997 plan. 1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan was adopted by the board of directors in April 1999 and will be submitted for approval by our stockholders prior to completion of this offering. A total of 600,000 shares of common stock has been reserved for issuance under the 1999 employee stock purchase plan, none of which have been issued as of the date of this offering. The number of shares reserved for issuance under the 1999 employee stock purchase plan will be subject to an automatic annual increase on the first day of each of our fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 250,000 shares, 1% of our outstanding common stock on the last day of the immediately preceding fiscal year, or a lesser number of shares as determined by the board of directors. The 1999 employee stock purchase plan becomes effective upon the date of this offering. Unless terminated earlier by the board of directors, the 1999 employee stock purchase plan will terminate twenty years following the date of this offering. The 1999 employee stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, will be implemented by a series of overlapping offering periods of approximately 24 months' duration, with new offering periods (other than the first offering period) commencing on February 1 and August 1 of each year. Each offering period will generally consist of four consecutive purchase periods of six months' duration, at the end of which an automatic purchase will be made for participants. The initial offering period is expected to commence on the date of this offering and end on July 31, 2001; the initial purchase period is expected to begin on the date of this offering and end on January 31, 2000, with subsequent purchase periods ending on July 31, 2000, January 31, 2001 and July 31, 2001. The 1999 employee stock purchase plan will be administered by the board of directors or by a committee appointed by the board. Our employees (including officers and employee directors), or employees of any majority-owned subsidiary designated by the board, are eligible to participate in the 1999 employee stock purchase plan if they are employed at least 20 hours per week and more than five months per year. The 1999 employee stock purchase plan permits eligible employees to purchase common stock through payroll deductions, which in any event may not exceed 20% of an employee's base salary. The price at which stock is purchased under the 1999 employee stock purchase plan is equal to the lower of 85% of the fair market value of the common stock at the beginning of each offering period or at the end of each purchase period. Employees may end their participation in the 1999 employee stock purchase plan at any time during an offering period, and participation ends automatically on termination of employment. The board may implement provisions of the 1999 employee stock purchase plan that permit stock purchases through cash or stock contributions. An employee cannot be granted an option under the 1999 employee stock purchase plan if immediately after the grant that employee would own stock or hold outstanding options to purchase stock equaling 5% or more of the total voting power or value of all classes of our stock or stock of our subsidiaries, or if the option would give an employee rights to purchase stock under the 1999 employee stock purchase plan at a rate that exceeds $25,000 of fair market value of the stock for each calendar year in which the option is outstanding. In addition, no employee may purchase more than 2,500 shares of 54 60 common stock under the 1999 employee stock purchase plan in any one purchase period. If the fair market value of the common stock on a purchase date is less than the fair market value at the beginning of the offering period, each participant in that offering period shall automatically be withdrawn from the offering period as of the end of the purchase date and re-enrolled in the new twenty-four month offering period beginning on the first business day following the purchase date. If we merge or consolidate with or into another corporation or sell all or substantially all of our assets, each right to purchase stock under the 1999 employee stock purchase plan will be assumed or an equivalent right substituted by the successor corporation unless our acquiror does not agree to assume or substitute outstanding rights, in which case the offering period then in progress will be shortened so that employees' rights to purchase stock under the 1999 employee stock purchase plan are exercised prior to the transaction. The board of directors has the power to amend or terminate the 1999 employee stock purchase plan and to change or terminate offering periods as long as this action does not adversely affect any outstanding rights to purchase stock thereunder. However, the board of directors may amend or terminate the 1999 purchase plan or an offering period even if it would adversely affect outstanding options in order to avoid our incurring adverse accounting charges. In addition, the purchase price may be adjusted during an offering period in order to avoid our incurring adverse accounting charges. 1999 Directors' Stock Option Plan. The 1999 directors' stock option was adopted by the board of directors in April 1999 and will be submitted for approval by our stockholders prior to completion of this offering. It will become effective upon the date of this offering. A total of 500,000 shares of common stock has been reserved for issuance under the 1999 directors' plan, all of which remain available for future grants. The 1999 directors' plan provides for the grant of nonstatutory stock options to our nonemployee directors. The 1999 directors' plan is designed to work automatically without administration. To the extent administration is necessary, it will be performed by the board of directors. To the extent conflicts of interest arise, it is expected that they will be addressed by abstention of any interested director from both deliberations and voting regarding matters in which that director has a personal interest. Unless terminated earlier, the 1999 directors' plan will terminate ten years from the date of this offering in April 2009. The 1999 directors' plan provides that each person who becomes a nonemployee director after the completion of this offering will be granted: (1) a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which he or she first becomes a member of our board of directors, (2) an additional nonstatutory stock option to purchase 20,000 shares on the one year anniversary of his or her election as a director and (3) an additional nonstatutory stock option to purchase 4,000 shares on the first day of each fiscal year beginning at least two years after his or her election as a director. Each nonemployee director who was a member of the board of directors before the completion of the offering will be granted an option to purchase 4,000 shares of common stock on the first day of each fiscal year beginning on January 1, 2000. All options granted under the 1999 directors' plan will have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant and will be nontransferable. All options granted under the 1999 directors' plan shall vest in full immediately upon grant. If a nonemployee director ceases to serve as a director for any reason other than death or disability, he or she may, but only within 90 days after the date he or she ceases to be a director, exercise options granted under the directors' plan. If he or she does not exercise the option within this 90-day period, the option shall terminate. If 55 61 a director's service terminates as a result of his or her disability or death, or if a director dies within three months following termination for any reason, the director or his or her estate will have 12 months after the date of termination or death, as applicable, to exercise options that were vested as of the date of termination. If we are acquired by another corporation, each option outstanding under the directors' plan will be assumed or equivalent options substituted by our acquirer, unless our acquirer does not agree to this assumption or substitution, in which case the options will terminate upon consummation of the transaction to the extent not previously exercised. Our board of directors may amend or terminate the 1999 directors' plan as long as that action does not adversely affect any outstanding option and we obtain stockholder approval for any amendment to the extent required by applicable law. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of or her actions in that capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors and executive officers in addition to indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses specified in the agreements, including attorneys' fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of his or her services as a director or executive officer of Persistence, any subsidiary of Persistence or any other entity to which he or she provides services at our request. In addition, we maintain directors' and officers' insurance. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 56 62 CERTAIN TRANSACTIONS In April 1997, we issued Derek Henninger, one of our executive officers, 1,700 shares of common stock at $0.23 per share under the 1994 stock purchase plan. In December 1997, we issued each of Barry Goss, Alan Cohen and Christine Russell, each of whom is an executive officer, 260,000 shares of common stock at $0.23 per share under the 1997 stock plan. All these shares are subject to a right of repurchase at cost in our favor which lapses at the rate of 1/4th of the total number of shares on the first anniversary of the vesting commencement date and 1/48th of the total number of shares per month thereafter. In April 1998, we granted Mark Douglas, Janet McGraw and Erik Frieberg, each an executive officer, options to purchase 130,000, 75,000 and 75,000 shares of common stock, respectively, at $0.50 per share. In July 1998, we granted Jack L. Hancock, one of our directors, an option to purchase 35,000 shares of common stock at $0.50 per share in connection with his appointment as a director. In July 1998, we granted Mark Douglas an option to purchase 65,000 shares of common stock at $0.50 per share and we granted Janet McGraw an option to purchase 35,000 shares of common stock at $0.50 per share. In October 1998, we granted Erik Frieberg an option to purchase 55,000 shares of common stock at $0.60 per share. In February 1999, we granted Christine Russell and Alan Cohen each an option to purchase 20,000 shares of common stock at $1.65 per share. In April 1999, we granted Janet McGraw and Mark Douglas each an option to purchase 20,000 shares of common stock at $10.00 per share. All these options become exercisable at the rate of 1/4th of the total number of shares on the first anniversary of the vesting commencement date and 1/48th of the total number of shares per month thereafter. All these options were granted under the 1997 stock plan and have not been exercised. In April 1999, we granted Gregory Ennis, Jack Hancock, Larry Henninger, William Harding, Merritt Lutz and Jeffrey Webber, who serve as our directors, each an option under the 1997 stock plan to purchase 10,000 shares of common stock at $10.00 per share. In April 1999, we also granted Joseph Roebuck, who serves as our director, an option under the 1997 stock plan to purchase 20,000 shares of common stock at $10.00 per share. These options are fully-vested and have not been exercised. In April 1999, we granted Laurence Hootnick, our President and a director, an option to purchase 850,000 shares of common stock at $10.00 per share. The option is immediately exercisable. However, if the option is exercised, the underlying shares are subject to a right of repurchase at $10.00 per share in our favor in the event Mr. Hootnick ceases employment with us. Our repurchase option lapses at the rate of 1/4th of the total number of shares on the first anniversary of the vesting commencement date and 1/48th of the total number of shares per month thereafter. In April 1999, we also granted Mr. Hootnick an option to purchase 340,000 shares of common stock at $10.00 per share. The option vests upon the earlier of five years or the attainment of specified revenue milestones within 36 months of Mr. Hootnick's first date of employment. In April 1998, we granted Merritt Lutz, one of our directors, an option to purchase 35,000 shares of common stock at $0.50 per share. The option becomes exercisable at the rate of 1/48th of the total number of shares on January 1, 1999 and 1/48th of the total shares per month thereafter. In connection with consulting services tendered to us, we granted Mr. Lutz a fully-vested option to purchase 3,572 shares of common stock at $0.50 per share in July 1998, a fully-vested option to purchase 6,288 shares of common stock at $1.65 per share in February 1999, and a fully-vested option to purchase 393 shares of common stock at $10.00 per share in April 1999. All of these options were granted under the 1997 stock plan and have not been exercised. 57 63 We engage R.B. Webber & Company to perform market and business analysis for us on a project by project basis. Jeffrey Webber, one of our directors, is President of R.B. Webber. In connection with these services, we paid R.B. Webber & Company $18,700 in 1997 and $20,500 in 1998. In addition, we have issued Mr. Webber common stock in connection with consulting services rendered to us by Mr. Webber. In April 1996, we issued Mr. Webber 29,060 shares of common stock at $0.23 per share. In November 1996, we issued Mr. Webber 3,300 shares of common stock at $0.23 per share. All these shares were issued under the 1994 stock purchase plan. Larry E. Henninger, who served on our board of directors from February 1994 to April 1999, is the father of Derek P. Henninger, our Vice President of Engineering. We have an unwritten consulting arrangement with Larry Henninger, pursuant to which we paid Mr. Henninger $18,000 per year during each of 1996, 1997 and 1998. In April 1997, in connection with these consulting services, we sold Mr. Henninger 7,000 shares of common stock at $0.23 per share. We currently intend to continue to pay Mr. Henninger $1,500 per month as a retainer for consulting services. We entered into change of control agreements with Christine Russell on February 18, 1997, with Alan Cohen on December 31, 1997, with Barry Goss on January 1, 1998, with Erik Frieberg on March 23, 1998, with Mark Douglas on April 1, 1998 and with Laurence Hootnick on April 29, 1999. These change of control agreements provide that restricted stock or stock options granted to these officers under the 1997 stock plan will immediately vest if they are terminated without cause or resign for good reason within 12 months after our change of control. This offering will not constitute a change of control. The following executive officers have issued full recourse promissory notes in our favor in order to purchase shares of common stock pursuant to stock purchase rights granted under the 1997 stock plan:
NAME DATE OF NOTE PRINCIPAL AMOUNT DATE DUE INTEREST RATE - ---- ------------ ---------------- -------- ------------- Alan Cohen.............. 12/30/97 $53,820 12/30/01 5.93% Barry Goss.............. 12/27/97 $53,820 12/27/01 5.93% Christine Russell....... 12/27/97 $53,820 12/27/01 5.93%
We have entered into indemnification agreements with our officers and directors containing provisions that may require us to indemnify our officers and directors against liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them. In November 1996, we entered into a technology development and license agreement with Morgan Stanley Dean Witter & Co., pursuant to which Morgan Stanley Dean Witter paid us a purchase advance of $50,000 and granted us a source code license to incorporate specific technology into products to be developed for Morgan Stanley Dean Witter and other commercial use. If we default under the agreement, Morgan Stanley Dean Witter is entitled to use portions of our source code specified in the agreement to develop products for internal use and to use object code versions of specified products we have developed under the agreement. We recognized revenue of $300,000 from Morgan Stanley Dean Witter in 1997 and revenue of $168,000 from Morgan Stanley Dean Witter in 1998. At December 31, 1998, we had $30,000 of deferred revenue and $101,000 of accounts receivable with Morgan Stanley Dean Witter. MSIT Holdings, Inc. and Morgan Stanley & Co.'s wholly-owned subsidiaries, Morgan Stanley Venture Capital Fund II, L.P., Morgan 58 64 Stanley Venture Investors, L.P. and Morgan Stanley Venture Capital Fund II, C.V., own shares of our Series B and Series C preferred stock. MSIT Holdings, Inc. and the managing general partner of the general partner of the Morgan Stanley Dean Witter Venture Partner entities are wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co. Merritt Lutz, who is affiliated with MSIT Holdings, Inc., and William Harding, who is affiliated with the Morgan Stanley Dean Witter Venture Partner entities, serve as our directors. The following table summarizes the shares of preferred stock purchased by our directors and 5% stockholders and persons and entities associated with them in private placement transactions. The shares of Series A preferred stock were sold at $0.59662 per share, the shares of Series B preferred stock were sold at $2.29 per share, the shares of Series C preferred stock were sold at $4.63 per share, and the shares of Series D preferred stock were sold at $5.35 per share.
SERIES A SERIES B SERIES C SERIES D ENTITIES AFFILIATED WITH DIRECTORS PREFERRED PREFERRED PREFERRED PREFERRED - ---------------------------------- --------- --------- --------- --------- Entities affiliated with Thompson Clive Investments plc (Gregory Ennis)..................... 2,084,715 218,341 10,799 -- Entities affiliated with Morgan Stanley Dean Witter Venture Partners (William J. Harding)................ -- 1,528,384 21,598 -- MSIT Holdings, Inc. (Merritt Lutz).... -- 1,484,716 -- -- The Entrepreneurs' Fund, L.P. (Jeffrey T. Webber).......................... 50,000 -- 53,996 28,037
- ------------------------- This table includes: - - shares held by Thompson Clive Investments plc. Mr. Ennis is a director of Thompson Clive Inc., a wholly-owned U.S. subsidiary of Thompson Clive & Partners Limited, the manager of Thompson Clive Investments plc. Mr. Ennis is a director of Persistence. He disclaims beneficial ownership of the shares held by the entity except to the extent of his proportionate interest therein. - - shares held by Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Investors, L.P. and Morgan Stanley Venture Capital Fund II, C.V. Dr. Harding is a general partner of Morgan Stanley Venture Partners II, L.P., which is the general partner of Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Investors, L.P. and Morgan Stanley Venture Capital Fund II, C.V., and a director of Persistence. He disclaims beneficial ownership of the shares held by these entities except to the extent of his proportionate interest therein. - - shares held by MSIT Holdings, Inc. Mr. Lutz is the Chairman of MSIT Holdings, Inc. and a director of Persistence. He disclaims beneficial ownership of the shares held by this entity except to the extent of his proportionate interest therein. - - shares held by Lighthouse Nineteen Ninety-Nine Fund, LDC and The Entrepreneurs' Fund, L.P. Mr. Webber is a beneficiary of a trust which indirectly owns Lighthouse Nineteen Ninety-Nine Fund, LDC, a general partner of The Entrepreneurs' Fund, L.P., and a director of Persistence. He disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. 59 65 PRINCIPAL STOCKHOLDERS The following table sets forth information known to us with respect to beneficial ownership of our common stock as of May 31, 1999, as adjusted to reflect the sale of common stock offered in this offering, by: - each person, or group of affiliated persons, known by us to own beneficially more than 5% of our outstanding common stock, - each director, - our Chief Executive Officer and four other most highly compensated executive officers, and - all directors and executive officers as a group.
PERCENT BENEFICIALLY OWNED -------------------- NUMBER OF BEFORE AFTER SHARES OFFERING OFFERING ---------- -------- -------- Christopher T. Keene........................... 2,790,000 18.06% 15.12% Gregory Ennis(1)............................... 2,428,095 15.71 13.15 Thompson Clive Investments plc(2).............. 2,418,095 15.65 13.11 3000 Sand Hill Road Building 1, Suite 185 Menlo Park, CA 94025 William J. Harding(3).......................... 1,559,982 10.09 8.45 Entities affiliated with Morgan Stanley Dean Witter Venture Partners(4)................... 1,549,982 10.03 8.40 3000 Sand Hill Road Building 4, Suite 250 Menlo Park, CA 94025 Merritt Lutz(5)................................ 1,518,094 9.81 8.21 MSIT Holdings, Inc............................. 1,484,716 9.61 8.05 1585 Broadway New York, NY 10036 Derek Henninger................................ 1,301,700 8.43 7.06 Laurence R. Hootnick(6)........................ 850,000 5.22 4.40 Jeffrey T. Webber(7)........................... 269,393 1.74 1.46 Alan Cohen(8).................................. 260,000 1.68 1.41 Barry Goss..................................... 260,000 1.68 1.41 Christine Russell.............................. 260,000 1.68 1.41 Jack L. Hancock(9)............................. 10,000 * * Joseph P. Roebuck(10).......................... 20,000 * * All directors and executive officers as a group (14 persons)................................. 11,641,326 70.53% 59.87%
- ------------------------- * Less than 1% of the outstanding shares of common stock. (1) Includes 10,000 shares issuable upon exercise of an option that will be exercisable within 60 days of May 31, 1999, 2,365,975 shares held by Thompson Clive Investments plc, 52,120 shares held by Thompson Clive Inc. 401(k) fbo Greg Ennis and 52,120 shares held by Thompson Clive Inc. 401(k) fbo Peter H. Ziebelman. Mr. Ennis is a director of Thompson Clive Inc., a wholly-owned U.S. subsidiary of Thompson Clive & Partners Limited, the manager of Thompson Clive 60 66 Investments plc. Mr. Ennis disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. (2) Includes 52,120 shares held by Thompson Clive Inc. 401(k) fbo Greg Ennis and 52,120 shares held by Thompson Clive Inc. 401(k) fbo Peter H. Ziebelman. (3) Includes 10,000 shares issuable upon exercise of an option that will be exercisable within 60 days of May 31, 1999, 1,027,381 shares held by Morgan Stanley Venture Capital Fund II, L.P., 266,642 shares held by Morgan Stanley Venture Investors, L.P. and 255,959 shares held by Morgan Stanley Venture Capital Fund II, C.V. Dr. Harding is a general partner of Morgan Stanley Dean Witter Venture Partners II, L.P., which is the managing general partner of the general partner of Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Investors, L.P. and Morgan Stanley Venture Capital Fund II, C.V. He disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. (4) Includes 1,027,381 shares held by Morgan Stanley Venture Capital Fund II, L.P., 266,642 shares held by Morgan Stanley Venture Investors, L.P. and 255,959 shares held by Morgan Stanley Venture Capital Fund II, C.V. (5) Includes 33,378 shares issuable upon exercise of options which will be exercisable within 60 days of May 31, 1999 and 1,484,716 shares held by MSIT Holdings, Inc. Mr. Lutz is the Chairman of MSIT Holdings, Inc. He disclaims beneficial ownership of the shares held by the entity except to the extent of his proportionate interest therein. (6) Includes 850,000 shares issuable upon exercise of an option which will be exercisable within 60 days of May 31, 1999, but which are subject to a right of repurchase in our favor at cost in the event Mr. Hootnick ceases employment with us. (7) Includes 10,000 shares issuable upon exercise of an option that will be exercisable within 60 days of May 31, 1999, 130,000 shares held by Lighthouse Nineteen Ninety-Nine Fund, LDC, 82,033 shares held by The Entrepreneurs' Fund, L.P. and 45,000 shares held by Healdsburg Consulting Group. Mr. Webber is a beneficiary of a trust that indirectly owns Lighthouse Nineteen Ninety-Nine Fund, LDC, as well as a general partner of The Entrepreneurs' Fund, L.P. and President of Healdsburg Consulting Group. He disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. (8) Includes 260,000 shares held by Alan B. Cohen and Vivian L. Cohen, Trustees of the Alan and Vivian Cohen Trust of 12/2/98. Mr. Cohen is a trustee of this entity. He disclaims beneficial ownership of the shares except to the extent of his proportionate interest therein. (9) Includes 10,000 shares issuable upon exercise of an option that will be exercisable within 60 days of May 31, 1999. (10) Includes 20,000 shares issuable upon exercise of an option that will be exercisable within 60 days of May 31, 1999. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. The number of shares beneficially owned by a person includes shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of May 31, 1999. The shares issuable pursuant to these options are deemed outstanding for computing the percentage ownership of the person holding these options but are not deemed outstanding for the purposes of computing the percentage ownership of each other person. The number of shares listed in the table above for all directors and executive officers as a group includes 114,062 shares that are currently exercisable within 60 days of May 31, 1999 held by executive officers not named in the table. The table excludes 252,000 shares held as of May 31, 1999 by Larry Henninger, who resigned as a director in April 1999. 61 67 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, we will be authorized to issue 75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock is intended to be a summary and does not describe all provisions of our certificate of incorporation or bylaws or Delaware law applicable to Persistence. For a more thorough understanding of the terms of our capital stock, you should refer to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK As of March 31, 1999, there were 15,447,941 shares of common stock outstanding, held of record by approximately 108 stockholders, which reflects the conversion of all outstanding shares of preferred stock into common stock. In addition, as of March 31, 1999, there were 1,388,036 shares of common stock subject to outstanding options and 80,556 shares of common stock subject to outstanding warrants. Upon completion of this offering, there will be 18,447,941 shares of common stock outstanding, assuming no exercise of the underwriters' overallotment option or additional exercise of outstanding options under our stock option plan and warrants. The holders of common stock are entitled to one vote per share on all matters to be voted upon by stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably dividends as may be declared by the board of directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding preferred stock. The common stock has no preemptive or conversion rights, other subscription rights, or redemption or sinking fund provisions. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. PREFERRED STOCK Upon the closing of the offering, all outstanding shares of preferred stock will be converted into 7,697,885 shares of common stock and automatically retired. Thereafter, the board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying or preventing our change in control without further action by the stockholders. We have no present plans to issue any shares of preferred stock. WARRANTS As of March 31, 1999 there were warrants outstanding to purchase a total of 55,556 shares of common stock at a price of $0.90 per share, which expire on December 31, 2001. In addition, there were warrants outstanding to purchase a total of 25,000 shares of common stock at $0.90 per share, which expire on February 6, 2001. 62 68 REGISTRATION RIGHTS The holders of 7,726,434 shares of common stock and warrants to purchase 80,556 shares of common stock (the "registrable securities") are entitled to have their shares registered by us under the Securities Act under the terms of an agreement between us and the holders of the registrable securities. Subject to limitations specified in the agreement, these registration rights include the following: - The holders registrable securities may require, on two occasions beginning six months after the date of this prospectus, that we use our best efforts to register the registrable securities for public resale, provided that the aggregate offering price for these registrable securities is at least $5,000,000. This right is subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions. - If we register any common stock, either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their shares of common stock in that registration. This right is subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions. - The holders of at least 1% of the then outstanding registrable securities may require us to register all or a portion of their registrable securities on Form S-3 when use of this form becomes available to us, provided that the proposed aggregate offering price is at least $1,000,000. The holders of registrable securities may not exercise this right within six months immediately following the effective date of a Form S-3 registration previously demanded by the holders of registrable securities or more than once in any twelve-month period. We will bear all registration expenses other than underwriting discounts and commissions, except in the case of registrations on Form S-3 demanded after one such registration on Form S-3 has already been declared effective. All registration rights terminate on the date five years following the closing of this offering, or, with respect to each holder of registrable securities, at the time when the holder owns less than 2% of the voting stock and is entitled to sell all of its shares in any three month period under Rule 144 of the Securities Act. DELAWARE ANTI-TAKEOVER LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS Provisions of Delaware law and our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us or to remove our incumbent officers and directors. These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of Persistence to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited acquisition proposal outweigh the disadvantages of discouraging these proposals because, among other things, negotiation could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a 63 69 period of three years following the date the person became an interested stockholder, unless: - the board of directors approved the transaction in which the person became an interested stockholder prior to the date the interested stockholder attained this status; - upon consummation of the transaction that resulted in the person's becoming an interested stockholder, he or she owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers; or - on or subsequent to the date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders. A business combination generally includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. In general, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. Our certificate of incorporation and bylaws do not provide for the right of stockholders to act by written consent without a meeting or for cumulative voting in the election of directors. In addition, our certificate of incorporation permits the board of directors to issue preferred stock with voting or other rights without any stockholder action. Our certificate of incorporation provides for the board of directors to be divided into three classes, with staggered three-year terms, commencing at our first annual meeting of stockholders following the date on which we have at least 800 stockholders. As a result, only one class of directors will be elected at each annual meeting of stockholders. Each of the two other classes of directors will continue to serve for the remainder of its respective three-year term. These provisions, which require the vote of stockholders holding at least two thirds of the outstanding common stock to amend, may have the effect of deterring hostile takeovers or delaying changes in our management. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is U.S. Stock Transfer Corporation. The transfer agent's address and telephone number is 1745 Gardena Avenue, Glendale, CA, 91204, (818)502-1404. 64 70 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. As described below, no shares currently outstanding will be available for sale immediately after this offering because of contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and impair our ability to raise equity capital in the future. Upon completion of the offering, we will have 18,447,941 outstanding shares of common stock. Of these shares, the 3,000,000 shares sold in the offering, plus any shares issued upon exercise of the underwriters' overallotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. In general, affiliates include officers, directors or 10% stockholders. The remaining 15,447,941 shares outstanding are restricted securities within the meaning of Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of restricted securities in the public market, or the availability of these shares for sale, could adversely affect the market price of the common stock. Our directors, officers and securityholders have entered into lock-up agreements in connection with this offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 90 or 180 days after the date of this prospectus without the prior written consent of BancBoston Robertson Stephens. Notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k)and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are waived by BancBoston Robertson Stephens. Taking into account the lock-up agreements, and assuming BancBoston Robertson Stephens does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: - Beginning on the effective date of this prospectus, only the 3,000,000 shares sold in the offering will be immediately available for sale in the public market. - Beginning 90 days after the effective date, approximately 147,790 shares will be eligible for sale, none of which will be subject to volume, manner of sale and other limitations under Rule 144. None of these shares are held by affiliates. - Beginning 180 days after the effective date, approximately 14,434,150 shares will be eligible for sale, 7,014,673 of which will be subject to volume, manner of sale and other limitations under Rule 144. All but 3,636,301 of the total 14,434,150 shares are held by affiliates. - The remaining 866,001 shares will be eligible for sale pursuant to Rule 144 upon the expiration of various one-year holding periods during the six months following 180 days after the effective date. All but 837,964 of these shares are held by affiliates. In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year 65 71 would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of common stock then outstanding which will equal approximately 184,479 shares immediately after the offering; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice, and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at anytime during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell his or her shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell these shares in reliance upon Rule 144 but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, we intend to file registration statements under the Securities Act as promptly as possible after the effective date to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under the 1994 stock purchase plan, the 1997 stock plan, the 1999 employee stock purchase plan, the 1999 directors' stock option plan or any other benefit plan after the effectiveness of the registration statements will also be freely tradable in the public market. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resalable under Rule 701. As of March 31, 1999 there were outstanding options for the purchase of 1,388,036 shares of common stock, of which options to purchase 271,235 shares were exercisable. 66 72 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and SoundView Technology Group, Inc., have entered into an underwriting agreement with us to purchase the number of shares of common stock set forth opposite their names below. The underwriters are committed to purchase and pay for all of the shares listed below if any shares are purchased.
UNDERWRITER NUMBER OF SHARES ----------- ---------------- BancBoston Robertson Stephens Inc. .................. U.S. Bancorp Piper Jaffray Inc. ..................... SoundView Technology Group, Inc. .................... -------- Total...................................... 3,000,000 ========
Shares sold by the underwriters will initially be offered to the public at the initial public offering price set forth on the cover page of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to per share from the initial public offering price. These securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Over-Allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the same price per share as we will receive for the 3,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment, to purchase approximately the same percentage of such additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,000,000 shares in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the 3,000,000 shares are being sold. Indemnification. The underwriting agreement contains covenants of indemnity among the underwriters and us against specified civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-up Agreement. Each of our officers, directors and securityholders agreed with the representatives or us for a period of 180 days, and in the case of some securityholders 90 days, after the effective date of this prospectus, not to dispose of or hedge any shares of common stock, or securities convertible into or exchangeable for shares of common stock, now owned or later acquired by them without the prior written consent of BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. All of the shares of common stock subject to the lock-up agreements will be eligible for sale in the public market upon the expiration of the lock-up agreements, subject to holding period, volume limitations and other conditions of Rule 144. 67 73 Future Sales. In addition, we have agreed that during the 180 days following the effective date of this prospectus, we will not, without the prior written consent of BancBoston Robertson Stephens Inc., subject to limited exceptions (including in connection with acquisitions), dispose of or hedge any shares of common stock, or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than (i) our sales of shares in this offering, (ii) the issuance of common stock upon the exercise of outstanding options or warrants or (iii) our issuance of options or shares under the 1994 stock purchase plan, 1997 stock plan, 1999 employee stock purchase plan and 1999 directors' stock option plan. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Determination of Offering Price. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock in this offering has been determined through negotiations among us and the representatives of the underwriters. The factors considered in these negotiations included prevailing market conditions, our financial information, the market valuation of other companies that we and the representatives believe to be comparable to us, estimates of our business potential and the business potential of the industry in which we compete, an assessment of our management, our past and present operation, the prospects for our future revenues and other factors deemed relevant. Share Ownership by Underwriters. An entity affiliated with U.S. Bancorp Piper Jaffray Inc. purchased an aggregate of 53,996 shares of our Series C preferred stock from us in August 1998. This affiliate is subject to the 180-day lock-up that applies to other securityholders as described above. U.S. Bancorp Piper Jaffray Inc. and its affiliates (other than the holder described above) will be permitted to engage in stabilization, brokerage and ordinary course of business transactions. See "Shares Eligible for Future Sale." Stabilization. The representatives have advised us that, pursuant to Regulation M under the Securities Act, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Reserved Shares. The underwriters have reserved for sale at the initial public offering price up to 5% of the common stock in this offering for individuals designated by us who have expressed an interest in purchasing shares of common stock in this offering. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. The underwriters will offer any reserved shares 68 74 not so purchased to the general public on the same basis as other shares in this offering described above. Under an agreement among us and our principal stockholders, affiliates of Amerindo Investment Advisors L.P. have the right to purchase up to 3% of the shares offered in this offering. To exercise this right, these entities must state the number of shares they intend to purchase and commit to purchase such number within five business days after we provide them notice of this offering. 69 75 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and SoundView Technology Group, Inc., have entered into an underwriting agreement with us to purchase the number of shares of common stock set forth opposite their names below. The underwriters are committed to purchase and pay for all of the shares listed below if any shares are purchased.
NUMBER OF SHARES --------- UNDERWRITER BancBoston Robertson Stephens Inc. ....................... U.S. Bancorp Piper Jaffray Inc. .......................... SoundView Technology Group, Inc. ......................... INTERNATIONAL UNDERWRITER BancBoston Robertson Stephens International Limited ...... --------- Total........................................... 3,000,000 =========
Shares sold by the underwriters will initially be offered to the public at the initial public offering price set forth on the cover page of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to per share from the initial public offering price. These securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Over-Allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the same price per share as we will receive for the 3,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment, to purchase approximately the same percentage of such additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,000,000 shares in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the 3,000,000 shares are being sold. Indemnification. The underwriting agreement contains covenants of indemnity among the underwriters and us against specified civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-up Agreement. Each of our officers, directors and securityholders agreed with the representatives or us for a period of 180 days, and in the case of some securityholders 90 days, after the effective date of this prospectus, not to dispose of or hedge any shares of common stock, or securities convertible into or exchangeable for shares of common stock, now owned or later acquired by them without the prior written consent of BancBoston 67 76 Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. All of the shares of common stock subject to the lock-up agreements will be eligible for sale in the public market upon the expiration of the lock-up agreements, subject to holding period, volume limitations and other conditions of Rule 144. Future Sales. In addition, we have agreed that during the 180 days following the effective date of this prospectus, we will not, without the prior written consent of BancBoston Robertson Stephens Inc., subject to limited exceptions (including in connection with acquisitions), dispose of or hedge any shares of common stock, or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than (i) our sales of shares in this offering, (ii) the issuance of common stock upon the exercise of outstanding options or warrants or (iii) our issuance of options or shares under the 1994 stock purchase plan, 1997 stock plan, 1999 employee stock purchase plan and 1999 directors' stock option plan. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Determination of Offering Price. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock in this offering has been determined through negotiations among us and the representatives of the underwriters. The factors considered in these negotiations included prevailing market conditions, our financial information, the market valuation of other companies that we and the representatives believe to be comparable to us, estimates of our business potential and the business potential of the industry in which we compete, an assessment of our management, our past and present operation, the prospects for our future revenues and other factors deemed relevant. Share Ownership by Underwriters. An entity affiliated with U.S. Bancorp Piper Jaffray Inc. purchased an aggregate of 53,996 shares of our Series C preferred stock from us in August 1998. This affiliate is subject to the 180-day lock-up that applies to other securityholders as described above. U.S. Bancorp Piper Jaffray Inc. and its affiliates (other than the holder described above) will be permitted to engage in stabilization, brokerage and ordinary course of business transactions. See "Shares Eligible for Future Sale." Stabilization. The representatives have advised us that, pursuant to Regulation M under the Securities Act, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 68 77 Reserved Shares. The underwriters have reserved for sale at the initial public offering price up to 5% of the common stock in this offering for individuals designated by us who have expressed an interest in purchasing shares of common stock in this offering. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. The underwriters will offer any reserved shares not so purchased to the general public on the same basis as other shares in this offering described above. Under an agreement among us and our principal stockholders, affiliates of Amerindo Investment Advisors L.P. have the right to purchase up to 3% of the shares offered in this offering. To exercise this right, these entities must state the number of shares they intend to purchase and commit to purchase such number within five business days after we provide them notice of this offering. LEGAL MATTERS The validity of the common stock in this offering will be passed upon for Persistence by Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025. Mark Medearis, a Director of Venture Law Group, is the Assistant Secretary of Persistence. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303. As of the date of this prospectus, attorneys of Venture Law Group and an investment partnership controlled by Venture Law Group beneficially own an aggregate of 6,551 shares of Persistence's common stock. EXPERTS The consolidated financial statements of Persistence as of December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 included in the prospectus and the related financial statement schedule included elsewhere in the Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports thereon appearing herein and elsewhere in the Registration Statement and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and its exhibits and schedule. For further information with respect to us and our common stock being offered, see the registration statement and its exhibits and schedule. A copy of the registration statement and its exhibits and schedule may be inspected without charge at the public reference facilities maintained by the SEC located at Room 1024, 450 Fifth Street, Washington, D.C. 20549 and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the registration statement may be obtained from these offices upon the payment of the fees prescribed by the SEC. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. 69 78 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, 1997, 1998, March 31, 1999 (unaudited) and Pro forma at March 31, 1999 (unaudited)....................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and three-months ended March 31, 1998 and 1999 (unaudited).................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 and three months ended March 31, 1999 (unaudited)................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and three months ended March 31, 1998 and 1999 (unaudited).................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 79 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 as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. 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 Persistence Software, Inc. and subsidiary at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California March 2, 1999 (April 21, 1999 as to Note 11) F-2 80 PERSISTENCE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
DECEMBER 31, PRO FORMA ------------------ MARCH 31, MARCH 31, 1997 1998 1999 1999 ------- -------- ----------- ----------- (NOTE 1) (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,610 $ 4,938 $ 7,386 Accounts receivable, net of allowances of $75, $47 and $47.................................................... 1,876 1,759 2,198 Prepaid expenses and other current assets................. 89 155 164 ------- -------- -------- Total current assets................................... 4,575 6,852 9,748 Property and equipment, net................................. 837 723 676 Deposits.................................................... 35 29 31 ------- -------- -------- Total assets........................................... $ 5,447 $ 7,604 $ 10,455 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 801 $ 596 $ 519 Accrued compensation and related benefits................. 528 512 513 Other accrued liabilities................................. 64 154 516 Deferred revenues......................................... 1,385 1,798 1,545 Current portion of long-term obligations.................. 193 408 370 ------- -------- -------- Total current liabilities.............................. 2,971 3,468 3,463 ------- -------- -------- Long-term obligations....................................... 259 650 643 Deferred rent............................................... 160 64 40 Commitments (Note 4)........................................ Stockholders' equity: Series A convertible preferred stock $0.001 par value; designated and outstanding -- 2,134,715 shares; pro forma -- none (liquidation preference of $1,274)....... 1,250 1,250 1,250 -- Series B convertible preferred stock $0.001 par value; designated and outstanding -- 3,243,192 shares; pro forma -- none (liquidation preference of $7,427)....... 7,387 7,387 7,387 -- Series C convertible preferred stock $0.001 par value; designated -- 1,544,277 shares; outstanding -- 1997, 431,965 shares; 1998 and 1999, 1,544,277 shares; pro forma -- none (liquidation preference of $10,725)...... 1,973 7,080 7,080 -- Series D convertible preferred stock $0.001 par value; designated -- 775,701 shares; outstanding -- 1997 and 1998, none; 1999, 775,701 shares; pro forma -- none (liquidation preference of $4,150)..................... -- -- 4,142 -- Common stock, $0.001 par value; authorized -- 41,100,000 shares; outstanding -- 1997, 7,652,741 shares; 1998, 7,634,414 shares; 1999, 7,750,056 shares; pro forma -- 15,447,941 shares............................. 592 2,854 3,997 23,856 Deferred stock compensation............................... (287) (2,222) (2,705) (2,705) Notes receivable from stockholders........................ (181) (161) (161) (161) Accumulated deficit....................................... (8,677) (12,766) (14,681) (14,681) ------- -------- -------- -------- Total stockholders' equity............................. 2,057 3,422 6,309 $ 6,309 ------- -------- -------- ======== Total liabilities and stockholders' equity............. $ 5,447 $ 7,604 $ 10,455 ======= ======== ========
See notes to consolidated financial statements. F-3 81 PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, --------------------------- ----------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: License........................... $ 2,603 $ 3,546 $ 7,478 $ 1,004 $ 2,116 Service........................... 1,171 1,867 2,682 706 747 ------- ------- ------- ------- ------- Total revenues................. 3,774 5,413 10,160 1,710 2,863 ------- ------- ------- ------- ------- Cost of revenues: License........................... 139 342 239 56 42 Service........................... 221 729 1,372 326 580 ------- ------- ------- ------- ------- Total cost of revenues......... 360 1,071 1,611 382 622 ------- ------- ------- ------- ------- Gross profit........................ 3,414 4,342 8,549 1,328 2,241 Operating expenses: Sales and marketing............... 3,798 4,712 7,168 1,687 2,015 Research and development.......... 1,976 2,954 4,234 1,038 1,806 General and administrative........ 985 1,362 1,237 311 383 ------- ------- ------- ------- ------- Total operating expenses....... 6,759 9,028 12,639 3,036 4,204 ------- ------- ------- ------- ------- Loss from operations................ (3,345) (4,686) (4,090) (1,708) (1,963) Interest income (expense): Interest income................... 72 85 116 16 63 Interest expense.................. (38) (73) (115) (12) (15) ------- ------- ------- ------- ------- Total interest income (expense).................... 34 12 1 4 48 ------- ------- ------- ------- ------- Net loss............................ $(3,311) $(4,674) $(4,089) $(1,704) $(1,915) ======= ======= ======= ======= ======= Basic and diluted net loss per share............................. $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27) ======= ======= ======= ======= ======= Shares used in calculating basic and diluted net loss per share........ 6,135 6,366 6,879 6,733 7,044 ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per share (Note 1)................ $ (0.31) $ (0.13) ======= ======= Shares used in calculating pro forma basic and diluted net loss per share (Note 1).................... 13,183 14,320 ======= =======
See notes to consolidated financial statements. F-4 82 PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE DEFERRED COMMON STOCK NOTES PREFERRED STOCK COMMON STOCK STOCK SUBSCRIBED RECEIVABLE ------------------- ------------------ COMPEN- ---------------- FROM SHARES AMOUNT SHARES AMOUNT SATION SHARES AMOUNT STOCKHOLDERS --------- ------- --------- ------ -------- ------- ------ ------------ Balances, January 1, 1996........ 2,134,715 $ 1,250 6,747,240 $ 48 $ (15) Sale of Series B preferred stock.......................... 3,237,992 7,375 Issuance of common stock......... 304,325 59 (23) Common stock subscribed.......... 32,359 $ 7 Repurchase of common stock....... (281,250) (17) 15 Net loss......................... --------- ------- --------- ------ ------- --- ----- Balances, December 31, 1996...... 5,372,707 8,625 6,770,315 90 32,359 7 (23) Sale of Series B preferred stock.......................... 5,200 12 Sale of Series C preferred stock.......................... 431,965 1,973 Issuance of common stock......... 1,119,482 257 (32,359) (7) (181) Repurchase of common stock....... (237,056) (42) 23 Compensatory stock arrangements................... 287 $ (287) Net loss......................... --------- ------- --------- ------ ------- ------- --- ----- Balances, December 31, 1997...... 5,809,872 10,610 7,652,741 592 (287) -- -- (181) 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) Repayment of notes receivable from stockholders.............. 20 Compensatory stock arrangements................... 2,266 (2,266) Amortization of deferred stock compensation................... 331 Net loss......................... --------- ------- --------- ------ ------- ------- --- ----- Balances, December 31, 1998...... 6,922,184 15,717 7,634,414 2,854 (2,222) -- -- (161) Sale of Series D preferred stock*......................... 775,701 4,142 Issuance of common stock*........ 115,642 156 Compensatory stock arrangements*.................. 987 (987) Amortization of deferred stock compensation*.................. 504 Net loss*........................ --------- ------- --------- ------ ------- ------- --- ----- Balances, March 31, 1999*........ 7,697,885 $19,859 7,750,056 $3,997 $(2,705) -- $-- $(161) ========= ======= ========= ====== ======= ======= === ===== ACCUMULATED DEFICIT TOTAL ----------- ------- Balances, January 1, 1996........ $ (692) $ 591 Sale of Series B preferred stock.......................... 7,375 Issuance of common stock......... 36 Common stock subscribed.......... 7 Repurchase of common stock....... (2) Net loss......................... (3,311) (3,311) -------- ------- Balances, December 31, 1996...... (4,003) 4,696 Sale of Series B preferred stock.......................... 12 Sale of Series C preferred stock.......................... 1,973 Issuance of common stock......... 69 Repurchase of common stock....... (19) Compensatory stock arrangements................... -- Net loss......................... (4,674) (4,674) -------- ------- Balances, December 31, 1997...... (8,677) 2,057 Sale of Series C preferred stock.......................... 5,107 Issuance of common stock......... 1 Repurchase of common stock....... (5) Repayment of notes receivable from stockholders.............. 20 Compensatory stock arrangements................... -- Amortization of deferred stock compensation................... 331 Net loss......................... (4,089) (4,089) -------- ------- Balances, December 31, 1998...... (12,766) 3,422 Sale of Series D preferred stock*......................... 4,142 Issuance of common stock*........ 156 Compensatory stock arrangements*.................. -- Amortization of deferred stock compensation*.................. 504 Net loss*........................ (1,915) (1,915) -------- ------- Balances, March 31, 1999*........ $(14,681) $ 6,309 ======== =======
- ------------------------- * Unaudited See notes to consolidated financial statements. F-5 83 PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (UNAUDITED) Cash flows from operating activities: Net loss.................................................. $(3,311) $(4,674) $(4,089) $(1,704) $(1,915) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 324 505 556 127 141 Amortization of deferred stock compensation............. -- -- 331 25 504 Stock issued in lieu of rent............................ 7 19 -- -- -- Loss on sale of fixed assets............................ 2 -- -- -- -- Gain on forgiveness of capital lease obligations........ (37) -- -- -- -- Changes in assets and liabilities: Accounts receivable................................... (576) (775) 117 467 (439) Prepaid expenses and other current assets............. 28 (37) (66) (38) (9) Accounts payable...................................... (7) 641 (205) (113) (77) Accrued compensation and related benefits............. 243 104 (16) 530 1 Other accrued liabilities............................. (40) 29 90 (486) 362 Deferred revenues..................................... 217 959 413 26 (253) Deferred rent......................................... 61 99 (96) (24) (24) ------- ------- ------- ------- ------- Net cash used in operating activities.............. (3,089) (3,130) (2,965) (1,190) (1,709) ------- ------- ------- ------- ------- Cash flows from investing activities: Property and equipment additions.......................... (53) (555) (442) (152) (94) Deposits.................................................. -- (34) 6 (1) (2) Proceeds from sale of fixed assets........................ 44 -- -- -- -- ------- ------- ------- ------- ------- Net cash used in investing activities.............. (9) (589) (436) (153) (96) ------- ------- ------- ------- ------- Cash flows from financing activities: Sale of convertible preferred stock, net.................. 7,375 1,985 5,107 -- 4,142 Sale of common stock...................................... 36 50 1 -- 156 Repurchase of common stock................................ (2) (19) (5) (1) -- Repayment of notes receivable from stockholders........... -- -- 20 19 -- Repayment of capital lease obligations.................... (146) (222) (194) (47) (45) Borrowing under loan agreement............................ -- -- 800 556 -- ------- ------- ------- ------- ------- Net cash provided by financing activities.......... 7,263 1,794 5,729 527 4,253 ------- ------- ------- ------- ------- Net increase (decrease) in cash and equivalents............. 4,165 (1,925) 2,328 (816) 2,448 Cash and cash equivalents -- beginning of period............ 370 4,535 2,610 2,610 4,938 ------- ------- ------- ------- ------- Cash and cash equivalents -- end of period.................. $ 4,535 $ 2,610 $ 4,938 $ 1,794 $ 7,386 ======= ======= ======= ======= ======= Noncash investing and financing activities: Common stock issued for notes receivable.................. $ 23 $ 181 $ -- $ -- $ -- ======= ======= ======= ======= ======= Cancellation of note receivable........................... $ -- $ 23 $ -- $ -- $ -- ======= ======= ======= ======= ======= Property and equipment acquired under capital leases...... $ 658 $ -- $ -- $ -- $ -- ======= ======= ======= ======= ======= Supplemental disclosure of cash flow information -- cash paid during the period for: Interest.................................................. $ 35 $ 72 $ 115 $ 12 $ 15 ======= ======= ======= ======= ======= Income taxes.............................................. $ 1 $ 1 $ 1 $ 1 $ -- ======= ======= ======= ======= =======
See notes to consolidated financial statements. F-6 84 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Business -- Persistence Software, Inc. and subsidiary (the Company), incorporated in California in June 1991, develops and markets transactional application server software products that comprise the Internet software infrastructure for high-volume, high-performance electronic commerce applications. 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 a remaining maturity of three months or less to be cash equivalents. 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. 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. 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 F-7 85 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) typically consist of services. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. 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 October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, Software Revenue Recognition. This statement provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and superseded SOP 91-1, Software Revenue Recognition. SOP 97-2 was effective for transactions entered into in 1998. The adoption of this standard did not have a material effect on the Company's 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 U.S. dollar. 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. Transaction gains and losses, which are included in other income (expense) in the accompanying consolidated statements of operations, 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 at fair market value until they are exercised. Upon exercise, the net proceeds are credited to stockholders' equity. 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 since the effect of any potentially dilutive securities is excluded as they are anti-dilutive because of the Company's net losses. Pro Forma Net Loss per Common Share -- Pro forma basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase) and F-8 86 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the weighted average number of common shares resulting from the conversion of outstanding shares of convertible preferred stock, which will occur upon the closing of the planned initial public offering. Unaudited Pro Forma Information -- Upon the closing of the planned initial public offering, each of the outstanding shares of convertible preferred stock will convert into one share of common stock. The pro forma balance sheet presents the Company's balance sheet as if this had occurred at March 31, 1999. Unaudited Interim Financial Information -- The interim financial information as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. Concentration of Credit Risk -- Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade receivables. 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, notes receivable from stockholders and long-term debt. At December 31, 1997 and 1998, the fair value of these financial instruments approximated their financial statement carrying amounts. Significant Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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 Significant 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; year 2000 compliance issues; 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. Recently Issued Accounting Standards -- In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires an enterprise to report, by F-9 87 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) major components and as a single total, the change in its net assets during the period from nonowner sources; and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The Company had no comprehensive income items, other than net loss, to report for any of the periods presented. The Company currently operates in one reportable segment under SFAS No. 131. In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on its financial statements and related disclosures. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal year ending December 31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its financial statements and related disclosures. Reclassifications -- Certain reclassifications have been made to the 1996 and 1997 financial statement presentations to conform to the 1998 presentation. 2. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, ------------------ MARCH 31, 1997 1998 1999 ------- ------- --------- (IN THOUSANDS) Equipment............................... $ 1,427 $ 1,718 $ 1,772 Software................................ 424 575 615 Leasehold improvements.................. 60 60 60 ------- ------- ------- 1,911 2,353 2,447 Accumulated depreciation and amortization.......................... (1,074) (1,630) (1,771) ------- ------- ------- $ 837 $ 723 $ 676 ======= ======= =======
F-10 88 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LONG-TERM OBLIGATIONS Long-term obligations consist of:
DECEMBER 31, --------------- MARCH 31, 1997 1998 1999 ----- ------ --------- (IN THOUSANDS) Equipment term loan....................... $ -- $ 800 $ 800 Capital lease obligations (see Note 4).... 452 258 213 ----- ------ ------ 452 1,058 1,013 Less current portion...................... (193) (408) (370) ----- ------ ------ $ 259 $ 650 $ 643 ===== ====== ======
In February 1998, the Company entered into a $2,000,000 line of credit with a bank. Borrowings under the line bear interest at the bank's base rate (7.75% at December 31, 1998) and are limited to a percentage of eligible accounts receivable, as defined. At December 31, 1998, there were no borrowings under the line. At December 31, 1998, the Company had outstanding borrowings of $800,000 under a bank promissory note, which bears interest at 7.75%. The Company is required to make principal payments of $22,222 per month plus interest on the unpaid principal balance, payable in 36 monthly installments commencing April 1, 1999. The line of credit requires the Company, among other things, to maintain a minimum tangible net worth of $500,000 and a quick ratio greater than 1.3 to 1.0. At December 31, 1998, the Company was in compliance with the financial covenant requirements. Both agreements are collateralized by substantially all of the Company's assets. Annual maturities under the term loan are as follows:
FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS) ------------------ -------------- 1999........................................... $200 2000........................................... 267 2001........................................... 267 2002........................................... 66 ---- Total.................................. $800 ====
4. LEASE COMMITMENTS Equipment with a net book value of $301,000 and $89,000 at December 31, 1997 and 1998, respectively, (net of accumulated amortization of $391,000 and $603,000) has been leased under capital leases. The Company leases its principal facility under a noncancelable operating lease expiring in June 1999. Rent expense was approximately $150,000, $330,000 and $337,000 in 1996, 1997 and 1998, respectively. F-11 89 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under the Company's leases at December 31, 1998 are:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 1999................................................ $ 193 $218 2000................................................ 66 -- 2001................................................ 21 -- ----- ---- Total.......................................... 280 $218 ==== Amount representing interest........................ (22) ----- Present value....................................... 258 Current portion..................................... (208) ----- Long-term portion................................... $ 50 =====
5. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK Terms of the convertible preferred stock are as follows: - Each share of Series A, Series B and Series C preferred stock is convertible into one share of common stock (subject to adjustment for events of dilution). Each share will automatically convert into common stock upon the completion of a public offering with aggregate proceeds greater than $12,000,000 and at a price per share of not less than $7.00. - Each share of Series A, Series B and Series C preferred stock has voting rights equivalent to the number of shares of common stock into which it is convertible. - When declared by the Board of Directors, the holders of Series A preferred stock are entitled to receive cumulative dividends of $0.035797, and the holders of Series B and Series C preferred stock are entitled to receive noncumulative dividends of $0.1374 and $0.2778 per share, respectively, per annum prior to the payment of any dividends on common stock. At December 31, 1998, dividends in arrears for Series A preferred stock were approximately $373,000. However, as of December 31, 1998, no dividends have been declared by the Board of Directors. - In the event of liquidation, dissolution or winding up of the Company, Series A, Series B and Series C preferred stockholders shall receive $0.59662, $2.29, and $6.945 per share, respectively (aggregating approximately $1,274,000, $7,427,000 and $10,725,000 at December 31, 1998, respectively), plus all accrued but unpaid dividends; any remaining assets shall be distributed to the common stockholders. - The preferred stockholders have certain registration rights. F-12 90 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK In 1996, the Company entered into an agreement with the lessor of its principal facility to issue 110,000 shares of the Company's common stock valued at $0.23 per share in lieu of rent payments for the twelve-month period beginning September 1996. At December 31, 1996, 32,359 shares were subscribed under this agreement. All 110,000 shares were issued in 1997. An expense of $7,000 and $19,000 has been recorded in 1996 and 1997, respectively, related to the issuance of such shares. Rent expense has been recorded on a straight-line basis. During 1996 and 1997, the Company issued common stock to directors in their capacity as consultants (see Note 8). 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 the three months ended March 31, 1999 for the difference between the deemed fair value and the stock price of $1.65 per share. DEFERRED STOCK COMPENSATION In connection with grants of certain stock options and issuance of common stock in 1997, 1998 and in the three months ended March 31, 1999, the Company recorded $287,000, $2,266,000 and $987,000, 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 has been presented as a reduction of stockholders' equity and 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 year ended December 31, 1998 and three-month period ended March 31, 1999 was $331,000 and $504,000, respectively. 1994 STOCK PURCHASE PLAN Under the 1994 Stock Purchase Plan (the Plan), the Company may 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. During 1996 and 1997, the Company issued 304,325 and 212,995 shares of common stock, respectively, under the Plan. No shares were issued under the Plan in 1998. In 1996, the shares were issued at prices ranging from $0.06 to $0.23 per share, and in 1997 the shares were issued at $0.23 per share. 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 1996, 1997 and 1998, the Company repurchased 281,250, 237,056 and 23,081 shares, respectively, at prices ranging from $0.06 to $0.23 per share. At December 31, 1998, 55,697 shares were subject to repurchase and no shares were available for future grant. F-13 91 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1997 STOCK PLAN The Company has reserved 2,609,652 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. At December 31, 1998, 796,487 shares have been issued at $0.23 per share pursuant to restricted stock purchase agreements, 1,238,072 shares are reserved for exercise of issued and outstanding options, and 570,339 shares are available for future grant. 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, 1998, 574,167 shares were subject to repurchase. No shares were repurchased in 1997 or 1998. 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). 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, 1997................... -- $ -- Granted (weighted average fair value of $0.08).................................... 424,250 0.23 Canceled..................................... (12,000) 0.23 --------- ----- Outstanding, December 31, 1997 (none exercisable)................................. 412,250 0.23 Granted (weighted average fair value of $2.49).................................... 943,572 0.51 Exercised.................................... (4,754) 0.23 Canceled..................................... (112,996) 0.23 --------- ----- Outstanding, December 31, 1998................. 1,238,072 0.46 Granted...................................... 204,288 1.65 Exercised.................................... (25,342) 0.23 Canceled..................................... (28,982) 0.45 --------- ----- Outstanding, March 31, 1999.................... 1,388,036 $0.64 ========= =====
F-14 92 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additional information regarding options outstanding as of December 31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED RANGE OF REMAINING WEIGHTED AVERAGE EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE - -------- ----------- ---------------- -------------- ----------- ----------- $0.23................ 300,500 8.7 $0.23 114,016 $0.23 0.50................ 790,072 9.5 0.50 3,572 0.50 0.60................ 98,500 9.8 0.60 -- -- 1.00................ 49,000 10.0 1.00 -- -- - --------------------- --------- ---- ----- ------- ----- $0.23-$1.00 1,238,072 9.2 $0.46 117,588 $0.24 ===================== ========= ==== ===== ======= =====
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 minimum value option pricing model with the following weighted average assumptions: expected life, 24 months following vesting in 1997 and 1998; risk free interest rate, 6.0% in 1997 and 5.5% in 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 1997 and 1998 awards 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 year ended December 31, 1998, as discussed above) would have been approximately $4.7 million ($0.73 per basic and diluted share) in 1997 and $4.4 million ($0.63 per basic and diluted share) in 1998. WARRANTS In December 1995, in conjunction with a capital lease agreement (see Note 3), the Company issued a warrant to purchase up to 55,556 shares of common stock at $0.90 per share. The warrant expires in December 2001. In February 1996, in connection with a line of credit agreement with a bank, a warrant was issued to the bank to purchase up to 25,000 shares of common stock at $0.90 per share. The warrant expires in February 2001. The line of credit expired in April 1997. The aggregate fair value of such warrants was insignificant. F-15 93 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK RESERVED At December 31, 1998, the Company has reserved shares of common stock for issuance as follows: Conversion of preferred stock....................... 6,922,184 Issuances available under 1997 Stock Plan........... 570,339 Exercise of options................................. 1,238,072 Exercise of warrants................................ 80,556 --------- Total.......................................... 8,811,151 =========
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 THREE MONTHS ENDED DECEMBER 31, MARCH 31, --------------------------- ------------------- 1996 1997 1998 1998 1999 ------- ------- ------- -------- -------- Net loss (numerator), basic and diluted....................... $(3,311) $(4,674) $(4,089) $(1,704) $(1,915) ======= ======= ======= ======= ======= Shares (denominator): Weighted average common shares outstanding................ 6,818 6,869 7,644 7,651 7,688 Weighted average common shares outstanding subject to repurchase................. (683) (503) (765) (918) (644) ------- ------- ------- ------- ------- Shares used in computation, basic and diluted.......... 6,135 6,366 6,879 6,733 7,044 ======= ======= ======= ======= ======= Net loss per share, basic and diluted....................... $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27) ======= ======= ======= ======= =======
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 F-16 94 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following:
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------------------ ----------------------- 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- Convertible preferred stock................ 5,372,707 5,809,872 6,992,184 5,809,872 7,697,885 Shares of common stock subject to repurchase........... 544,914 946,790 629,864 889,438 657,496 Outstanding options.... -- 412,250 1,238,072 412,250 1,388,036 Warrants............... 80,556 80,556 80,556 80,556 80,556 ---------- ---------- ---------- ---------- ---------- Total............. 5,998,117 7,249,468 8,940,676 7,192,116 9,823,973 ========== ========== ========== ========== ========== Weighted average exercise price of options.............. $ -- $ 0.23 $ 0.46 $ 0.23 $ 0.64 ========== ========== ========== ========== ========== Weighted average exercise price of warrants............. $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90 ========== ========== ========== ========== ==========
7. INCOME TAXES The Company's deferred income tax assets are comprised of the following at December 31:
1997 1998 ------- ------- (IN THOUSANDS) Net deferred tax assets: Net operating loss carryforwards................. $ 2,759 $ 4,113 Accruals deductible in different periods......... 324 941 General business credits......................... 382 890 Depreciation and amortization.................... 39 119 ------- ------- 3,504 6,063 Valuation allowance.............................. (3,504) (6,063) ------- ------- 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 benefits of its favorable tax attributes in future tax returns, as of December 31, 1997 and 1998, the Company has fully reserved its net deferred tax assets of approximately $3,504,000 and $6,063,000, respectively. F-17 95 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's effective rate differs from the expected benefit at the federal statutory tax rate at December 31 as follows:
1996 1997 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..................... -- -- 2.8 Other.......................................... 0.3 0.1 0.3 Valuation allowance............................ 40.7 40.9 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, 1998, the Company has net operating loss (NOL) carryforwards of approximately $10,840,000 and $3,606,000 for federal and state income tax purposes, respectively. The federal NOL carryforwards expire through 2018, while the state NOL carryforwards expire through 2003. 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, 1998, the Company also has research and development credit carryforwards of approximately $570,000 and $320,000 available to offset future federal and state income taxes, respectively. The federal credit carryforward expires in 2018, 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 1996, the Company recognized revenue of $24,000 from a stockholder. Also during 1996, the Company entered into a technology development and license agreement with a stockholder. Such stockholder paid the Company a purchase advance of $50,000 and granted the Company a source code license to incorporate specific technology into products developed for such stockholder and other commercial uses. During 1997, the Company recognized revenue of $300,000 and $250,000 from a Series B and a Series C preferred stockholder, respectively. At December 31, 1997, the Company had deferred revenue of $750,000 from the same Series C preferred stockholder. 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. At December 31, 1998, the Company had accounts receivable of $101,000 from the Series B preferred stockholder. F-18 96 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1996, 1997 and 1998, the Company paid $18,000 to a director for consulting services and in 1997 and 1998 paid $18,700 and $20,500, respectively, to another director for consulting services. During 1996 and 1997, the Company sold 29,060 and 10,300 shares of common stock, respectively, at a purchase price of $0.23 per share to these two directors in connection with consulting services rendered. No compensation expense was recorded for the sale of this common stock as the purchase price was equal to the fair market value of the common stock on the date of sale. 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. 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, THREE MONTHS ENDED MARCH 31, -------------------------------------------------------- -------------------------------- 1996 1997 1998 1998 1999 -------- --------------------- --------------------- -------- --------------------- REVENUES REVENUES LONG-LIVED REVENUES LONG-LIVED REVENUES REVENUES LONG-LIVED (IN THOUSANDS) (1) (1) ASSETS (1) ASSETS (1) (1) ASSETS - -------------- -------- -------- ---------- -------- ---------- -------- -------- ---------- United States.............. $3,208 $4,774 $832 $ 7,223 $673 $1,320 $2,237 $626 Europe..................... 528 511 5 2,866 50 379 603 50 Rest of the world.......... 38 128 -- 71 -- 11 23 -- ------ ------ ---- ------- ---- ------ ------ ---- $3,774 $5,413 $837 $10,160 $723 $1,710 $2,863 $676 ====== ====== ==== ======= ==== ====== ====== ====
- ------------------------- (1) Revenues are broken out geographically by the ship-to location of the customer. SIGNIFICANT CUSTOMERS During 1996, three unrelated customers accounted for 11%, 11% and 10% of the Company's total revenues, respectively. During 1997, an unrelated customer accounted for 11% of total revenues. During 1998, one customer (a Series C preferred stockholder) accounted for 14% of total revenues. Additionally, an unrelated customer accounted for 17% of total revenues. Subsequent to 1998, an entity affiliated with this customer purchased Series D preferred stock -- See Note 11. At December 31, 1997, two unrelated customers accounted for 25% and 17% of accounts receivable, respectively. At December 31, 1998, three unrelated customers each account for 14% 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-19 97 PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SUBSEQUENT EVENTS In February and March 1999, the Company received net proceeds of approximately $4,142,000 from the sale of 775,701 shares of Series D preferred stock at $5.35 per share. Also, in February 1999, the Company sold 90,300 shares of common stock to a customer and Series D preferred stockholder at $1.65 per share. The Series D preferred stockholders are entitled to receive noncumulative dividends of $0.321 per share per annum when declared by the Board of Directors prior to the payment of any dividends on common stock. In the event of liquidation, dissolution or winding up of the Company, Series D preferred stockholders will receive a liquidation preference of $5.35 per share (aggregating approximately $4,150,000) plus all accrued and unpaid dividends. Other significant terms of the Series D preferred stock regarding conversion to common stock, voting rights and registration rights are similar to those described in the Note 5. In April 1999, the Board of Directors approved, subject to stockholder approval, the following: - Reincorporation of the Company in the state of Delaware. - An amendment to the 1997 Stock Plan to increase the number of authorized shares reserved for issuance by 3,000,000 and to provide for an automatic annual increase on the first day of each fiscal year beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 650,000 shares, 3.5% 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. The amendment is effective upon the closing of the Company's initial public offering. - The Company's 1999 Employee Stock Purchase Plan (the "ESPP") and the 1999 Directors' Stock Option Plan (the "Directors' Plan"). The Plans become effective upon the closing of the Company's initial public offering. 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 will be reserved for issuance under the ESPP plus an automatic annual increase on the first day of each of the fiscal years beginning in 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. Under the Directors' Plan, a total of 500,000 shares of common stock has 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. - An increase of authorized shares of common stock to 75,000,000 shares and creation of newly undesignated preferred stock totaling 5,000,000 shares, contingent upon the approval of the reincorporation of the Company in Delaware and the closing of the Company's initial public offering. * * * * * F-20 98 GATEFOLD COVER: [Graphic: Company logo together with "The Engine for E-Commerce"] Inside Gatefold cover: [Graphic: Depiction of first generation application server, labeled "Traffic Cop," which can only manage access to centralized corporate resources] Inside front cover: [Graphic: Depiction of next generation transactional application servers, labeled "Digital Emissary," which allows companies to integrate processing across organizational boundaries] p. 39: [GRAPHIC: Depiction of PowerTier for EJB with two businesses communicating to each other through the firewall by using the PowerSync feature] Back Inside cover: [Graphic: brief descriptions of four case studies, describing customers' use of PowerTier] 99 Persistence Logo UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 100 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Persistence in connection with the sale of common stock being registered. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ---------- Securities and Exchange Commission registration fee......... $ 11,509 NASD filing fee............................................. 4,640 Nasdaq National Market listing fee.......................... 95,000 Printing and engraving expenses............................. 135,000 Legal fees and expenses..................................... 350,000 Accounting fees and expenses................................ 250,000 Blue Sky qualification fees and expenses.................... 5,000 Transfer Agent and Registrar fees........................... 15,000 Miscellaneous fees and expenses............................. 33,851 -------- Total............................................. 900,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware Law") authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article XIII of our certificate of incorporation (Exhibit 3.2) and Article VI of our bylaws (Exhibit 3.4) provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, we have entered into indemnification agreements (Exhibit 10.11) with our officers and directors. The underwriting agreement (Exhibit 1.1) also provides for cross-indemnification among us and the underwriters with respect to matters specified in the agreements, including matters arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since March 31, 1996, Persistence has sold and issued the following securities: 1. On April 14, 1996, we sold 1,000 shares of Series B preferred stock to one accredited investor for aggregate consideration of $2,290.00. 2. On November 27, 1996, we sold 1,484,716 shares of Series B preferred stock to one accredited investor for aggregate consideration of $3,399,999.64. 3. On June 10, 1997, we sold 4,000 shares of Series B preferred stock to one accredited investor for aggregate consideration of $9,160.00. 4. On December 31, 1997, we sold 431,965 shares of Series C preferred stock to one accredited investor for aggregate consideration of $1,999,997.95. II-1 101 5. On August 13, 1998 we sold an aggregate of 1,112,312 shares of Series C preferred stock to 12 accredited investors for aggregate consideration of $5,150,004.56. 6. On February 19, 1999, we sold 560,748 shares of Series D preferred stock to one accredited investor for aggregate consideration of $3,000,001.80 and 90,300 shares of common stock to the same accredited investor for aggregate consideration of $148,995. 7. On March 29, 1999, we sold 214,953 shares of Series D preferred stock to two accredited investors for aggregate consideration of $1,149,998.55. 8. Since March 31, 1996, we have issued stock purchase rights to purchase an aggregate of 1,234,807 shares of common stock under the 1994 Stock Purchase Plan and 1997 Stock Plan to our employees, directors and consultants. 9. Since March 31, 1996, we have issued options to purchase an aggregate of 2,368,597 shares of common stock under the 1997 Stock Plan to our employees, directors and consultants. The issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. In addition, the issuances described in Item 9 were deemed exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under the Securities Act. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution of securities and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement (subject to negotiation). 3.1++ Amended and Restated Articles of Incorporation of Persistence. 3.2++ Amended and Restated Certificate of Incorporation of Persistence (as proposed). 3.3++ Amended and Restated Bylaws of Persistence. 3.4 Amended and Restated Bylaws of Persistence (as proposed). 4.1** Specimen Stock Certificate. 5.1** Opinion of Venture Law Group regarding the legality of the common stock being registered. 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. 10.3* Fourth Amended and Restated Co-Sale Agreement dated February 19, 1999 among Persistence and certain investors. 10.4* Form of Change of Control Agreement between Persistence and each of Alan Cohen, Mark Douglas, Erik Frieberg, Barry Goss, Christine Russell and Laurence Hootnick.
II-2 102
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.5* 1994 Stock Purchase Plan 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. 23.2** Consent of Attorney (See Exhibit 5.1). 24.1 Power of Attorney (See page II-6). 27.1* Financial Data Schedule.
- ------------------------- * Previously filed. ** To be filed by amendment. + Confidential treatment requested as to certain portions of this exhibit. ++ Supersedes exhibit previously filed. (b) FINANCIAL STATEMENT SCHEDULES (1) Schedule II -- Valuation and Qualifying Accounts. Schedules not listed above have been omitted because the information required to be set forth in those schedules is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 103 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 104 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Mateo, State of California, on June 2, 1999. PERSISTENCE SOFTWARE, INC. By: Christopher T. Keene* ----------------------------------- Christopher T. Keene Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- Christopher T. Keene* Chairman of the Board and June 2, 1999 - --------------------------------------------- Chief Executive Officer Christopher T. Keene (Principal Executive Officer) /s/ CHRISTINE RUSSELL Chief Financial Officer June 2, 1999 - --------------------------------------------- (Principal Financial and Christine Russell Accounting Officer) Gregory Ennis* Director June 2, 1999 - --------------------------------------------- Gregory Ennis Jack Hancock* Director June 2, 1999 - --------------------------------------------- Jack Hancock William J. Harding* Director June 2, 1999 - --------------------------------------------- William J. Harding Laurence R. Hootnick* Director June 2, 1999 - --------------------------------------------- Laurence R. Hootnick Merritt Lutz* Director June 2, 1999 - --------------------------------------------- Merritt Lutz
II-5 105
SIGNATURE TITLE DATE --------- ----- ---- Joseph P. Roebuck* Director June 2, 1999 - --------------------------------------------- Joseph P. Roebuck Jeffrey T. Webber* Director June 2, 1999 - --------------------------------------------- Jeffrey T. Webber *By: /s/ CHRISTINE RUSSELL ---------------------------------------- Christine Russell Attorney-in-Fact
II-6 106 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Christopher Keene and Christine Russell and each of them, as his or her attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this Registration Statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement.
SIGNATURE TITLE DATE --------- ----- ---- /s/ LAURENCE R. HOOTNICK President and Director June 2, 1999 - --------------------------------------------- Laurence R. Hootnick /s/ JOSEPH P. ROEBUCK Director June 2, 1999 - --------------------------------------------- Joseph P. Roebuck
II-7 107 INDEPENDENT AUDITORS' REPORT ON SCHEDULE To the Board of Directors and Stockholders of Persistence Software, Inc.: Our audits of the consolidated financial statements of Persistence Software, Inc. (the Company) for the years ended December 31, 1996, 1997 and 1998 also included the financial statement schedule of the Company, listed in Item 16(b). The 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 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 March 2, 1999 S-1 108 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BEGINNING CHARGED TO COST DEDUCTIONS/ BALANCE AT OF PERIOD AND EXPENSES WRITE-OFFS END OF PERIOD ---------- --------------- ----------- ------------- Year ended December 31, 1996 Allowance for doubtful accounts................... $25,000 $ -- $ -- $25,000 ======= ======== ======= ======= Year ended December 31, 1997 Allowance for doubtful accounts................... $25,000 $131,000 $81,000 $75,000 ======= ======== ======= ======= Year ended December 31, 1998 Allowance for doubtful accounts................... $75,000 $ -- $28,000 $47,000 ======= ======== ======= =======
S-2 109 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement (subject to negotiation). 3.1++ Amended and Restated Articles of Incorporation of Persistence. 3.2++ Amended and Restated Certificate of Incorporation of Persistence (as proposed). 3.3++ Amended and Restated Bylaws of Persistence. 3.4 Amended and Restated Bylaws of Persistence (as proposed). 4.1** Specimen Stock Certificate. 5.1** Opinion of Venture Law Group regarding the legality of the common stock being registered. 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. 10.3* Fourth Amended and Restated Co-Sale Agreement dated February 19, 1999 among Persistence and certain investors. 10.4* Form of Change of Control Agreement between Persistence and each of Alan Cohen, Mark Douglas, Erik Frieberg, Barry Goss, Christine Russell and Laurence Hootnick. 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. 23.2** Consent of Attorney (See Exhibit 5.1). 24.1 Power of Attorney (See page II-6). 27.1* Financial Data Schedule.
- ------------------------- * Previously filed. ** To be filed by amendment. + Confidential treatment requested as to certain portions of this exhibit. ++ Supersedes exhibit previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 UNDERWRITING AGREEMENT June __, 1999 BancBoston Robertson Stephens Inc. U.S. Bancorp Piper Jaffray Inc. SoundView Technology Group, Inc. As Representatives of the several Underwriters c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: INTRODUCTORY. Persistence Software, Inc., a Delaware corporation (the "Company), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares") of its Common Stock, par value $0.001 per share (the "Common Shares"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional [___] Common Shares (the "Option Shares") as provided in Section 2. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares". BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and SoundView Technology Group, Inc. have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-76867), which contains a form of prospectus to be used in connection with the public offering and sale of the Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of BancBoston Robertson Stephens Inc., elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated ____________, 1999 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared 2 and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to each Representative one complete conformed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined 2. 3 below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Shares to Be Sold by the Company. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. Deloitte & Touche, LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting 3. 4 schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary -- Summary Selected Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Company's Accounting System. The Company and each of its subsidiaries maintain a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) Subsidiaries of the Company. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21.1 to the Registration Statement. (l) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction in which it is organized with full corporate power and authority to own its properties and conduct its business as described in the prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification. (m) Capitalization of the Subsidiaries. All the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances. (n) No Prohibition on Subsidiaries from Paying Dividends or Making Other Distributions. No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus. (o) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Shares (including the Shares) conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding Common Shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal or other 4. 5 similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (p) Stock Exchange Listing. The Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (q) No Consents, Approvals or Authorizations Required. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the National Association of Securities Dealers, LLC and (iii) by the federal and provincial laws of Canada. (r) Non-Contravention of Existing Instruments Agreements. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or bound or to which its or their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its subsidiaries or any of its or their properties. (s) No Defaults or Violations. Neither the Company nor any subsidiary is in violation or default of (i) any provision of its charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a Material Adverse Change except as otherwise disclosed in the Prospectus. (t) No Actions, Suits or Proceedings. Except as otherwise disclosed in the Prospectus, no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a Material Adverse Effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. 5. 6 (u) All Necessary Permits, Etc. Except as otherwise disclosed in the Prospectus, the Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (v) Title to Properties. Except as otherwise disclosed in the Prospectus, the Company and each of its subsidiaries has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (w) Tax Law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined. The Company is not aware of any tax deficiency that has been or might be asserted or threatened against the Company that could result in a Material Adverse Change. (x) Intellectual Property Rights. Each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a Material Adverse Change that is not otherwise disclosed in the Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Change. There is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company and its subsidiaries do not in the conduct of their business as now or proposed to be conducted as described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its 6. 7 subsidiaries, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (y) Year 2000 Preparedness. There are no issues related to the Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act which have not been accurately described in the Registration Statement or Prospectus, or (ii) might reasonably be expected to result in any Material Adverse Change or that might materially affect their properties, assets or rights. All internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products and each Constituent Component (as defined below) of those products of the Company and each of its subsidiaries fully comply with Year 2000 Qualification Requirements. "Year 2000 Qualifications Requirements" means that the internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products and each Constituent Component (as defined below) of those products of the Company and each of its Subsidiaries (i) have been reviewed to confirm that they store, process (including sorting and performing mathematical operations, calculations and computations), input and output data containing date and information correctly regardless of whether the date contains dates and times before, on or after January 1, 2000, (ii) have been designated to ensure date and time entry recognition and calculations, and date data interface values that reflect the century, (iii) accurately manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and will not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates, (iv) accurately process any date rollover, and (v) accept and respond to two-digit year date input in a manner that resolves any ambiguities as to the century. "Constituent Component" means all software (including operating systems, programs, packages and utilities), firmware, hardware, networking components, and peripherals provided as part of the configuration. The Company has inquired of material vendors as to their preparedness for the Year 2000 and has disclosed in the Registration Statement or Prospectus any issues that might reasonably be expected to result in any Material Adverse Change. (z) No Transfer Taxes or Other Fees. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the shares. (aa) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (bb) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes, general liability and Directors and Officers liability. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from 7. 8 similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (cc) Labor Matters. To the best of Company's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, value added resellers, subcontractors, original equipment manufacturers, authorized dealers or international distributors that might be expected to result in a Material Adverse Change. (dd) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (ee) Lock-Up Agreements. Each officer and director of the company and each beneficial owner of one or more percent of the outstanding issued share capital of the Company has agreed to sign an agreement substantially in the form attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. The Company hereby represents and warrants and agrees that it will not release any of its officers, directors or other securityholders from any Lock-up Agreements currently existing or hereafter effected, without the prior written consent of BancBoston Robertson Stephens Inc. (ff) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. (gg) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (hh) Environmental Laws. (i) the Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, except where the failure to comply would not result in a Material Adverse Change, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant 8. 9 to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (ii) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) The Firm Shares. The Company agrees to issue and sell to the several Underwriters the Firm Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on Schedule A. The purchase price per Firm Share to be paid by the several Underwriters to the Company shall be $___ per share. (b) The First Closing Date. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 6:00 a.m. San Francisco time, at the offices of Venture Law Group, 2775 Sand Hill Road, Menlo Park, CA 94025 (or at such other place as may be agreed upon among the Representatives and the Company), (i) on the third (3rd) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later that seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 2(g) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. 9. 10 (c) The Option Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of [___] Option Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Public Offering of the Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) Payment for the Shares. Payment for the Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer in immediately available-funds to the order of the Company. It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. BancBoston Robertson Stephens Inc., individually and not as a Representative of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) Delivery of the Shares. The Company shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company, as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered a credit representing the Option Shares the Underwriters have agreed to purchase at the First Closing Date (or the Second Closing Date, as the case may be), to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the 10. 11 time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) Registration Statement Matters. The Company will (i) use its best efforts to cause a registration statement on Form 8-A (the "Form 8-A Registration Statement") as required by the Securities Exchange Act of 1934 (the "Exchange Act") to become effective simultaneously with the Registration Statement, (ii) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (iii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) Securities Act Compliance. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) Blue Sky Compliance. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) Amendments and Supplements to the Prospectus and Other Securities Act Matters. The Company will comply with the Securities Act and the Exchange Act, and the rules 11. 12 and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (f) Insurance. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby and (ii) shall cause BancBoston Robertson Stephens Inc. to be added as an additional insured to such policy in respect of the offering contemplated hereby. (g) Notice of Subsequent Events. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Company Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (h) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Company Shares. (j) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending [the date that is first quarter ending after one year following the effective date] that satisfies the provisions of Section 11(a) of the Securities Act. 12. 13 (k) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) Agreement Not to Offer or Sell Additional Securities. The Company will not, without the prior written consent of BancBoston Robertson Stephens Inc., for a period of 180 days following the date of the Prospectus, offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other Common Shares or any securities convertible into, or exchangeable for, Common Shares; provided, however, that the Company may (i) issue and sell Common Shares pursuant to any director or employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus and described in the Prospectus so long as none of those shares may be transferred on during the period of 180 days from the date that the Registration Statement is declared effective (the "Lock-Up Period") and the Company shall enter stop transfer instructions with its transfer agent and registrar against the transfer of any such Common Shares and (ii) the Company may issue Common Shares issuable upon the conversion of securities or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus. (m) Future Reports to the Representatives. During the period of five years hereafter the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the National Association of Securities Dealers, LLC or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) Compliance with Registration Requirements; No Stop Order; No Objection from the National Association of Securities Dealers, LLC. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' 13. 14 Counsel; and the National Association of Securities Dealers, LLC shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) Corporate Proceedings. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change in the condition (financial or otherwise), earnings, operations, business or prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) Opinion of Counsel for the Company. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Venture Law Group, counsel for the Company substantially in the form of Exhibit B attached hereto, dated the First Closing Date, or the Second Closing Date, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. Counsel rendering the opinion contained in Exhibit B may rely as to questions of law not involving the laws of the United States, the State of New York or the State of California or general corporate laws of the State of Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) [Opinion of Patent Counsel for the Company]. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of [NAME OF PATENT COUNSEL], patent counsel for the Company substantially in the form of Exhibit C attached hereto.] (f) Opinion of Counsel for the Underwriters. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Brobeck, Phleger & Harrison LLP, substantially in the form of Exhibit D hereto. The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (g) Accountants' Comfort Letter. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from Deloitte & Touche, LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the 14. 15 execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four (4) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Deloitte & Touche, LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of December 31, 1998 and related consolidated statements of operations, shareholders' equity, and cash flows for the twelve (12) months ended December 31, 1998, (iii) state that Deloitte & Touche, LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Deloitte & Touche, LLP as described in SAS 71 on the financial statements for [each of the quarters in the ____] quarter period ended [March 31], 1999 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, (v) state that Deloitte & Touche, LLP has performed the procedures set out in Statement on Auditing Standards No. 86 with respect to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Prospectus and (vi) address other matters agreed upon by Deloitte & Touche, LLP and you. In addition, you shall have received from Deloitte & Touche, LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of December 31, 1998, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (h) Officers' Certificate. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; 15. 16 (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto contained all material information required to be included therein by the Securities Act and in all material respects conformed to the requirements of the Securities Act, the Registration Statement and the Prospectus, and any amendments or supplements thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or prospects of the Company and its subsidiaries considered as one enterprise. (i) Lock-up Agreement from Certain Stockholders of the Company. The Company shall have obtained and delivered to you an agreement substantially in the form of Exhibit A attached hereto from each officer and director of the Company, and each beneficial owner of one or more percent of the outstanding issued share capital of the Company. (j) Stock Exchange Listing. The Shares shall have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (k) Compliance with Prospectus Delivery Requirements. The Company shall have complied with the provisions of Sections 2(g) and 3(e) hereof with respect to the furnishing of Prospectuses. (l) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the 16. 17 representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the National Association of Securities Dealers, LLC review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the preparation and undertaking of "road show" preparations to be made to prospective investors, and (x) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 7, Section 8, Section 9, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but 17. 18 not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. INDEMNIFICATION AND CONTRIBUTION. (a) Indemnification of the Underwriters. The Company shall indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so 18. 19 to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Information Provided by the Underwriters. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the first paragraph, the second paragraph and the ninth paragraph under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. (d) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the 19. 20 indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (e) Settlements. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) Contribution. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such 20. 21 relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) Timing of Any Payments of Indemnification. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than thirty (30) days of invoice to the indemnifying party. (h) Survival. The indemnity and contribution agreements contained in this Section 7 and the representation and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) Acknowledgements of Parties. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of 21. 22 the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, and Section 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the National Association of Securities Dealers, LLC; (ii) a general banking moratorium shall have been declared by any of federal, New York or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of 22. 23 the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 9 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. SECTION 11. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: BANCBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 Facsimile: (415) 676-2696 Attention: General Counsel If to the Company: Persistence Software, Inc. 1720 S. Amphlett Blvd. San Mateo, California 94402 Facsimile: (650) 577-1725 Attention: Chief Financial Officer Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 9 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 23. 24 SECTION 14. GOVERNING LAW PROVISIONS. (a) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the state of California applicable to agreements made and to be performed in such state. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. (c) Waiver of Immunity. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. 24. 25 [The remainder of this page has been intentionally left blank.] 25. 26 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company [and the Custodian] the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, PERSISTENCE SOFTWARE, INC. By: --------------------------------------------- [Title] The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. BANCBOSTON ROBERTSON STEPHENS INC. U.S. BANCORP PIPER JAFFRAY INC. SOUNDVIEW TECHNOLOGY GROUP, INC. On their behalf and on behalf of each of the several underwriters named in Schedule A hereto. BY BANCBOSTON ROBERTSON STEPHENS INC. By: --------------------------------- Authorized Signatory 26. 27 SCHEDULE A
NUMBER OF FIRM COMMON UNDERWRITERS SHARES TO BE PURCHASED ------------ ---------------------- BANCBOSTON ROBERTSON STEPHENS INC. ................. [___] U.S. BANCORP PIPER JAFFRAY INC...................... [___] SOUNDVIEW TECHNOLOGY GROUP, INC..................... [___] .................................................... [___] .................................................... [___] Total...................................... [___]
B-1 28 EXHIBIT A LOCK-UP AGREEMENT B-2 29 EXHIBIT B MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL (i) The Company and each Significant Subsidiary (as that term is defined in Regulation S-X of the Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company and each Significant Subsidiary has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company and each Significant Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than [list subsidiaries]; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (v) All issued and outstanding shares of capital stock of each Significant Subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; (vi) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. (vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (viii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as enforceability B-3 30 may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (ix) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (x) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (xi) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (xii) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; (xiii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Securities Act; (xiv) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement, which are not described or referred to therein or filed as required; (xv) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; B-4 31 (xvi) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, (iii) such as may be required by the National Association of Securities Dealers, LLC and (iv) such as may be required under the federal or provincial laws of Canada; (xvii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Securities Act other than those described therein; (xviii) To such counsel's knowledge, neither the Company nor any of its subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; and (xix) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Company Shares or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Company Shares or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. (xx) The Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xxi) To such counsel's knowledge, the Company owns or possesses sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their business as now conducted; and the expected expiration of any such Intellectual Property Rights would not result in a Material Adverse Effect. The Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Effect. To such counsel's knowledge, the Company's discoveries, inventions, products, or processes referred to in the Registration Statement or Prospectus do not infringe or conflict with any right or patent which is the subject of a patent application known to the Company. B-5 32 In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-6 33 EXHIBIT C MATTERS TO BE COVERED IN THE OPINION OF PATENT COUNSEL FOR THE COMPANY Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, trademarks, service marks or other proprietary information or materials and: (i) The Company is listed in the records of the United States Patent and Trademark Office as the holder of record of the patents listed on a schedule to such opinion (the "Patents") and each of the applications listed on a schedule to such opinion (the "Applications"). To the knowledge of such counsel, there are no claims of third parties to any ownership interest or lien with respect to any of the Patents or Applications. Such counsel is not aware of any material defect in form in the preparation or filing of the Applications on behalf of the Company. To the knowledge of such counsel, the Applications are being pursued by the Company. To the knowledge of such counsel, the Company owns as its sole property the Patents and pending Applications; (ii) The Company is listed in the records of the appropriate foreign offices as the sole holder of record of the foreign patents listed on a schedule to such opinion (the "Foreign Patents") and each of the applications listed on a schedule to such opinion (the "Foreign Applications"). Such counsel knows of no claims of third parties to any ownership interest or lien with respect to the Foreign Patents or Foreign Applications. Such counsel is not aware of any material defect of form in the preparation or filing of the Foreign Applications on behalf of the Company. To the knowledge of such counsel, the Foreign Applications are being pursued by the Company. To the knowledge of such counsel, the Company owns as its sole property the Foreign Patents and pending Foreign Applications; (iii) Such counsel knows of no reason why the Patents or Foreign Patents are not valid as issued. Such counsel has no knowledge of any reason why any patent to be issued as a result of any Application or Foreign Application would not be valid or would not afford the Company useful patent protection with respect thereto; (iv) As to the statements under the captions "Risk Factors -- Dependence on Patents and Proprietary Rights" and "Business -- Patents and Proprietary Rights," nothing has come to the attention of such counsel which caused them to believe that the above-mentioned sections of the Registration Statement, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Stock are to be purchased the Registration Statement and any amendment or supplement thereto made available and reviewed by such counsel contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Stock are to be purchased, as the case may be, the above-mentioned sections of the Registration Statement, Prospectus and any amendment or supplement thereto made available and reviewed by such counsel contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make C-1 34 the statements therein, in light of the circumstances under which they were made, not misleading; and (v) Such counsel knows of no material action, suit, claim or proceeding relating to patents, patent rights or licenses, trademarks or trademark rights, copyrights, collaborative research, licenses or royalty arrangements or agreements or trade secrets, know-how or proprietary techniques, including processes and substances, owned by or affecting the business or operations of the Company which are pending or threatened against the Company or any of its officers or directors. C-2 35 EXHIBIT D MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL (i) The Firm Shares have been duly authorized and, upon issuance and delivery and payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. (ii) The Registration Statement complied as to form in all material respects with the requirements of the Act; the Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or threatened or are pending under the Act. (iii) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (iv) The Underwriting Agreement has been duly authorized, executed and delivered by the Company. Such counsel shall state that such counsel has reviewed the opinions addressed to the Representatives from [list each set of counsel that has provided an opinion], each dated the date hereof, and furnished to you in accordance with the provisions of the Underwriting Agreement. Such opinions appear on their face to be appropriately responsive to the requirements of the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. EX-3.1 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PERSISTENCE SOFTWARE, INC., a California corporation The undersigned Christopher Keene and Christine Russell hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of Persistence Software, Inc., a California corporation (the "Corporation"). 2. The Articles of Incorporation of the Corporation, as amended or supplemented to the date of the filing of these Restated Articles of Incorporation, including amendments set forth herein but not separately filed (and with the omissions required by Section 910 of the California Corporations Code), are amended and restated in their entirety as in Appendix I attached hereto. 3. The amendments and restatements herein set forth have been duly approved by the Board of Directors of the Corporation. 4. The amendments herein set forth have been duly approved by the required vote of the shareholders of the Corporation in accordance with Sections 902 and 903 of the California Corporations Code. The total number of outstanding shares entitled to vote with respect to the foregoing amendments was 7,750,222 shares of Common Stock, par value $.001 per share, 2,134,715 shares of Series A Preferred Stock, par value $.001 per share, 3,243,192 shares of Series B Preferred Stock, par value $.001 per share, 1,544,277 shares of Series C Preferred Stock, par value $.001 per share, and 775,701 shares of Series D Preferred Stock, par value $.001 per share. The number of shares voting in favor of the foregoing amendments equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock and Preferred Stock, voting together, two-thirds (66 2/3%) of the outstanding shares of Preferred Stock, voting as a separate class, and a majority of the outstanding shares of Series C Preferred Stock, voting as a separate series. 2 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at San Mateo, California, on May 25, 1999. /s/ Christopher Keene ------------------------------------------ Christopher Keene, President /s/ Christine Russell ------------------------------------------ Christine Russell, Secretary -2- 3 Appendix I AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PERSISTENCE SOFTWARE, INC. a California corporation ARTICLE I NAME The name of this corporation is Persistence Software, Inc. (the "Corporation"). ARTICLE II PURPOSES The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III CAPITAL STOCK The total number of shares of all classes of stock which the Corporation is authorized to issue is forty-nine million (49,000,000) shares, consisting of forty-one million one hundred thousand (41,100,000) shares of Common Stock, par value $0.001 per share, and seven million nine hundred thousand (7,900,000) shares of Preferred Stock. The Preferred Stock shall be issued in four series. The first series of Preferred Stock shall be designated Series A Preferred Stock and shall consist of two million one hundred thirty-four thousand seven hundred fifteen (2,134,715) shares, par value $0.001 per share, the second series of Preferred Stock shall be designated Series B Preferred Stock and shall consist of three million two hundred forty-three thousand one hundred ninety-two (3,243,192) shares, par value $0.001 per share, the third series of Preferred Stock shall be designated Series C Preferred Stock and shall consist of one million five hundred forty-four thousand two hundred seventy-seven (1,544,277) shares, par value $0.001 per share, and the fourth series of Preferred Stock shall be designated Series D Preferred Stock and shall consist of seven hundred seventy-five thousand seven hundred one (775,701) shares, par value $0.001 per share. The relative rights, preferences, privileges and restrictions granted to or imposed on the respective series or classes of capital stock or the holders thereof are as follows: Section 1. Dividends. The holders of Series A Preferred Stock shall be entitled to receive cumulative dividends, prior to the payment of any dividends on the Common Stock, at the rate of $0.035797 per annum per share of Series A Preferred Stock then held by them, the holders of Series B Preferred Stock shall be entitled to receive noncumulative dividends, prior to 4 the payment of any dividends on the Common Stock, at the rate of $0.1374 per annum per share of Series B Preferred Stock then held by them, the holders of Series C Preferred Stock shall be entitled to receive noncumulative dividends, prior to the payment of any dividends on the Common Stock, at the rate of $0.2778 per annum per share of Series C Preferred Stock then held by them, and the holders of Series D Preferred Stock shall be entitled to receive noncumulative dividends, prior to the payment of any dividends on the Common Stock, at the rate of $0.321 per annum per share of Series D Preferred Stock then held by them, out of any funds legally available therefor, when and as declared by the Board of Directors or upon the event of any liquidation, dissolution or winding up of the Corporation. No dividends shall be paid to holders of Common Stock unless all accrued dividends on the Series A Preferred Stock have been declared and paid and all declared dividends on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock have been paid, and unless at the same time dividends equal to the dividends paid per share of Common Stock are declared and paid to holders of Preferred Stock based on the number of shares of Common Stock into which each share of Preferred Stock is then convertible, as adjusted from time to time pursuant to Section 4 hereof. Dividends, if paid or declared and set apart for payment, must be paid or declared and set apart for payment in full on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock contemporaneously, or, if less than full dividends are paid or declared and set apart for payment on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, the same percentage of dividends shall be paid or declared and set apart for payment on each such series of Preferred Stock, based on the aggregate dividend preference of each such series. Section 2. Liquidation Preference. (a) (i) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to (as such amount shall be adjusted to reflect subdivisions and combinations of shares and stock dividends), (i) with respect to each outstanding share of Series A Preferred Stock, $0.59662 (the "Original Series A Liquidation Price"), together with all accrued but unpaid dividends with respect to each such share (the "Series A Liquidation Amount"), (ii) with respect to each outstanding share of Series B Preferred Stock, $2.29 (the "Original Series B Liquidation Price"), together with all declared but unpaid dividends with respect to each such share (the "Series B Liquidation Amount"), (iii) with respect to each outstanding share of Series C Preferred Stock, $4.63 (the "Original Series C Liquidation Price"), together with all declared but unpaid dividends with respect to each such share (the "Series C Liquidation Amount"), and (iv) with respect to each outstanding share of Series D Preferred Stock, $5.35 (the "Original Series D Liquidation Price"), together with all declared but unpaid dividends with respect to each such share (the "Series D Liquidation Amount"). If the assets and funds legally available for distribution among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be insufficient to permit the payment to such 5 holders of the full preferential amount, then such assets and funds shall be distributed ratably among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock in proportion to the total preferential liquidation amount which each such holder is entitled to receive. (ii) Upon the completion of the distribution required by Section 2(a)(i) above, the remaining assets of the Corporation available for distribution to shareholders shall be distributed between the holders of the Series C Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such shares of Series C Preferred Stock) until the holders of Series C Preferred Stock shall have received an aggregate of $6.945 per share of Series C Preferred Stock held (including amounts paid pursuant to Section 2(a)(i) above) and; thereafter, if assets remain in the Corporation, the holders of the Common Stock of the Corporation shall receive all of the remaining assets of the Corporation pro rata based on the number of shares of Common Stock held by each. (b) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, and to include, (A) the Corporation's sale of all or substantially all of its assets or (B) the consolidation or merger of the Corporation with or into any other corporation or corporations or the effecting by the Corporation of a transaction or series of related transactions after the Original Issue Date, as hereinafter defined, in which the shareholders of record of the Company immediately prior to such transaction or series of related transactions will hold (by virtue of the voting securities issued as consideration for such transaction or series of related transactions) less than 50% of the voting securities of the surviving entity (or parent, if any) immediately after such transaction or series of related transactions. (ii) In any of such events, if the consideration received by the Corporation is other than cash or indebtedness its value will be deemed to be its fair market value. In the case of securities, fair market value shall be determined as follows: (A) Securities not subject to investment or other similar restrictions on free marketability: (I) If traded on a securities exchange, the value shall be deemed to be the average of the closing sale prices of the securities on such exchange over the 30-day period ending three (3) days prior to the closing; (II) If actively traded over-the-counter, the value shall be deemed to be the average of the closing sale prices over the 30-day period ending three (3) days prior to the closing; and (III) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of not less than a majority of the then-outstanding shares of Preferred Stock, based on the number of shares of Common Stock into which each share of Preferred Stock is convertible, as adjusted from time to time pursuant to Section 4 hereof. 6 (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in (A) (I), (II) or (III) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of a majority of the then-outstanding shares of Preferred Stock based on the number of shares of Common Stock into which each share of Preferred Stock is convertible, as adjusted from time to time pursuant to Section 4 hereof. (C) If such holders and the Corporation are unable to agree as to matters for which their agreement is called for in this Section 2(b)(ii), the value of such consideration shall be determined by two investment bankers owning seats on the New York Stock Exchange who have no past, present or contemplated relationship with the Corporation or the holders of the then-outstanding shares of Preferred Stock, one of whom shall be selected by the Corporation's Board of Directors and the other by the holders of a majority of the then-outstanding shares of Preferred Stock, voting together as a class, based on the number of shares of Common Stock into which each share of Preferred Stock is convertible, as adjusted from time to time pursuant to Section 4 hereof. Any such determination of value shall be final and binding on the Corporation and such holders. Section 3. Voting Rights. (a) General. Each holder of shares of Common Stock issued and outstanding shall have one vote for each such share and each holder of shares of Preferred Stock issued and outstanding shall have the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock are convertible at the record date for determination of the shareholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not separately as a class. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. Each holder of shares of Preferred Stock shall be entitled to receive notice, together with the holders of each share of Common Stock, of all shareholder meetings even if only the holders of Common Stock are entitled to vote on the issues addressed at such meeting. (b) Board of Directors. The authorized number of directors is set at eight (8) and may be increased or decreased only by an amendment to these Articles of Incorporation. At all elections of members of the Corporation's Board of Directors, each holder of shares of the Corporation's stock shall be entitled to as many votes as shall equal the number of votes which such holder would be entitled to cast for the election of directors with respect to such holder's shares of stock multiplied by the number of directors to be elected by such holder, and such holder may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two (2) or more of them as such holder may see fit. 7 Section 4. Conversion. The holders of Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Optional Conversion. Each share of each series of Preferred Stock shall be convertible at the option of the holder thereof at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Liquidation Price for such series of Preferred Stock by the Conversion Price at the time in effect for such series of Preferred Stock. The initial Conversion Price for shares of Series A Preferred Stock shall be the Original Series A Liquidation Price; the initial Conversion Price for shares of Series B Preferred Stock shall be the Original Series B Liquidation Price; the initial Conversion Price for shares of Series C Preferred Stock shall be the Original Series C Liquidation Price; and the initial Conversion Price for shares of Series D Preferred Stock shall be the Original Series D Liquidation Price; provided, however, that the Conversion Price for each such series of Preferred Stock shall be subject to adjustment as set forth below. (ii) Automatic Conversion. Each share of each series of Preferred Stock shall automatically be converted into shares of Common Stock at the then-effective Conversion Price for such series of Preferred Stock upon (a) the closing of an underwritten public offering pursuant to an effective registration statement on Form S-1 (or a successor form) under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at an aggregate offering price of not less than Twelve Million Dollars ($12,000,000) and at a public offering price per share (prior to underwriter commissions and expenses) that is not less than $7.00 (as adjusted to reflect subdivisions and combinations of shares of Common Stock and stock dividends paid in shares of Common) or (b) the date specified by vote or written consent or agreement of: (i) the holders of at least two-thirds (66 2/3%) of the then outstanding shares of Preferred Stock, voting together as a single class on an as-converted to Common Stock basis, and (ii) the holders of at least a majority of the then outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a single class on an as-converted to Common Stock basis. In the event of such a public offering, the person(s) entitled to receive the Common Stock issuable upon conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of Common Stock, at which time each series of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Preferred Stock being converted are either delivered to the Corporation or its transfer agent, as hereinafter provided, or the holder notifies the Corporation or any transfer agent, as hereinafter provided, that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. Upon the automatic conversion of the Preferred 8 Stock, the holders of the Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or of any transfer agent for the Preferred Stock. Thereupon, there shall be issued and delivered to such holder, promptly at such office and in such holder's name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of the Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. (iii) Upon conversion of the Preferred Stock, the Common Stock so issued shall be duly and validly issued, fully paid and nonassessable shares of the Corporation. (b) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then-effective Conversion Price for such series of Preferred Stock. Except as provided in Section 4(a)(ii), before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash payable in lieu of fractional shares of Common Stock (after aggregating all shares of Common Stock issuable to such holder of Preferred Stock upon conversion of the number of shares of Preferred Stock at the time being converted). In addition, if less than all of the shares represented by such certificates are surrendered for conversion pursuant to Section 4(a)(i), the Corporation shall issue and deliver to such holder a new certificate for the balance of the shares of Preferred Stock not so converted. Except as provided in Section 4(a)(ii), such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering such Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock issuable upon such conversion of such Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustment to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Section 4(c), the following definitions shall apply: 9 (1) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities, except for those issued to officers, directors or employees of, or consultants to, the Corporation as provided in Section 4(c)(i)(4)(B). (2) "Original Issue Date" shall mean the date on which the first share of Series D Preferred Stock is issued. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock or Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 4(c)(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than: (A) shares of Common Stock issued or issuable upon conversion of shares of Preferred Stock; (B) shares of capital stock issued or issuable to officers, directors or employees of, or consultants to, the Corporation pursuant to a stock grant, stock option plan, stock purchase plan or other stock incentive agreement unanimously approved by the Board of Directors; (C) shares of capital stock or securities exercisable for or convertible into shares of capital stock issued to equipment or other lessors or institutional or other lenders or otherwise in connection with bank or institutional loans, unanimously approved by the Board of Directors; (D) shares of capital stock or securities exercisable for or convertible into shares of capital stock issued as a dividend or distribution on Preferred Stock; (E) shares of Common Stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of these Amended and Restated Articles of Incorporation; and (F) shares of Common Stock issued pursuant to a transaction described in Section 4(c)(vi) hereof. (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a particular series of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to, such issuance, for such series of Preferred Stock. 10 (iii) Deemed Issue of Additional Shares of Common. (1) Options and Convertible Securities. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date; provided, however, that Additional Shares of Common Stock shall not be deemed to have been issued with respect to a particular series of Preferred Stock unless the consideration per share (determined pursuant to Section 4(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for such series of Preferred Stock in effect on the date of and immediately prior to such issue, or such record date, as the case may be; and, provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price for a particular series of Preferred Stock shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price for a particular series of Preferred Stock computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease, insofar as it affects such Conversion Price, but no further change in such Conversion Price shall be made upon the exercise, conversion or exchange of such Options or Convertible Securities; (C) if any such Options or Convertible Securities shall expire without having been exercised or converted, the Conversion Price for a particular series of Preferred Stock as adjusted upon the issuance of such Options or Convertible Securities shall be readjusted to the Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Options or the conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such Options, whether or not exercised, plus the consideration 11 received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities; and (D) no readjustment pursuant to clauses (B) or (C) above shall have the effect of increasing the Conversion Price for a particular series of Preferred Stock to an amount which exceeds the lower of (i) the Conversion Price for such series of Preferred Stock on the original adjustment date (immediately prior to the adjustment), or (ii) the Conversion Price for such series of Preferred Stock that would have resulted from any actual issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(c)(iii)), without consideration or for a consideration per share less than the Conversion Price for a series of Preferred Stock in effect on the date of and immediately prior to such issue, then and in each such event, the Conversion Price for such series of Preferred Stock shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction (1) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price, and (2) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, however, that, for the purposes of this Section 4(c)(iv), all shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock and shares of Common Stock issuable upon conversion of outstanding Convertible Securities shall be deemed to be outstanding; and, further provided, that immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 4(c)(iii), such Additional Shares of Common Stock shall be deemed to be outstanding. (v) Determination of Consideration. For purposes of this Section 4(c), the consideration received by the Corporation for the issuance of any Additional Shares of Common Stock shall be computed as follows; (1) Cash and Property. Such consideration shall : (A) insofar as it consists of cash, be computed at the aggregate amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof; 12 (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, by the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(c)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing: (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Adjustments for Dividends, Distributions, Subdivisions, Combinations or Consolidation of Common Stock. (1) Stock Dividends, Distributions or Subdivisions. Notwithstanding any provision to the contrary in Section 4(c)(iv), in the event the Corporation shall issue Additional Shares of Common Stock pursuant to a stock dividend, stock distribution or subdivision, the Conversion Price for each series of Preferred Stock in effect immediately prior to such stock dividend, stock distribution or subdivision shall concurrently with such stock dividend, stock distribution or subdivision, be proportionately decreased. (2) Combinations or Consolidations. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price for each series of Preferred Stock in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 13 (d) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of each series of Preferred Stock against impairment. (e) Reservation of Stock Issuable upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then-outstanding shares of Preferred Stock, in addition to such other remedies as shall be available to the holders of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price for a series of Preferred Stock pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such series of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) all such adjustments and readjustments, (ii) the Conversion Price for such series of Preferred Stock at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such Preferred Stock. (g) Notices of Record Date. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon the Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus, other than distributions to shareholders in connection with the repurchase of Common Stock from former employees or consultants upon termination of service to the Corporation pursuant to plans or arrangements approved by the Board of Directors of the Corporation; or (ii) to offer for subscription to all holders of any class or series of its capital stock any additional shares of stock of any class or series or any other rights; or (iii) to effect any reclassification or recapitalization; or 14 (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days prior written notice of the date of a shareholders meeting at which a vote on such matters shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event and the amount of securities or other property deliverable upon such event). Each such written notice shall be given personally or by first class mail, postage prepaid, addressed to the holders of Preferred Stock at the address for each such holder as shown on the books of the Corporation. Section 5. No Reissuance of Preferred Stock. No share or shares of Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. Section 6. Protective Provisions. (a) In addition to any other rights provided by law, so long as at least 500,000 shares of Preferred Stock (as adjusted for stock splits, reverse stock splits, stock dividends, recapitalizations and the like) are outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of two-thirds (66 2/3%) of the outstanding shares of Preferred Stock voting together as a class (based on the number of shares of Common Stock into which each share of Preferred Stock is convertible, as adjusted from time to time pursuant to Section 4 hereof): (i) take any action which alters or changes any of the rights, privileges or preferences of the Preferred Stock, including without limitation (A) increasing the aggregate number of authorized shares of Common Stock, Preferred Stock, or any series of Preferred Stock, other than an increase incident to Section 4(c)(vi), (B) effecting an exchange, reclassification or cancellation of all or part of the shares of Preferred Stock, other than in accordance with Section 4(c)(vi), and (C) effecting an exchange, or creating a right of exchange, of all or part of the shares of another class into the shares of Preferred Stock; (ii) take any action which creates any new class or series of shares having any right, preference, priority or power superior to or on a parity with any such right, preference, priority or power of any series of Preferred Stock; 15 (iii) take any action involving (A) the sale by the Corporation of all or a substantial portion of its assets, or (B) any reorganization of the Corporation or the consolidation or merger of the Corporation with or into any other corporation or corporations or other transaction or series of related transactions in which the shareholders of record of the Company immediately prior to such transaction or series of related transactions will hold (by virtue of the voting securities issued as consideration for such transaction or series of related transactions) less than 50% of the voting securities of the surviving entity (or parent, if any) immediately after such transaction or series of related transactions. (iv) amend the Corporation's Articles of Incorporation; (v) do any act or thing which would result in taxation to the holders of Preferred Stock under Section 305 of the Internal Revenue Act of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereinafter from time to time amended); or (vi) declare or pay any dividend or other distribution on Common Stock (other than in shares of Common Stock). (b) Notwithstanding the provisions of Section 6(a) above, and in addition to any other rights provided by law, so long as any shares of Preferred Stock are outstanding, this Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of a series of Preferred Stock voting together as a separate class, take any action which alters or changes any of the rights, privileges or preferences of such series of Preferred Stock so as to affect such shares adversely and in a manner different than any other series of Preferred Stock. Section 7. Inapplicability of Corporations Code Sections 502 and 503. As authorized by Section 402.5 of the California Corporations Code, the provisions of Sections 502 and 503 of the California Corporations Code shall not apply to, and the liquidation and dividend preferences of holders of Series A Preferred Stock and Series B Preferred Stock provided herein shall not be deemed to be impaired by, any distributions made by the Corporation in connection with the repurchase of the Corporation's Common Stock from former employees or consultants upon termination of their employment or services pursuant to agreements between the Corporation and such persons providing for the right of such repurchase and the holders of Preferred Stock shall be deemed to have consented to such repurchases. ARTICLE IV DIRECTORS AND AGENTS The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through by-law provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the 16 indemnification otherwise permitted Section 317 of the California Corporations Code, subject only to the applicable limits on indemnification set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the Corporation or its shareholders. Any repeal or modification of this Article IV, or the adoption of any provision of the Articles of Incorporation inconsistent with this Article IV, shall only be prospective and shall not adversely affect the rights under this Article IV in effect at the time of the alleged occurrence of any action or omission to act giving rise to indemnification. EX-3.2 4 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PERSISTENCE SOFTWARE, INC. Christopher T. Keene and Christine Russell hereby certify that: 1. The date of filing the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is __________, 1999. 2. They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of Persistence Software, Inc., a Delaware corporation. 3. The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: ARTICLE I "The name of this corporation is Persistence Software, Inc. (the "Corporation"). ARTICLE II The address of the registered office of the Corporation in the State of Delaware is: Corporation Trust Company 1209 Orange Street Wilmington, County of New Castle Delaware, 19801 The name of the Corporation's registered agent at said address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 80,000,000 shares, each with a par value of 2 $0.001 per share. 75,000,000 of such shares shall be Common Stock, and 5,000,000 of such shares shall be Preferred Stock. (B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. ARTICLE VI "Listing Event" as used in this Amended and Restated Certificate of Incorporation shall mean the first annual meeting of stockholders following such time as the Corporation meets the criteria set forth in subdivisions (1), (2) or (3) of Section 2115(c) the California Corporations Code as of the record date of such meeting. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, its directors and its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the occurrence of the Listing Event: (i) The number of directors which shall constitute the entire Board of Directors, and the number of directors in each class, shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. Until changed by a resolution of the Board of Directors, Class I shall consist of three directors, each of whom shall be designated by the Board of Directors; Class II shall consist of three directors, each of whom shall be designated by the Board of Directors; and Class III shall consist of three directors, each of whom shall be designated by the Board of Directors. Upon the occurrence of the Listing Event, the terms of office of the Class I directors shall expire, and Class I directors shall be elected for a full term of three years. At the first annual meeting of stockholders following the Listing Event, the term of office of the Class II directors shall expire, and Class II directors shall be elected for a full term of three years. At the -2- 3 second annual meeting of stockholders following the Listing Event, the term of office of the Class III directors shall expire, and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. In addition to the requirements of law and any other provisions hereof (and notwithstanding the fact that approval by a lesser vote may be permitted by law or any other provision hereof), the affirmative vote of the holders of at least 66 2/3 percent of the voting power of the then outstanding shares of stock of all classes and all series of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter, repeal, or adopt any provision inconsistent with this Section (i) of this Article VI. (ii) There shall be no right with respect to shares of stock of the Corporation to cumulate votes in the election of directors. (iii) Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least 66-2/3% of the voting power of the then-outstanding shares of the Voting Stock. ARTICLE VII No action shall be taken by the stockholders of the Corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the Corporation's bylaws. -3- 4 ARTICLE VIII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -4- 5 ARTICLE IX The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI The Corporation shall have perpetual existence. ARTICLE XII (A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of the Corporation's directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended. (B) Any repeal or modification of the foregoing provisions of this Article XII shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification. ARTICLE XIII (A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) though bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others. (B) Any repeal or modification of any of the foregoing provisions of this Article XIII shall not adversely affect any right or protection of a director, officer, agent or other person -5- 6 existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification." * * * -6- 7 The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at San Mateo, California, on ____________________, 1999. _____________________________ Christopher T. Keene Chief Executive Officer _____________________________ Christine Russell Secretary EX-3.3 5 AMENDED AND RESTATED BYLAWS OF PERSISTENCE 1 Exhibit 3.3 BYLAWS OF FULCRUM INNOVATIONS, INC. 2 BYLAWS OF FULCRUM INNOVATIONS, INC. TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES ............................................................................. 1 1.1 PRINCIPAL OFFICE ........................................................................... 1 1.2 OTHER OFFICES .............................................................................. 1 ARTICLE II - MEETINGS OF SHAREHOLDERS ..................................................................... 1 2.1 PLACE OF MEETINGS .......................................................................... 1 2.2 ANNUAL MEETING ............................................................................. 1 2.3 SPECIAL MEETING ............................................................................ 2 2.4 NOTICE OF SHAREHOLDERS' MEETINGS ........................................................... 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................................................ 3 2.6 QUORUM ..................................................................................... 4 2.7 ADJOURNED MEETING; NOTICE .................................................................. 4 2.8 VOTING ..................................................................................... 4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT .......................................... 5 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING .................................... 6 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS ................................ 7 2.12 PROXIES .................................................................................... 8 2.13 INSPECTORS OF ELECTION ..................................................................... 8 ARTICLE III - DIRECTORS ................................................................................... 9 3.1 POWERS ..................................................................................... 9 3.2 NUMBER OF DIRECTORS ........................................................................ 9 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS ................................................... 10 3.4 RESIGNATION AND VACANCIES .................................................................. 10 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ................................................... 11 3.6 REGULAR MEETINGS ........................................................................... 11 3.7 SPECIAL MEETINGS; NOTICE ................................................................... 11 3.8 QUORUM ..................................................................................... 12 3.9 WAIVER OF NOTICE ........................................................................... 12 3.10 ADJOURNMENT ................................................................................ 12 3.11 NOTICE OF ADJOURNMENT ...................................................................... 12 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING .......................................... 13 3.13 FEES AND COMPENSATION OF DIRECTORS ......................................................... 13 3.14 APPROVAL OF LOANS TO OFFICERS............................................................... 13
-i- 3 TABLE OF CONTENTS (Continued)
Page ---- ARTICLE IV - COMMITTEES ................................................................................... 13 4.1 COMMITTEES OF DIRECTORS .................................................................... 13 4.2 MEETINGS AND ACTION OF COMMITTEES .......................................................... 14 ARTICLE V - OFFICERS . .................................................................................... 15 5.1 OFFICERS ................................................................................... 15 5.2 ELECTION OF OFFICERS ....................................................................... 15 5.3 SUBORDINATE OFFICERS ....................................................................... 15 5.4 REMOVAL AND RESIGNATION OF OFFICERS ........................................................ 15 5.5 VACANCIES IN OFFICES ....................................................................... 16 5.6 CHAIRMAN OF THE BOARD ...................................................................... 16 5.7 PRESIDENT................................................................................... 16 5.8 VICE PRESIDENTS ............................................................................ 16 5.9 SECRETARY .................................................................................. 17 5.10 CHIEF FINANCIAL OFFICER .................................................................... 17 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS .......................... 18 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS .................................................. 18 6.2 INDEMNIFICATION OF OTHERS .................................................................. 18 6.3 PAYMENT OF EXPENSES IN ADVANCE ............................................................. 18 6.4 INDEMNITY NOT EXCLUSIVE .................................................................... 19 6.5 INSURANCE INDEMNIFICATION .................................................................. 19 6.6 CONFLICTS .................................................................................. 19 ARTICLE VII - RECORDS AND REPORTS ......................................................................... 20 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER................................................ 20 7.2 MAINTENANCE AND INSPECTION OF BYLAWS........................................................ 20 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS ...................................... 21 7.4 INSPECTION BY DIRECTORS .................................................................... 21 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER ...................................................... 21 7.6 FINANCIAL STATEMENTS........................................................................ 22 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............................................. 22 ARTICLE VIII - GENERAL MATTERS ............................................................................ 23 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING ...................................... 23 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................................................... 23
-ii- 4 TABLE OF CONTENTS (Continued)
Page ---- 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........................................... 23 8.4 CERTIFICATES FOR SHARES .................................................................... 24 8.5 LOST CERTIFICATES .......................................................................... 24 8.6 CONSTRUCTION; DEFINITIONS .................................................................. 24 ARTICLE IX - AMENDMENTS ................................................................................... 25 9.1 AMENDMENT BY SHAREHOLDERS .................................................................. 25 9.2 AMENDMENT BY DIRECTORS ..................................................................... 25
-iii- 5 BYLAWS OF FULCRUM INNOVATIONS, INC. ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the 3rd Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 6 2.3 SPECIAL MEETING A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. -2- 7 If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, or (iv) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. -3- 8 2.6 QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to -4- 9 one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second -5- 10 paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or -6- 11 transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. -7- 12 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; -8- 13 (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders 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 of the corporation shall be eight(8) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). -9- 14 No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders 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 required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony,(iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, -10- 15 if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 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 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. -11- 16 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. 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 Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. -12- 17 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS* The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve * This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. -13- 18 at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws 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 -14- 19 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 president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and 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 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, 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 may empower the president to appoint, such other officers 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. 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 the board of directors at any regular or special meeting of the board or, except in 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 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 -15- 20 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 A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of 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 there be such an officer, the president shall be the chief executive officer of the corporation and 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 shall preside at all meetings of the shareholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have 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 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 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. -16- 21 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 shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' 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 shareholders 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 shareholders and of the board of directors required to be given by law or by these bylaws. He 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 money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. -17- 22 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 Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) 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 (iii) 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 extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) 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 (iii) who was an 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 civil or criminal 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 -18- 23 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 Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 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: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders 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 (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -19- 24 ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the -20- 25 corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any -21- 26 report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, 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 president or a vice president, is authorized to -22- 27 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 herein granted 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 such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS 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, 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. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED 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 -23- 28 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. 8.4 CERTIFICATES FOR SHARES A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 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 cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of -24- 29 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. ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. -25- 30 CERTIFICATE OF ADOPTION OF BYLAWS OF FULCRUM INNOVATIONS, INC. Adoption by Incorporator The undersigned person appointed in the Articles of Incorporation to act as the Incorporator of Fulcrum Innovations, Inc. hereby adopts the foregoing bylaws, comprising twenty-five (25) pages, as the Bylaws of the corporation. Executed this 6th day of June 1991. /s/ Christopher T. Keene ------------------------------- Christopher T. Keene, Incorporator Certificate by Secretary of Adoption by Incorporator The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Fulcrum Innovations, Inc. and that the foregoing Bylaws, comprising twenty-five (25) pages, were adopted as the Bylaws of the corporation on June 6, 1991, by the person appointed in the Articles of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 6th day of June 1991. /s/ Mark A. Medearis ------------------------------- Mark A. Medearis, Secretary -26- EX-3.4 6 AMENDED AND RESTATED BYLAWS (AS PROPOSED) 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....................................................................................13 5.1 Officers...................................................................................13 5.2 Appointment Of Officers....................................................................13 5.3 Subordinate Officers.......................................................................13 5.4 Removal And Resignation Of Officers........................................................14 5.5 Vacancies In Offices.......................................................................12 5.6 Chief Executive Officer....................................................................14
i 3 5.7 President..................................................................................14 5.8 Vice Presidents............................................................................13 5.9 Secretary..................................................................................13 5.10 Chief Financial Officer...................................................................15 5.11 Representation Of Shares Of Other Corporations............................................15 5.12 Authority And Duties Of Officers..........................................................16 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS........................16 6.1 Indemnification Of Directors And Officers..................................................16 6.2 Indemnification Of Others..................................................................16 6.3 Payment Of Expenses In Advance.............................................................16 6.4 Indemnity Not Exclusive....................................................................17 6.5 Insurance..................................................................................17 6.6 Conflicts..................................................................................17 ARTICLE VII - RECORDS AND REPORTS.......................................................................18 7.1 Maintenance And Inspection Of Records......................................................18 7.2 Inspection By Directors....................................................................18 7.3 Annual Statement To Stockholders...........................................................18 ARTICLE VIII - GENERAL MATTERS..........................................................................18 8.1 Checks.....................................................................................18 8.2 Execution Of Corporate Contracts And Instruments...........................................19 8.3 Stock Certificates; Partly Paid Shares.....................................................19 8.4 Special Designation On Certificates........................................................19 8.5 Lost Certificates..........................................................................20 8.6 Construction; Definitions..................................................................20 8.7 Dividends..................................................................................20 8.8 Fiscal Year................................................................................20 8.9 Seal.......................................................................................21 8.10 Transfer Of Stock.........................................................................21 8.11 Stock Transfer Agreements.................................................................21 8.12 Registered Stockholders...................................................................21 ARTICLE IX - AMENDMENTS.................................................................................21
-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. 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 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. 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. 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 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 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 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. 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. 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. 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 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. 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 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. 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, 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 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. 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. EX-10.6 7 1997 STOCK PLAN (AS AMENDED) 1 EXHIBIT 10.6 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN (Amended December 11, 1997) (Amended April 30, 1998) (Amended January 3, 1999) (Amended April 21, 1999) 1. PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "AFFILIATE" means an entity other than a Subsidiary (as defined below) in which the Company owns a significant interest, directly or indirectly, as determined in the discretion of the Committee, or which, together with the Company, is under common control of a third person or entity. (c) "APPLICABLE LAWS" means the legal requirements relating to the administration of stock option and restricted stock purchase plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any Stock Exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time; provided, however, that to the extent permitted under such laws, rules, regulations and requirements, the rights of any participant under the Plan shall be determined in accordance with the law of the State of California, without giving effect to principles of conflict of law. (d) "BOARD" means the Board of Directors of the Company. (e) "CHANGE OF CONTROL" means a sale of all or substantially all of the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power 2 represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means one or more committees or subcommittees of the Board appointed by the Board to administer the Plan in accordance with Section 4 below. (h) "COMMON STOCK" means the Common Stock of the Company. (i) "COMPANY" means Persistence Software, Inc., a California corporation. (j) "CONSULTANT" means any person, including an advisor, who renders services to the Company or any Parent, Subsidiary or Affiliate and is compensated for such services, and any Director of the Company whether compensated for such services or not. (k) "CONTINUOUS SERVICE" means the absence of any interruption or termination of service as an Employee or Consultant to the Company or a Parent, Subsidiary or Affiliate. Continuous Service shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Parent(s), Subsidiaries, Affiliates or their respective successors. Unless otherwise determined by the Administrator or the Company, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute a termination of Continuous Service. (l) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (m) "DIRECTOR" means a member of the Board. (n) "EMPLOYEE" means any person (including, if appropriate, any Named Executive, Officer or Director) employed by the Company or any Parent, Subsidiary or Affiliate of the Company. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (p) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market 3 Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange on the date of determination (or if no trading or bids occurred on the date of determination, on the last trading day prior to the date of determination), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the date of determination (or if no bids occurred on the date of determination, on the last trading day prior to the date of determination); or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (q) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable Option Agreement. (r) "LISTED SECURITY" means any security of the Company that is listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (s) "NAMED EXECUTIVE" means any individual who, on the last day of the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four most highly compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (t) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable Option Agreement. (u) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder. (v) "OPTION" means a stock option granted pursuant to the Plan. (w) "OPTION AGREEMENT" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of an Option granted under the Plan and includes any documents attached to or incorporated into such Option Agreement, including, but not limited to, a notice of stock option grant and a form of exercise notice. 4 (x) "OPTION EXCHANGE PROGRAM" means a program approved by the Administrator whereby outstanding Options are exchanged for Options with a lower exercise price. (y) "OPTIONED STOCK" means the Common Stock subject to an Option. (z) "OPTIONEE" means an Employee or Consultant who receives an Option. (aa) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (bb) "PARTICIPANT" means any holder of one or more Options or Stock Purchase Rights, or the Shares issuable or issued upon exercise of such awards, under the Plan. (cc) "PLAN" means this 1997 Stock Plan. (dd) "REPORTING PERSON" means an Officer, Director or greater than 10% shareholder of the Company within the meaning of Rule 16a-2 of the Exchange Act, who is required to file reports pursuant to Rule 16a-3 of the Exchange Act. (ee) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (ff) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of a Stock Purchase Right granted under the Plan and includes any documents attached to such agreement. (gg) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as amended from time to time, or any successor provision. (hh) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan. (ii) "STOCK EXCHANGE" means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any given time. (jj) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock pursuant to Section 11 below. (kk) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. (ll) "TEN PERCENT HOLDER" means a person who owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary. 5 3. STOCK SUBJECT TO THE PLAN. The maximum aggregate number of shares that may be sold under the Plan (as amended effective April 21, 1999) is 5,609,652 Shares of Common Stock, plus a maximum of 38,645 additional Shares that may be transferred to the Plan from the Company's 1994 Stock Purchase Plan upon return to the 1994 Stock Purchase Plan pursuant to an amendment to the Plan dated December 10, 1997, plus an annual increase on the first day of each of the Company's fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of (i) 650,000 Shares, (ii) three and one-half percent (3.5%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. The number of Shares subject to the Plan set forth in this Section 3 are subject to adjustment in accordance with the provisions of Section 15 of the Plan. If an Option expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares that were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise or purchase shall be treated as not issued and shall continue to be available under the Plan. Notwithstanding any other provision of the Plan, Shares issued under the Plan and later repurchased by the Company pursuant to any repurchase right that the Company may have shall not be available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) GENERAL. The Plan shall be administered by the Board or a Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Participants and, if permitted by the Applicable Laws, the Board may authorize one or more officers (who may (but need not) be Officers) to grant Options or Stock Purchase Rights to Employees and Consultants (other than Consultants who are Directors). (b) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS AND NAMED EXECUTIVES. With respect to Options granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit grants of Options to Reporting Persons to qualify for the exemption set forth in Rule 16b-3 and to permit grants of Options to Named Executives to qualify as performance-based compensation under Section 162(m) of the Code, and otherwise so as to satisfy the Applicable Laws. (c) COMMITTEE COMPOSITION. If a Committee has been appointed pursuant to this Section 4, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the 6 Applicable Laws and, in the case of a Committee administering the Plan pursuant to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and Section 162(m) of the Code. (d) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(p) of the Plan; (ii) to select the Employees and Consultants to whom Options and Stock Purchase Rights or any combination thereof may from time to time be granted; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted; (iv) to determine the number of Shares of Common Stock to be covered by each such award granted; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder, which terms and conditions include but are not limited to the exercise or purchase price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to determine whether and under what circumstances an Option may be settled in cash under Section 10(f) instead of Common Stock; (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted and to make any other amendments or adjustments to any Option that the Administrator determines, in its discretion and under the authority granted to it under the Plan, to be necessary or advisable, provided however that no amendment or adjustment to an Option that would materially and adversely affect the rights of any Optionee shall be made without the prior written consent of the Optionee; (ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; (x) to initiate an Option Exchange Program; (xi) to construe and interpret the terms of the Plan and awards granted under the Plan; and 7 (xii) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to Participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs. (e) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants. 5. ELIGIBILITY. (a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees, provided however that Employees of Affiliates shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option or Stock Option Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) TYPE OF OPTION. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date of grant of such Option. In the event any Option designated as an Incentive Stock Option fails to meet the requirements set forth in this Plan for an Incentive Stock Option or as required to qualify as an incentive stock option within the meaning of Code Section 422, such Option shall not be void but instead shall be deemed a Nonstatutory Stock Option. (c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any Participant any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided however that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement and provided further that, in the case of an Incentive Stock Option granted to a person who at the time of such grant is a Ten Percent Holder, the term of such Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8 8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided in Section 13 below, the maximum number of Shares which may be subject to Options and Stock Purchase Rights granted to any one Employee under this Plan for any fiscal year of the Company shall be 2,000,000. 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator and set forth in the Option Agreement, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; or (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a person who is at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator; (B) granted to a person who, at the time of the grant of such Option, is a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant if such Option is intended to qualify as performance-based compensation under Section 162(m) of the Code; or (C) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to any person other than a Named Executive or a Ten Percent Holder, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant if required by Applicable Law and, if not so required, shall be such price as is determined by the Administrator. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a Corporate Transaction. (b) PERMISSIBLE CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash; (2) check; (3) delivery of Optionee's 9 promissory note with such recourse, interest, security and redemption provisions as the Administrator determines to be appropriate; (4) cancellation of indebtedness; (5) surrender of other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender (or such other period as may be required to avoid a charge to the Company's earnings) or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option is exercised; (6) authorization by the Optionee for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; (7) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect exercise of the Option and prompt delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable withholding taxes; (8) any combination of the foregoing methods of payment; or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under the Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider whether acceptance of such consideration may be reasonably expected to benefit the Company and the Administrator may refuse to accept a particular form of consideration at the time of any Option exercise if, in its sole discretion, acceptance of such form of consideration is not in the best interests of the Company at such time. 10. EXERCISE OF OPTION. (a) VESTING. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, consistent with the terms of the Plan, and reflected in the Option Agreement, including vesting requirements and/or performance criteria with respect to the Company and/or the Optionee; provided however that, if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall become exercisable at a rate of at least 20% per year over five years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least 20% per year over five years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer (including but not limited to Officers), Director or Consultant, the Option may become exercisable, or a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided however that in the absence of such determination, vesting of Options shall be tolled during any such leave. (b) PROCEDURE FOR EXERCISE. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to 10 which the Option is exercised. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (c) RIGHTS AS A SHAREHOLDER. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 15 of the Plan. (d) TERMINATION OF CONTINUOUS SERVICE. In the event of termination of an Optionee's Continuous Service, such Optionee's right to exercise the Option shall cease and the Option shall forthwith become void and cease to have effect, except as set forth specifically in the Option Agreement. Notwithstanding the foregoing, if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall be exercisable by the Optionee for a period of time following the termination of the Optionee's Continuous Service as follows: (i) In the event of termination of Continuous Service for reasons other than the Optionee's disability or death, the Option shall be exercisable by the Optionee following such termination for a period of not less than thirty (30) days, as is determined by the Administrator (with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option), after the date of such termination of Continuous Service (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), to the extent that the Optionee was entitled to exercise it at the date of such termination. If an Option Agreement provides that an Incentive Stock Option may be exercised more than three (3) months after the termination of the Optionee's Continuous Service, to the extent that such Optionee fails to exercise such Option within three (3) months of the date of such termination, such Option thereafter shall be treated as a Nonstatutory Stock Option. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise the Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (ii) In the event of termination of Continuous Service as a result of Optionee's disability, such Optionee may, but only within six (6) months (or such longer period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent he or she was entitled to 11 exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise the Option to the extent so entitled within the time specified herein, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (iii) In the event of the death of an Optionee prior to termination of his or her Continuous Service, the Option may be exercised at any time within six (6) months (or such longer period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement) by such Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or, if earlier, the date of termination of the Optionee's Continuous Service. To the extent that the Optionee was not entitled to exercise the Option at the date of death or termination, as the case may be, or if the Optionee does not exercise such Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (e) EXTENSION OF EXERCISE PERIOD. The Administrator shall have full power and authority to extend the period of time for which an Option is to remain exercisable following termination of an Optionee's Continuous Service from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in the Option Agreement to such greater time as the Board shall deem appropriate, provided that in no event shall such Option be exercisable later than the date of expiration of the term of such Option as set forth in the Option Agreement. (f) BUY-OUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted under the Plan based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time such offer is made. 11. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the consideration to be paid, and the time within which such person must accept such offer, which shall in no event exceed 30 days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. In the case of a Stock Purchase Right granted prior to the date, if any, on which the Common Stock becomes a Listed Security and if required by the Applicable Laws at such time, the purchase price of Shares subject to such Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. The offer to purchase Shares subject to 12 Stock Purchase Rights shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company an irrevocable, exclusive option (the "Repurchase Option") exercisable upon the termination of the purchaser's Continuous Service. The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original purchase price paid by the purchaser and may be paid by cash, check or cancellation of any indebtedness of the purchaser to the Company, at the Company's option. The Repurchase Option shall lapse at such rate as the Administrator may determine; provided however that with respect to a Stock Purchase Right granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a purchaser who is not an officer (including an Officer), Director or Consultant of the Company or of any Parent or Subsidiary of the Company, such Repurchase Option shall lapse at a minimum rate of 20% of the Shares subject to the Stock Purchase Right if required by the Applicable Laws. (c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan. 12. TAXES. (a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising the Option or Stock Purchase Right) shall make such arrangements as the Administrator may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of Option or Stock Purchase Right and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. (b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option or Stock Purchase Right. (c) This Section 12(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax 13 obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the amount required to be withheld. For purposes of this Section 12, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date"). (d) At the discretion of the Administrator, a Participant may satisfy his or her tax withholding obligations arising in connection with an Option by one or some combination of the following methods: (i) by cash payment; (ii) by payroll deduction out of the Optionee's current compensation; or (iii) if permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (A) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six (6) months on the date of surrender, and (B) have a Fair Market Value determined as of the applicable Tax Date equal to the amount required to be withheld. (e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 12(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 12(d) above must be made on or prior to the applicable Tax Date. (f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and Stock Purchase Rights may not be transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder); provided that, after the date, if any, upon which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer shall be subject to the Applicable Laws. The designation of a beneficiary by an Optionee will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 13. 14 14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such later date as is determined by the Administrator; provided however that in the case of an Incentive Stock Option, the grant date shall be the later of the date on which the Administrator makes the determination granting such Incentive Stock Option or the date of commencement of the Optionee's employment relationship with the Company. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, CORPORATE TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, the number of Shares set forth in Sections 3 and 8 above, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per Share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock (including any change in the number of Shares of Common Stock effected in connection with a change of domicile of the Company), or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares of Common Stock subject to an Option or Stock Purchase Right. (b) DISSOLUTION OR LIQUIDATION. In the event of the dissolution or liquidation of the Company, the Administrator shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not previously been exercised, each outstanding Option or Stock Purchase Right shall terminate immediately prior to the consummation of such action, unless otherwise provided by the Administrator. (c) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a Corporate Transaction, including a Change of Control, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation (such entity, the "Successor Corporation"), unless the Successor Corporation does not agree to such assumption 15 or substitution, in which case such Options and Stock Purchase Rights shall terminate upon consummation of the transaction. For purposes of this Section 15(c), an Option or a Stock Purchase Right shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction or a Change of Control, as the case may be, each holder of an Option or Stock Purchase Right would be entitled to receive upon exercise of the Option or Stock Purchase Right the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option or the Stock Purchase Right at such time (after giving effect to any adjustments in the number of Shares covered by the Option or Stock Purchase Right as provided for in this Section 15); provided however that if the consideration received in the transaction is not solely common stock of the Successor Corporation, the Administrator may, with the consent of the Successor Corporation, provide for the consideration to be received upon exercise of the Option or Stock Purchase Right to be solely common stock of the Successor Corporation equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (d) CERTAIN DISTRIBUTIONS. In the event of any distribution to the Company's shareholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution. 16. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend, discontinue or terminate the Plan. To the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such as degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Except as provided in Section 15, no amendment, suspension or termination of the Plan shall materially and adversely affect Options already granted and such Options shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by such Optionee and the Company. Except as provided in Section 15, no amendment, suspension or termination of the Plan shall materially and adversely affect Stock Purchase Rights already granted, or the 16 holder of Restricted Stock acquired pursuant to a Stock Purchase Right, unless mutually agreed otherwise between the holder of the Stock Purchase Right and the Company, which agreement must be in writing and signed by such holder and the Company. 17. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the Applicable Laws, with such compliance determined by the Company in consultation with its legal counsel. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by Applicable Laws. 18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by Option Agreements and Restricted Stock Purchase Agreements, respectively, in such form(s) as the Administrator shall from time to time approve. 20. SHAREHOLDER APPROVAL. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under the Applicable Laws. 21. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to the date, if any, upon which the Common Stock becomes a Listed Security and if required by the Applicable Laws, the Company shall provide financial statements at least annually to each Optionee and to each individual who acquired Shares pursuant to the Plan, during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares. The Company shall not be required to provide such information if the issuance of Options or Stock Purchase Rights under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. 17 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN NOTICE OF STOCK OPTION GRANT [Forms for Use Pre-IPO] <> You have been granted an option to purchase Common Stock "Common Stock" of Persistence Software, Inc. (the "Company") as follows: Board Approval Date: <> Date of Grant (Later of Board Approval Date or Commencement of Employment/Consulting): <> Vesting Commencement Date: <> Exercise Price per Share: $<> Total Number of Shares Granted: <> Total Exercise Price: $<> Type of Option: <> Incentive Stock Option <> Nonstatutory Stock Option Term/Expiration Date: <> Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 1/4th of the Shares subject to the Option shall vest on the 12th month anniversary of the Vesting Commencement Date and 1/48th of the total number of Shares subject to the Option shall vest on the monthly anniversary date of the Vesting Commencement Date thereafter. Termination Period: Option may be exercised for 90 days after termination of employment or consulting relationship except as set out in Sections 6 and 7 of the Stock Option Agreement (but in no event later than the Expiration Date). 18 By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1997 Stock Plan and the Stock Option Agreement, both of which are attached and made a part of this document. <>: PERSISTENCE SOFTWARE, INC. By: Signature Print Name Print Name and Title Address (if different from above): Address: 1720 South Amphlett Blvd., Suite 300 San Mateo, CA 94402 -2- 19 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN STOCK OPTION AGREEMENT 1. GRANT OF OPTION. Persistence Software, Inc., a California corporation (the "Company"), hereby grants to <> ("Optionee"), an option (the "Option") to purchase a total number of shares of Common Stock (the "Shares") set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, definitions and provisions of the Persistence Software, Inc. 1997 Stock Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option. If designated an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. 2. EXERCISE OF OPTION. This Option shall be exercisable during its Term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and with the provisions of Section 9 of the Plan as follows: (a) RIGHT TO EXERCISE. (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 5, 6 and 7 below, subject to the limitation contained in Section 2(a)(i). (iii) In no event may this Option be exercised after the date of expiration of the Term of this Option as set forth in the Notice of Stock Option Grant. (b) METHOD OF EXERCISE. This Option shall be exercisable by execution and delivery of the Exercise Notice and Restricted Stock Purchase Agreement attached hereto as Exhibit A (the "Exercise Agreement") or of any other form of written notice approved for such purpose by the Company which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. 20 No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of applicable law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of Optionee: (a) cash; (b) check; (c) surrender of other shares of Common Stock of the Company which (i) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by Optionee for more than six (6) months on the date of surrender, and (ii) have a fair market value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (d) if there is a public market for the Shares and they are registered under the Securities Act, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 5. TERMINATION OF RELATIONSHIP. In the event of termination of Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set forth in the Notice of Stock Option Grant. To the extent that Optionee was not entitled to exercise this Option at such Termination Date, or if Optionee does not exercise this Option within the Termination Period, the Option shall terminate. 6. DISABILITY OF OPTIONEE. (a) Notwithstanding the provisions of Section 5 above, in the event of termination of Continuous Status as an Employee or Consultant as a result of Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the Termination Date (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), exercise this Option to the -2- 21 extent Optionee was entitled to exercise it as of such Termination Date. To the extent that Optionee was not entitled to exercise the Option as of the Termination Date, or if Optionee does not exercise such Option (to the extent so entitled) within the time specified in this Section 6(a), the Option shall terminate. (b) Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee's consulting relationship or Continuous Status as an Employee as a result of disability not constituting a total and permanent disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the Termination Date (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), exercise the Option to the extent Optionee was entitled to exercise it as of such Termination Date; provided, however, that if this is an Incentive Stock Option and Optionee fails to exercise this Incentive Stock Option within three (3) months from the Termination Date, this Option will cease to qualify as an Incentive Stock Option (as defined in Section 422 of the Code) and Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such exercise in an amount generally measured by the difference between the Exercise Price for the Shares and the fair market value of the Shares on the date of exercise. To the extent that Optionee was not entitled to exercise the Option at the Termination Date, or if Optionee does not exercise such Option to the extent so entitled within the time specified in this Section 6(b), the Option shall terminate. 7. DEATH OF OPTIONEE. In the event of the death of Optionee (a) during the Term of this Option and while an Employee or Consultant of the Company and having been in Continuous Status as an Employee or Consultant since the date of grant of the Option, or (b) within thirty (30) days after Optionee's Termination Date, the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the Termination Date. 8. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him or her. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 9. TERM OF OPTION. This Option may be exercised only within the Term set forth in the Notice of Stock Option Grant, subject to the limitations set forth in Section 7 of the Plan. 10. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option of certain of the federal tax consequences of exercise of this Option and disposition of the Shares under the laws in effect as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. -3- 22 (a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject Optionee to the alternative minimum tax in the year of exercise. (b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option does not qualify as an Incentive Stock Option, there may be a regular federal (and state) income tax liability upon the exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (c) DISPOSITION OF SHARES. In the case of a Nonstatutory Stock Option, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an Incentive Stock Option are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the fair market value of the Shares on the date of exercise, or (ii) the sale price of the Shares. (d) NOTICE OF DISQUALIFYING DISPOSITION OF INCENTIVE STOCK OPTION SHARES. If the Option granted to Optionee herein is an Incentive Stock Option, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the Incentive Stock Option on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, Optionee shall immediately notify the Company in writing of such disposition. Optionee acknowledges and agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from the early disposition by payment in cash or out of the current earnings paid to Optionee. 11. WITHHOLDING TAX OBLIGATIONS. Optionee understands that, upon exercising a Nonstatutory Stock Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the Exercise Price. However, the timing of this income recognition may be deferred for up to six months if Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If Optionee is an employee, the Company will be required to withhold from Optionee's compensation, or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income. Additionally, -4- 23 Optionee may at some point be required to satisfy tax withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option by one or some combination of the following methods: (a) by cash payment, (b) out of Optionee's current compensation, (c) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares which (i) in the case of Shares previously acquired from the Company, have been owned by Optionee for more than six months on the date of surrender, and (ii) have a fair market value on the date of surrender equal to or greater than Optionee's marginal tax rate times the ordinary income recognized, or (d) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). If Optionee is subject to Section 16 of the Exchange Act (an "Insider"), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"). All elections by Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made; and (c) all elections shall be subject to the consent or disapproval of the Administrator. 12. MARKET STANDOFF AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Optionee hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the public offering. [Signature Page Follows] -5- 24 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one document. Persistence Software, Inc. By: ________________________ [name] [title] OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Dated: ________________________ ______________________________ <> -6- 25 EXHIBIT A PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT This Agreement ("Agreement") is made as of ______________, by and between Persistence Software, Inc., a California corporation (the "Company"), and <> ("Purchaser"). To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the 1997 Stock Plan. 1. EXERCISE OF OPTION. Subject to the terms and conditions hereof, Purchaser hereby elects to exercise his or her option to purchase ______________ shares of the Common Stock (the "Shares") of the Company under and pursuant to the Company's 1997 Stock Plan (the "Plan") and the Stock Option Agreement dated _______________, (the "Option Agreement"). The purchase price for the Shares shall be $<> per Share for a total purchase price of $_________________. The term "Shares" refers to the purchased Shares and all securities received in replacement of the Shares or as stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser's ownership of the Shares. 2. TIME AND PLACE OF EXERCISE. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution and delivery of this Agreement in accordance with the provisions of Section 2(b) of the Option Agreement. On such date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser's name) against payment of the exercise price therefor by Purchaser by (a) check made payable to the Company, (b) cancellation of indebtedness of the Company to Purchaser, (c) delivery of shares of the Common Stock of the Company in accordance with Section 3 of the Option Agreement, or (d) by a combination of the foregoing. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares except in compliance with the provisions below and applicable securities laws. (a) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser or any transferee of Purchaser (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 3(a) (the "Right of First Refusal"). 26 (i) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the terms and conditions of each proposed sale or transfer. The Holder shall offer the Shares at the same price (the "Offered Price") and upon the same terms (or terms as similar as reasonably possible) to the Company or its assignee(s). (ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (iii) below. (iii) PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section 3(a) shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (iv) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section 3(a), then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 60 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section 3 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, or if the Holder proposes to change the price or other terms to make them more favorable to the Proposed Transferee, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section 3(a) notwithstanding, the transfer of any or all of the Shares during Purchaser's lifetime or on Purchaser's death by will or intestacy to Purchaser's Immediate Family or a trust for the benefit of Purchaser's Immediate Family shall be exempt from the provisions of this Section 3(a). "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the -2- 27 provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section 3. (b) INVOLUNTARY TRANSFER. (i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY TRANSFER. In the event, at any time after the date of this Agreement, of any transfer by operation of law or other involuntary transfer (including death or divorce, but excluding a transfer to Immediate Family as set forth in Section 3(a)(vi) above) of all or a portion of the Shares by the record holder thereof, the Company shall have an option to purchase all of the Shares transferred at the greater of the purchase price paid by Purchaser pursuant to this Agreement or the fair market value of the Shares on the date of transfer. Upon such a transfer, the person acquiring the Shares shall promptly notify the Secretary of the Company of such transfer. The right to purchase such Shares shall be provided to the Company for a period of thirty (30) days following receipt by the Company of written notice by the person acquiring the Shares. (ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any stock to be transferred pursuant to Section 3(b)(i), the price per Share shall be a price set by the Board of Directors of the Company that will reflect the current value of the stock in terms of present earnings and future prospects of the Company. The Company shall notify Purchaser or his or her executor of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of Shares. However, if the Purchaser does not agree with the valuation as determined by the Board of Directors of the Company, the Purchaser shall be entitled to have the valuation determined by an independent appraiser to be mutually agreed upon by the Company and the Purchaser and whose fees shall be borne equally by the Company and the Purchaser. (c) ASSIGNMENT. The right of the Company to purchase any part of the Shares may be assigned in whole or in part to any shareholder or shareholders of the Company or other persons or organizations; provided, however, that an assignee, other than a corporation that is the parent or a 100% owned subsidiary of the Company, must pay the Company, upon assignment of such right, cash equal to the difference between the original purchase price and fair market value, if the original purchase price is less than the fair market value of the Shares subject to the assignment. (d) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement. Any sale or transfer of the Company's Shares shall be void unless the provisions of this Agreement are satisfied. (e) TERMINATION OF RIGHTS. The right of first refusal granted the Company by Section 3(a) above and the option to repurchase the Shares in the event of an involuntary transfer granted the Company by Section 3(b) above shall terminate upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act. Upon termination of the right of first refusal described in Section -3- 28 3(a) above, a new certificate or certificates representing the Shares not repurchased shall be issued, on request, without the legend referred to in Section 6(a)(ii) herein and delivered to Purchaser. 4. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the purchase of the Shares, Purchaser represents to the Company the following: (a) Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. Purchaser is purchasing these securities for investment for his or her own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (b) Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein. (c) Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. Purchaser understands that the certificate(s) evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) Purchaser is familiar with the provisions of Rules 144 and 701, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the securities, such issuance will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the securities exempt under Rule 701 may be resold by the Purchaser ninety (90) days thereafter, subject to the satisfaction of certain of the conditions specified by Rule 144, including, among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), Purchaser acknowledges and agrees to the restrictions set forth in paragraph (f) hereof. In the event that the Company does not qualify under Rule 701 at the time of purchase, then the securities may be resold by the Purchaser in certain limited circumstances subject to the provisions of Rule 144, which requires, among other things: (1) the availability of certain public information about the Company; (2) the resale occurring not less than two -4- 29 years after the party has purchased, and made full payment of (within the meaning of Rule 144), the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (e) Purchaser further understands that at the time he or she wishes to sell the securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 or 701, and that, in such event, Purchaser would be precluded from selling the securities under Rule 144 or 701 even if the two-year minimum holding period had been satisfied. (f) Purchaser further understands that in the event all of the applicable requirements of Rule 144 or 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (g) Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. (a) LEGENDS. The certificate or certificates representing the Shares shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws): (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR -5- 30 THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 6. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment, for any reason, with or without cause. 7. MARKET STAND-OFF AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the public offering. 8. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless -6- 31 in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (d) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (e) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (f) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (g) SUCCESSORS AND ASSIGNS. The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Signature Page Follows] -7- 32 The parties have executed this Exercise Notice and Restricted Stock Purchase Agreement as of the date first set forth above. COMPANY: PERSISTENCE SOFTWARE, INC. By: [name] [title] 1720 South Amphlett Blvd. Suite 300 San Mateo, CA 94402 PURCHASER: <> (Signature) (Print Name) Address: I, ______________________, spouse of <>, have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall hereby by similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. Spouse of <> -8- 33 RECEIPT The undersigned hereby acknowledges receipt of Certificate No. _____ for __________ shares of Common Stock of Persistence Software, Inc. (the "Company"). Dated: <> 34 RECEIPT Persistence Software, Inc. (the "Company") hereby acknowledges receipt of a check in the amount of $<> given by <> as consideration for Certificate No. _________ for <> shares of Common Stock of Persistence Software, Inc. Dated: Persistence Software, Inc. By: [name] [title] 35 PERSISTENCE SOFTWARE, INC. COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is made as of ____________, 199_ by and between Persistence Software, Inc. a California corporation (the "Company"), and ________________ ("Purchaser"). 1. SALE OF STOCK. Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, ________ shares of the Company's Common Stock (the "Shares") at a purchase price of $_____ per Share for a total purchase price of $______. The term "Shares" refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser's ownership of the Shares. 2. PURCHASE. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties, or on such other date as the Company and Purchaser shall agree (the "Purchase Date"). On the Purchase Date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser's name) against payment of the purchase price therefor by Purchaser by [delivery of a check made payable to the Company] [delivery of a promissory note in the form attached as Exhibit A to this Agreement and a Pledge and Security Agreement in the form attached as Exhibit B to this Agreement] [surrender of _____ Shares of Common Stock owned by Purchaser for at least six months plus delivery of a check made payable to the Company in the amount of $___] [description of other combination of acceptable consideration]. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company's Repurchase Option (as defined below), except as provided below. After any Shares have been released from the Repurchase Option, Purchaser shall not assign, encumber or dispose of any interest in such Shares except in compliance with the provisions below and applicable securities laws. (a) REPURCHASE OPTION. (i) In the event of the voluntary or involuntary termination of Purchaser's employment or consulting relationship with the Company for any reason (including death or disability), with or without cause, the Company shall upon the date of such termination (the "Termination Date") have an irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days from such date to repurchase all or any portion of the Shares held by Purchaser as of the Termination Date which have not yet been released from the Company's Repurchase Option at the original purchase price per Share specified in Section 1 (adjusted for any stock 36 splits, stock dividends and the like); provided, however, that the Repurchase Option shall continue for a period of up to one year from the Termination Date to the extent that the Company reasonably determines that such an extension of time is necessary to prevent the repurchase of Purchaser's Shares from causing other capital stock of the Company to not qualify as "small business stock" under Section 1202 of the Internal Revenue Code of 1986, as amended. (ii) The Repurchase Option shall be exercised by the Company by written notice to Purchaser or Purchaser's executor and, at the Company's option, (A) by delivery to Purchaser or Purchaser's executor with such notice of a check in the amount of the purchase price for the Shares being purchased, or (B) in the event Purchaser is indebted to the Company, by cancellation by the Company of an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (C) by a combination of (A) and (B) so that the combined payment and cancellation of indebtedness equals such purchase price. Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser. (iii) __________ percent (___%) of the Shares shall initially be subject to the Repurchase Option. The Shares shall be released from the Repurchase Option in accordance with the following Vesting Schedule: [Example: ___ of the total number of Shares shall be released from the Repurchase Option on the ___-month anniversary of the Vesting Commencement Date (as set forth on the signature page of this Agreement), and an additional ___ of the total number of Shares shall be released from the Repurchase Option at the end of each month thereafter, until all Shares are released from the Repurchase Option] (provided in each case that Purchaser's Continuous Service has not been terminated prior to the date of any such release). Fractional shares shall be rounded to the nearest whole share. (b) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser or any transferee of Purchaser (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 3(b) (the "Right of First Refusal"). (i) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (A) the Holder's bona fide intention to sell or otherwise transfer such Shares; (B) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (C) the number of Shares to be transferred to each Proposed Transferee; and (D) the terms and conditions of each proposed sale or transfer. The Holder shall offer the Shares at the same price (the "Offered Price") and upon the same terms (or terms as similar as reasonably possible) to the Company or its assignee(s). (ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice -2- 37 to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (iii) below. (iii) PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section 3(b) shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (iv) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section 3(b), then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 60 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section 3 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, or if the Holder proposes to change the price or other terms to make them more favorable to the Proposed Transferee, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section 3(b) notwithstanding, the transfer of any or all of the Shares during Purchaser's lifetime or on Purchaser's death by will or intestacy to Purchaser's Immediate Family or a trust for the benefit of Purchaser's Immediate Family shall be exempt from the provisions of this Section 3(b). "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section 3. (c) INVOLUNTARY TRANSFER. (i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY TRANSFER. In the event, at any time after the date of this Agreement, of any transfer by operation of law or other involuntary transfer (including death or divorce, but excluding a transfer to Immediate Family as set forth in Section 3(b)(vi) above) of all or a portion of the Shares by the record -3- 38 holder thereof, the Company shall have an option to purchase all of the Shares transferred at the greater of the purchase price paid by Purchaser pursuant to this Agreement or the fair market value of the Shares on the date of transfer. Upon such a transfer, the person acquiring the Shares shall promptly notify the Secretary of the Company of such transfer. The right to purchase such Shares shall be provided to the Company for a period of thirty (30) days following receipt by the Company of written notice by the person acquiring the Shares. (ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any stock to be transferred pursuant to Section 3(c)(i), the price per Share shall be a price set by the Board of Directors of the Company that will reflect the current value of the stock in terms of present earnings and future prospects of the Company. The Company shall notify Purchaser or his or her executor of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of Shares. However, if the Purchaser does not agree with the valuation as determined by the Board of Directors of the Company, the Purchaser shall be entitled to have the valuation determined by an independent appraiser to be mutually agreed upon by the Company and the Purchaser and whose fees shall be borne equally by the Company and the Purchaser. (d) ASSIGNMENT. The right of the Company to purchase any part of the Shares may be assigned in whole or in part to any shareholder or shareholders of the Company or other persons or organizations; provided, however, that an assignee, other than a corporation that is the parent or a 100% owned subsidiary of the Company, must pay the Company, upon assignment of such right, cash equal to the difference between the original purchase price and fair market value, if the original purchase price is less than the fair market value of the Shares subject to the assignment. (e) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement, including, insofar as applicable, the Repurchase Option. Any sale or transfer of the Company's Shares shall be void unless the provisions of this Agreement are met. (f) TERMINATION OF RIGHTS. The right of first refusal granted the Company by Section 3(b) above and the option to repurchase the Shares in the event of an involuntary transfer granted the Company by Section 3(c) above shall terminate upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). Upon termination of the right of first refusal described in Section 3(b) and the expiration or exercise of the Repurchase Option, a new certificate or certificates representing the Shares not repurchased shall be issued, on request, without the legend referred to in Section 6(a)(ii) below and delivered to Purchaser. 4. ESCROW OF UNVESTED SHARES. For purposes of facilitating the enforcement of the provisions of Section 3 above, Purchaser agrees, immediately upon receipt of the certificate(s) for the Shares subject to the Repurchase Option, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached to this Agreement as Exhibit C -4- 39 executed by Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the Secretary of the Company, or the Secretary's designee, to hold such certificate(s) and Assignment Separate from Certificate in escrow and to take all such actions and to effectuate all such transfers and/or releases as are in accordance with the terms of this Agreement. Purchaser hereby acknowledges that the Secretary of the Company, or the Secretary's designee, is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment is coupled with an interest and is accordingly irrevocable. Purchaser agrees that said escrow holder shall not be liable to any party hereof (or to any other party). The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Purchaser agrees that if the Secretary of the Company, or the Secretary's designee, resigns as escrow holder for any or no reason, the Board of Directors of the Company shall have the power to appoint a successor to serve as escrow holder pursuant to the terms of this Agreement. 5. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the purchase of the Shares, Purchaser represents to the Company the following: (a) Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. Purchaser is purchasing the Shares for investment for his or her own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (b) Purchaser understands that the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein. (c) Purchaser understands that the Shares are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Purchaser acknowledges that the Company has no obligation to register or qualify the Shares for resale. Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. (d) Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted any tax consultants Purchaser deems advisable in connection the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. -5- 40 6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. (a) LEGENDS. The certificate or certificates representing the Shares shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws): (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (iii) Any legend required to be placed thereon by the California Commissioner of Corporations. (b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 7. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment, for any reason, with or without cause. 8. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference -6- 41 between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" means the right of the Company to buy back the Shares pursuant to the Repurchase Option set forth in Section 3(a) of this Agreement. Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased, rather than when and as the Repurchase Option expires, by filing an election under Section 83(b) (an "83(b) Election") of the Code with the Internal Revenue Service within 30 days from the date of purchase. Even if the fair market value of the Shares at the time of the execution of this Agreement equals the amount paid for the Shares, the election must be made to avoid income under Section 83(a) in the future. Purchaser understands that failure to file such an election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his or her federal income tax return for the calendar year in which the date of this Agreement falls. Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Shares hereunder, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which Purchaser may reside, and the tax consequences of Purchaser's death. Purchaser agrees that he will execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment and Statement of Decision Regarding Section 83(b) Election (the "Acknowledgment"), attached hereto as Exhibit D. Purchaser further agrees that Purchaser will execute and submit with the Acknowledgment a copy of the 83(b) Election, attached hereto as Exhibit E, if Purchaser has indicated in the Acknowledgment his or her decision to make such an election. 9. MARKET STANDOFF AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the public offering. 10. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and -7- 42 merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (d) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (e) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (f) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (g) SUCCESSORS AND ASSIGNS. The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [SIGNATURE PAGE FOLLOWS] -8- 43 The parties have executed this Agreement as of the date first set forth above. PERSISTENCE SOFTWARE, INC. By: _______________________________ Title: ____________________________ Address: 1720 South Amphlett Blvd. Suite 300 San Mateo, CA 94402 PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON PURCHASER ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. PURCHASER: [PURCHASER'S NAME] ____________________________________ (Signature) Address: ___________________________ ___________________________ Vesting Commencement Date: _______________ I, spouse of [___________, Purchaser], have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. _____________________________ Spouse of ________, Purchaser -9- 44 EXHIBIT A PROMISSORY NOTE $__________ ___________, California _________________, 199_ For value received, the undersigned promises to pay Persistence Software, Inc. a California corporation (the "Company"), at its principal office the principal sum of $_________ with interest from the date hereof at a rate of _____% per annum, compounded semiannually, on the unpaid balance of such principal sum. Such principal and interest shall be due and payable on , 200_. If the undersigned's employment or consulting relationship with the Company is terminated prior to payment in full of this Note, this Note shall be immediately due and payable. Principal and interest are payable in lawful money of the United States of America. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT INTEREST OR PENALTY. Should suit be commenced to collect any sums due under this Note, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of nonpayment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Pledge and Security Agreement between the undersigned and the Company of even date herewith. _____________________________ [name of Purchaser] 45 EXHIBIT B PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (the "Agreement") is entered into this _____ day of _________, 199_ by and between Persistence Software, Inc. a California corporation (the "Company") and ________________ ("Purchaser"). RECITALS In connection with Purchaser's purchase of certain shares of the Company's Common Stock (the "Shares") pursuant to a Common Stock Purchase Agreement dated _______________, 199_ between Purchaser and the Company, Purchaser is delivering a promissory note of even date herewith (the "Note") in full or partial payment of the exercise price for the Shares. The company requires that the Note be secured by a pledge of the Shares on the terms set forth below. AGREEMENT In consideration of the Company's acceptance of the Note as full or partial payment of the exercise price of the Shares, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Note shall become payable in full upon the voluntary or involuntary termination or cessation of employment of Purchaser with the Company, for any reason, with or without cause (including death or disability). 2. Purchaser shall deliver to the Secretary of the Company, or his or her designee (hereinafter referred to as the "Pledge Holder"), all certificates representing the Shares, together with an Assignment Separate from Certificate in the form attached to this Agreement as Attachment A executed by Purchaser and by Purchaser's spouse (if required for transfer), in blank, for use in transferring all or a portion of the Shares to the Company if, as and when required pursuant to this Agreement. In addition, if Purchaser is married, Purchaser's spouse shall execute the signature page attached to this Agreement. 3. As security for the payment of the Note and any renewal, extension or modification of the Note, Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company Purchaser's Shares (sometimes referred to herein as the "Collateral"). 4. In the event that Purchaser prepays all or a portion of the Note, in accordance with the provisions thereof, Purchaser intends, unless written notice to the contrary is delivered to the Pledge Holder, that the Shares represented by the portion of the Note so repaid, including annual interest thereon, shall continue to be so held by the Pledge Holder, to serve as independent collateral for the outstanding portion of the Note for the purpose of commencing the holding 46 period set forth in Rule 144(d) promulgated under the Securities Act of 1933, as amended (the "Securities Act"). 5. In the event of any foreclosure of the security interest created by this Agreement, the Company may sell the Shares at a private sale or may repurchase the Shares itself. The parties agree that, prior to the establishment of a public market for the Shares of the Company, the securities laws affecting sale of the Shares make a public sale of the Shares commercially unreasonable. The parties further agree that the repurchasing of such Shares by the Company, or by any person to whom the Company may have assigned its rights under this Agreement, is commercially reasonable if made at a price determined by the Board of Directors in its discretion, fairly exercised, representing what would be the fair market value of the Shares reduced by any limitation on transferability, whether due to the size of the block of shares or the restrictions of applicable securities laws. 6. In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the California Commercial Code including the right to sell the Collateral at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (a) To the extent necessary, proceeds shall be used to pay all reasonable expenses of the Company in enforcing this Agreement and the Note, including, without limitation, reasonable attorney's fees and legal expenses incurred by the Company. (b) To the extent necessary, proceeds shall be used to satisfy any remaining indebtedness under Purchaser's Note. (c) Any remaining proceeds shall be delivered to Purchaser. 7. Upon full payment by Purchaser of all amounts due under the Note, Pledge Holder shall deliver to Purchaser all Shares in Pledge Holder's possession belonging to Purchaser, and Pledge Holder shall thereupon be discharged of all further obligations under this Agreement; provided, however, that Pledge Holder shall nevertheless retain the Shares as escrow agent if at the time of full payment by Purchaser said Shares are still subject to a Repurchase Option in favor of the Company. -2- 47 The parties have executed this Pledge and Security Agreement as of the date first set forth above. COMPANY: PERSISTENCE SOFTWARE, INC. By:_______________________________________ Name:_____________________________________ (print) Title:____________________________________ Address: 1720 South Amphlett Blvd. Suite 300 San Mateo, CA 94402 PURCHASER: [NAME OF PURCHASER] __________________________________________ (Signature) Address: __________________________________________ __________________________________________ -3- 48 ATTACHMENT A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Pledge and Security Agreement between the undersigned ("Purchaser") and Persistence Software, Inc. (the "Company") dated _____________ (the "Agreement"), Purchaser hereby sells, assigns and transfers unto the Company _______________________________ (________) shares of the Common Stock of the Company standing in Purchaser's name on the Company's books and represented by Certificate No. _____, and hereby irrevocably appoints _______________________ to transfer said stock on the books of the Company with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT. Dated: ____________ Signature: _______________________________________ [name of Purchaser] _______________________________________ Spouse of ________, Purchaser (if applicable) Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to perfect the security interest of the Company pursuant to the Agreement. 49 EXHIBIT C ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Common Stock Purchase Agreement between the undersigned ("Purchaser") and Persistence Software, Inc. (the "Company") dated _______________ (the "Agreement"), Purchaser hereby sells, assigns and transfers unto the Company _________________________________ (________) shares of the Common Stock of the Company standing in Purchaser's name on the Company's books and represented by Certificate No. ______, and does hereby irrevocably constitute and appoint _____________________________ to transfer said stock on the books of the Company with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO. Dated: ______________________ Signature: _______________________________________ [name of Purchaser] _______________________________________ Spouse of _________, Purchaser (if applicable) Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser. 50 EXHIBIT D ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING SECTION 83(B) ELECTION The undersigned has entered a stock purchase agreement with Persistence Software, Inc. a California corporation (the "Company"), pursuant to which the undersigned is purchasing _________ shares of Common Stock of the Company (the "Shares"). In connection with the purchase of the Shares, the undersigned hereby represents as follows: 1. The undersigned has carefully reviewed the stock purchase agreement pursuant to which the undersigned is purchasing the Shares. 2. The undersigned either [check and complete as applicable]: (a) ____ has consulted, and has been fully advised by, the undersigned's own tax advisor, __________________________, whose business address is _____________________________, regarding the federal, state and local tax consequences of purchasing the Shares, and particularly regarding the advisability of making elections pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") and pursuant to the corresponding provisions, if any, of applicable state law; or (b) ____ has knowingly chosen not to consult such a tax advisor. 3. The undersigned hereby states that the undersigned has decided [check as applicable]: (a) ____ to make an election pursuant to Section 83(b) of the Code, and is submitting to the Company, together with the undersigned's executed Common Stock Purchase Agreement, an executed form entitled "Election Under Section 83(b) of the Internal Revenue Code of 1986;" or (b) ____ not to make an election pursuant to Section 83(b) of the Code. 4. Neither the Company nor any subsidiary or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned's purchase of the Shares or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law. Date:_________________________________ _____________________________________ [name of Purchaser] Date:_________________________________ _____________________________________ Spouse of ___________, Purchaser 51 EXHIBIT E ELECTION UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code, to include in taxpayer's gross income for the current taxable year, the amount of any compensation taxable to taxpayer in connection with taxpayer's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME OF TAXPAYER: __________________ NAME OF SPOUSE: _____________________ ADDRESS:_____________________________ _____________________________ IDENTIFICATION NO. OF TAXPAYER:_________________________ IDENTIFICATION NO. OF SPOUSE:___________________________ TAXABLE YEAR: 199_ 2. The property with respect to which the election is made is described as follows: _________ shares of the Common Stock $0.001 par value, of Persistence Software, Inc. a California corporation (the "Company"). 3. The date on which the property was transferred is: _______________, 199_. 4. The property is subject to the following restrictions: Repurchase option at cost in favor of the Company upon termination of taxpayer's employment or consulting relationship. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $_________. 6. The amount (if any) paid for such property: $_______________ The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: _____________________________ ________________________________________ Taxpayer Dated: _____________________________ ________________________________________ Spouse of Taxpayer 52 RECEIPT hereby acknowledges receipt of a promissory note in the amount of $__________ given by [name of Purchaser] and cash payment in the amount of $__________ as consideration for Certificate No. __ for shares of Common Stock of Persistence Software, Inc. Dated: ________________ Persistence Software, Inc. By:_________________________________________ Title:______________________________________ 53 NORMAL.DOT________ RECEIPT AND CONSENT The undersigned hereby acknowledges receipt of a photocopy of Certificate No. __ for _________ shares of Common Stock of Persistence Software, Inc. (the "Company"). The undersigned further acknowledges that the Secretary of the Company, or his or her designee, is acting as escrow holder pursuant to the Common Stock Purchase Agreement Purchaser has previously entered into with the Company. As escrow holder, the Secretary of the Company, or his or her designee, holds the original of the aforementioned certificate issued in the undersigned's name. Dated: _________________________ ______________________________________ [name of Purchaser] 54 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN NOTICE OF STOCK OPTION GRANT [Forms for Use Post-IPO] <> <> <> You have been granted an option to purchase Common Stock of Persistence Software, Inc. (the "Company") as follows: Board Approval Date: <> Date of Grant (Later of Board Approval Date or Commence- ment of Employment/Consulting): <> Exercise Price per Share: $<> Total Number of Shares Granted: <> Total Exercise Price: $<> Type of Option: <> Incentive Stock Option <> Nonstatutory Stock Option Term/Expiration Date: <> Vesting Commencement Date: <> Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: <>
55 Termination Period: Option may be exercised for 30 days after termination of employment or consulting relationship except as set out in Sections 6 and 7 of the Stock Option Agreement (but in no event later than the Expiration Date). Transferability: [Not Transferable.] [Transferable as follows: ]
By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1997 Stock Plan and the Stock Option Agreement, both of which are attached and made a part of this document. <>: PERSISTENCE SOFTWARE, INc. By: Signature Print Name Print Name and Title Address (if different from above): Address: 1720 South Amphlett Blvd., Suite 300 San Mateo, CA 94402 56 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN STOCK OPTION AGREEMENT 1. GRANT OF OPTION. Persistence Software, Inc., a Delaware corporation (the "Company"), hereby grants to <> ("Optionee"), an option (the "Option") to purchase a total number of shares of Common Stock (the "Shares") set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, definitions and provisions of the Persistence Software, Inc. Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. To the extent designated an Incentive Stock Option in the Notice of Stock Option Grant, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and, to the extent not so designated, this Option is intended to be a Nonstatutory Stock Option. Notwithstanding the foregoing, if designated as an Incentive Stock Option, in the event that the Shares subject to this Option (and all other Incentive Stock Options granted to Optionee by the Company or any Parent or Subsidiary) that first become exercisable in any calendar year have an aggregate fair market value (determined for each Share as of the date of grant of the option covering such Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option, in accordance with Section 5(b) of the Plan. 2. EXERCISE OF OPTION. (a) RIGHT TO EXERCISE. This Option is exercisable during its Term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Stock Option Agreement. In the event of Optionee's death, disability or the termination of Optionee's Continuous Service, the exercisability of the Option is governed by the applicable provisions of the Plan and this Stock Option Agreement. This Option may not be exercised for a fraction of a Share. (b) METHOD OF EXERCISE. (i) This Option shall be exercisable in whole or in part as to Shares which have vested under the Vesting Schedule indicated on the Notice of Stock Option Grant by execution and delivery to the Company a written notice of exercise in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as to the holder's 57 investment intent with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice of exercise shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice of exercise shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed written notice of exercise, accompanied by such aggregate Exercise Price. (ii) As a condition to the exercise of this Option, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the exercise of the Option or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise, as set forth in Section 11 of this Agreement. (iii) No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of applicable law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock of the Company that (i) in the case of Shares acquired upon exercise of an Option, have either been owned by Optionee for more than six (6) months on the date of surrender (or such other period as may be required to avoid a charge to the Company's earnings) or were not acquired, directly or indirectly, from the Company, and (ii) have a fair market value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (d) if there is a public market for the Shares and they are registered under the Securities Act of 1933, as amended, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. -2- 58 5. TERMINATION OF CONTINUOUS SERVICE. In the event of termination of Optionee's Continuous Service, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set forth in the Notice of Stock Option Grant. To the extent that Optionee was not entitled to exercise this Option at such Termination Date, or if Optionee does not exercise this Option within the Termination Period, the Option shall terminate. 6. DISABILITY OF OPTIONEE. (a) Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee's Continuous Service as a result of Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the Termination Date (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), exercise this Option to the extent Optionee was entitled to exercise it as of such Termination Date. To the extent that Optionee was not entitled to exercise the Option as of the Termination Date, or if Optionee does not exercise such Option (to the extent so entitled) within the time specified in this Section 6(a), the Option shall terminate. (b) Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee's Continuous Service as a result of disability not constituting a total and permanent disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the Termination Date (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), exercise the Option to the extent Optionee was entitled to exercise it as of such Termination Date; provided, however, that if this is an Incentive Stock Option and Optionee fails to exercise this Incentive Stock Option within three (3) months from the Termination Date, this Option will cease to qualify as an Incentive Stock Option (as defined in Section 422 of the Code) and Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such exercise in an amount generally measured by the difference between the Exercise Price for the Shares and the fair market value of the Shares on the date of exercise. To the extent that Optionee was not entitled to exercise the Option at the Termination Date, or if Optionee does not exercise such Option to the extent so entitled within the time specified in this Section 6(b), the Option shall terminate. 7. DEATH OF OPTIONEE. In the event of the death of Optionee (a) during the Term of this Option and while an Employee or Consultant of the Company and having been in Continuous Service since the date of grant of the Option, or (b) within thirty (30) days after Optionee's Termination Date, the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the Termination Date. 8. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution or pursuant to a -3- 59 domestic relations order (as defined by the Code or rules thereunder), except as set forth in the Notice of Stock Option Grant and subject to Applicable Laws. This Option may be exercised during the lifetime of Optionee only by him or her or by a transferee permitted by this Section 8. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 9. TERM OF OPTION. This Option may be exercised only within the Term set forth in the Notice of Stock Option Grant, subject to the limitations set forth in Section 7 of the Plan. 10. TAX CONSEQUENCES. Optionee acknowledges that he or she has read the brief summary set forth below of certain of the federal tax consequences of exercise of this Option and disposition of the Shares under the laws in effect as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an item of alternative minimum taxable income for federal tax purposes and may subject Optionee to the alternative minimum tax in the year of exercise. (b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option does not qualify as an Incentive Stock Option, Optionee may incur regular federal (and state) income tax liability upon the exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (c) DISPOSITION OF SHARES. In the case of a Nonstatutory Stock Option, if Shares are held for more than 12 months, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for more than one year after exercise and more than two years after the Date of Grant, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an Incentive Stock Option are disposed of within either of such two holding periods, then any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the fair market value of the Shares on the date of exercise, or (ii) the sales proceeds of the Shares. -4- 60 (d) NOTICE OF DISQUALIFYING DISPOSITION OF INCENTIVE STOCK OPTION SHARES. If the Option granted to Optionee herein is an Incentive Stock Option, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the Incentive Stock Option on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, Optionee shall notify the Company in writing within thirty (30) days after the date of any such disposition. Optionee acknowledges and agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from the early disposition by payment in cash or out of the current earnings paid to Optionee. 11. WITHHOLDING TAX OBLIGATIONS. Optionee acknowledges and agrees that the delivery of any Shares under the Plan is conditioned on satisfaction by the Optionee of applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of an Option. Such withholding obligations shall be satisfied in accordance with the provisions of Section 12 of the Plan. 12. MARKET STANDOFF AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Optionee hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the public offering. [Signature Page Follows] -5- 61 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one document. PERSISTENCE SOFTWARE, INC. By: (Print name and title) OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Dated: <> -6- 62 EXHIBIT A PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN NOTICE OF EXERCISE To: PERSISTENCE SOFTWARE, INC. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase shares of PERSISTENCE SOFTWARE, INC. Common Stock, under and pursuant to the Persistence Software, Inc. 1997 Stock Plan and the Stock Option Agreement dated , as follows: Date of Grant (or Grant Number): Type of Option (ISO or NSO): Date of Purchase: Number of Shares: Purchase Price: Method of Payment of Purchase Price: Social Security No.: The shares should be issued as follows: Name: Address: Signed: Date: 63 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN COMMON STOCK PURCHASE AGREEMENT This Restricted Stock Purchase Agreement (the "Agreement") is made as of __________________, 19__, by and between Persistence Software, Inc., a Delaware corporation (the "Company"), and ____________________ ("Purchaser") pursuant to the Company's 1997 Stock Plan. 1. SALE OF STOCK. Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, _______________ shares of the Company's Common Stock (the "Shares") at a purchase price of $_____ per Share for a total purchase price of $_________________. The term "Shares" refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser's ownership of the Shares. 2. PURCHASE. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company, in accordance with Section 11 of the Plan, simultaneously with the execution of this Agreement by the parties or on such other date as the Company and Purchaser shall agree (the "Purchase Date"). On the Purchase Date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser's name) against payment of the purchase price therefor by Purchaser by check made payable to the Company. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company's Repurchase Option (as defined below). After any Shares have been released from the Repurchase Option, Purchaser shall not assign, encumber or dispose of any interest in such Shares except in compliance with the provisions below and applicable securities laws. (a) REPURCHASE OPTION. (i) In the event of the voluntary or involuntary termination of Purchaser's Continuous Service for any reason (including death or disability), with or without cause, the Company shall upon the date of such termination (the "Termination Date") have an irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days from such date to repurchase all or any portion of the Shares held by Purchaser as of the Termination Date which have not yet been released from the Company's Repurchase Option at the original purchase price per Share specified in Section 1 (adjusted for any stock splits, stock dividends and the like). 64 (ii) The Repurchase Option shall be exercised by the Company by written notice to Purchaser or Purchaser's executor and, at the Company's option, (A) by delivery to Purchaser or Purchaser's executor with such notice of a check in the amount of the purchase price for the Shares being purchased, or (B) in the event Purchaser is indebted to the Company, by cancellation by the Company of an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (C) by a combination of (A) and (B) so that the combined payment and cancellation of indebtedness equals such purchase price. Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser. (iii) _______ percent (___%) of the Shares shall initially be subject to the Repurchase Option. The Shares shall be released from the Repurchase Option in accordance with the following Vesting Schedule: [Example:): __ of the total number of Shares shall be released from the Repurchase Option on the __-month anniversary of the Vesting Commencement Date (as set forth on the signature page of this Agreement), and an additional __ of the total number of Shares shall be released from the Repurchase Option each month thereafter, until all Shares are released from the Repurchase Option] (provided in each case that Purchaser's Continuous Service has not been terminated prior to the date of any such release). Fractional shares shall be rounded to the nearest whole share. (b) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement, including insofar as applicable the Company's Repurchase Option. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are satisfied. (c) TERMINATION OF RIGHTS. Upon the expiration or exercise of the Repurchase Option, a new certificate or certificates representing the Shares not repurchased shall be issued, on request, without the legend referred to in Section 5(a) below and delivered to Purchaser. 4. ESCROW OF UNVESTED SHARES. For purposes of facilitating the enforcement of the provisions of Section 3 above, Purchaser agrees, immediately upon receipt of the certificate(s) for the Shares subject to the Repurchase Option, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached to this Agreement as Exhibit A executed by Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the Secretary of the Company, or the Secretary's designee, to hold such certificate(s) and Assignment Separate from Certificate in escrow and to take all such actions and to effectuate all such transfers and/or releases as are in accordance with the terms of this Agreement. Purchaser hereby acknowledges that the Secretary of the Company, or the Secretary's designee, is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment is coupled with an interest and is accordingly irrevocable. Purchaser agrees that said escrow holder shall not be liable to any party hereof (or -3- 65 to any other party). The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Purchaser agrees that if the Secretary of the Company, or the Secretary's designee, resigns as escrow holder for any or no reason, the Board of Directors of the Company shall have the power to appoint a successor to serve as escrow holder pursuant to the terms of this Agreement. 5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. (a) LEGENDS. The certificate or certificates representing the Shares shall bear the following legend (as well as any legends required by applicable state and federal corporate and securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 6. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause. 7. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" means the right of the Company to buy back the Shares pursuant to the Repurchase Option set forth in Section 3(a) of this Agreement. Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased, rather than when and as the Repurchase Option expires, by filing an election under Section 83(b) (an "83(b) Election") of the Code with the Internal Revenue Service within 30 days from the date of purchase. Even if the fair market value of the Shares at the time of the execution of this Agreement equals the amount paid for the Shares, the election must be made to avoid income under Section 83(a) in the future. Purchaser understands that failure to file such an -4- 66 election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his or her federal income tax return for the calendar year in which the date of this Agreement falls. Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Shares hereunder, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which Purchaser may reside, the tax consequences of Purchaser's death and the decision as to whether or not to file an 83(b) Election in connection with the acquisition of the Shares. Purchaser agrees that he will execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment and Statement of Decision Regarding Section 83(b) Election (the "Acknowledgment"), attached hereto as Exhibit B. Purchaser further agrees that Purchaser will execute and submit with the Acknowledgment a copy of the 83(b) Election, attached hereto as Exhibit C, if Purchaser has indicated in the Acknowledgment his or her decision to make such an election. 8. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms. (d) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (e) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax or 48 -5- 67 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth below or as subsequently modified by written notice. (f) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (g) SUCCESSORS AND ASSIGNS. The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company. [Signature Page Follows] -6- 68 The parties have executed this Agreement as of the date first set forth above. PERSISTENCE SOFTWARE, INC. By: Title: Address: PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON PURCHASER ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. PURCHASER: [PURCHASER NAME] (Signature) Address: Vesting Commencement Date: I, , spouse of [Purchaser], have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or similar interest that I may have in the Shares shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. Spouse of [Purchaser] -7- 69 EXHIBIT C EXHIBIT A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Common Stock Purchase Agreement between the undersigned ("Purchaser") and Persistence Software, Inc. (the "Company") dated _______________ (the "Agreement"), Purchaser hereby sells, assigns and transfers unto the Company _________________________________ (________) shares of the Common Stock of the Company standing in Purchaser's name on the Company's books and represented by Certificate No. _____, and does hereby irrevocably constitute and appoint ______________________ to transfer said stock on the books of the Company with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO. Dated: ______________________ Signature: _____________________________________ [Purchaser] _____________________________________ Spouse of [Purchaser] (if applicable) Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser. 70 RECEIPT Persistence Software, Inc. hereby acknowledges receipt of a check in the amount of $__________ given by [______________, Purchaser] as consideration for Certificate No. ___________ for ____________ shares of Common Stock of Persistence Software, Inc. Dated: ________________ Persistence Software, Inc. By:_________________________________________ Title:______________________________________ 71 RECEIPT AND CONSENT The undersigned hereby acknowledges receipt of a photocopy of Certificate No. ______ for _____________ shares of Common Stock of Persistence Software, Inc. (the "Company"). The undersigned further acknowledges that the Secretary of the Company, or his or her designee, is acting as escrow holder pursuant to the Restricted Stock Purchase Agreement Purchaser has previously entered into with the Company. As escrow holder, the Secretary of the Company, or his or her designee, holds the original of the aforementioned certificate issued in the undersigned's name. Dated: _________________________ ___________________________ [Purchaser] 72 EXHIBIT B ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING SECTION 83(b) ELECTION The undersigned has entered a stock purchase agreement with Persistence Software, Inc., a Delaware corporation (the "Company"), pursuant to which the undersigned is purchasing ______________ shares of Common Stock of the Company (the "Shares"). In connection with the purchase of the Shares, the undersigned hereby represents as follows: 1. The undersigned has carefully reviewed the stock purchase agreement pursuant to which the undersigned is purchasing the Shares. 2. The undersigned either [check and complete as applicable]: (a) ____ has consulted, and has been fully advised by, the undersigned's own tax advisor, __________________________, whose business address is _____________________________, regarding the federal, state and local tax consequences of purchasing the Shares, and particularly regarding the advisability of making elections pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") and pursuant to the corresponding provisions, if any, of applicable state law; or (b) ____ has knowingly chosen not to consult such a tax advisor. 3. The undersigned hereby states that the undersigned has decided [check as applicable]: (a) ____ to make an election pursuant to Section 83(b) of the Code, and is submitting to the Company, together with the undersigned's executed Common Stock Purchase Agreement, an executed form entitled "Election Under Section 83(b) of the Internal Revenue Code of 1986"; or (b) ____ not to make an election pursuant to Section 83(b) of the Code. 73 4._______Neither the Company nor any subsidiary or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned's purchase of the Shares or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law. Date: __________________ _________________________________ [Purchaser] Date: __________________ _________________________________ Spouse of [Purchaser] 74 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code, to include in taxpayer's gross income for the current taxable year, the amount of any compensation taxable to taxpayer in connection with taxpayer's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME OF TAXPAYER: [Purchaser] NAME OF SPOUSE: ADDRESS: IDENTIFICATION NO. OF TAXPAYER: IDENTIFICATION NO. OF SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: ______________ shares of the Common Stock $0.001 par value, of Persistence Software, Inc., a Delaware corporation (the "Company"). 3. The date on which the property was transferred is: __________________ 4. The property is subject to the following restrictions: Repurchase option at cost in favor of the Company upon termination of taxpayer's employment or consulting relationship. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $_____________. 6. The amount (if any) paid for such property: $______________ The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: ______________________ ________________________________ Taxpayer Dated: ______________________ ________________________________ Spouse of Taxpayer EX-10.7 8 1999 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.7 PERSISTENCE SOFTWARE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the Persistence Software, Inc. 1999 Employee Stock Purchase Plan. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means Persistence Software, Inc., a Delaware corporation. (e) "Compensation" means all regular straight time gross earnings and commissions, and shall not include payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Continuous Status as an Employee" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Company, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to Company policy adopted from time to time. (g) "Contributions" means all amounts credited to the account of a participant pursuant to the Plan. (h) "Corporate Transaction" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "Designated Subsidiary" means any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan; provided, however, that the Board shall only have the discretion to designate a Subsidiary if the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. 2 (j) "Employee" means any person, including an Officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or a Designated Subsidiary. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means, as of any date, the value of Common Stock determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding Trading Day), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding Trading Day), as reported in The Wall Street Journal. For purposes of the Offering Date of the first Offering Period under the Plan, the Fair Market Value of a share of the Common Stock of the Company shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended, for the initial public offering of the Company's Common Stock (the "Registration Statement"). (m) "Offering Date" means the first Trading Day of each Offering Period of the Plan. (n) "Offering Period" means a period of approximately twenty-four (24) months and not exceeding twenty-seven (27) months, except for the first Offering Period as set forth in Section 4(a). The duration and timing of the Offering Periods may be changed pursuant to Section 4 of the Plan. (o) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "Plan" means this Persistence Software, Inc. 1999 Employee Stock Purchase Plan. (q) "Purchase Date" means the last Trading Day of each Purchase Period. (r) "Purchase Period" means a period of approximately six (6) months within an Offering Period, except for the first Purchase Period as set forth in Section 4(b). The duration and timing of the Purchase Periods may be changed pursuant to Section 4 of the Plan. (s) "Purchase Price" means with respect to a Purchase Period an amount equal to 85% of the Fair Market Value (as defined in Section 2(l) above) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the -2- 3 event (i) there is any increase in the number of Shares available for issuance under the Plan (including without limitation an automatic increase pursuant to Section 14(a) below or as a result of a stockholder-approved amendment to the Plan), and (ii) all or a portion of such additional Shares are to be issued with respect to one or more Offering Periods that are underway at the time of such increase ("Additional Shares"), and (iii) the Fair Market Value of a Share of Common Stock on the date of such increase is higher than the Fair Market Value on the Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to such Additional Shares shall be 85% of the Fair Market Value of a Share of Common Stock on the date of such increase or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. (t) "Share" means a share of Common Stock, as adjusted in accordance with Section 20 of the Plan. (u) "Subsidiary" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (v) "Trading Day" means a day on which national stock exchanges and the Nasdaq System are open for trading. 3. ELIGIBILITY. (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code; provided, however, that eligible Employees may not participate in more than one Offering Period at a time. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary, or (ii) to the extent such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of Fair Market Value (as defined in Section 2(l) above) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS AND PURCHASE PERIODS. (a) OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods generally of twenty-four (24) months duration and not exceeding twenty-seven (27) months duration, with new Offering Periods commencing on or about February 1 and August 1 -3- 4 of each year, or at such other time or times as may be determined by the Board of Directors. Offering Periods shall commence on a continuing and overlapping basis until terminated in accordance with Section 21 hereof. Notwithstanding the foregoing, the first Offering Period under the Plan shall commence on the beginning of the effective date of the Registration Statement on Form S-1 for the initial public offering of the Company's Common (the "IPO Date") and continue until the last Trading Day on or before July 31, 2001. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. (b) PURCHASE PERIODS. Each Offering Period shall generally consist of four (4) Purchase Periods of approximately six (6) months duration, the first commencing on the Offering Date and ending on the July 31 or January 31 next following, and each other Purchase Period in such Offering Period commencing on the day after the last day of the preceding Purchase Period and ending on the July 31 or January 31 next following; provided, however, that the first Purchase Period shall commence on the IPO Date and shall end on January 31, 2000. The Board of Directors of the Company shall have the power to change the duration and/or frequency of Purchase Periods with respect to future purchases without stockholder approval if such change is announced at least five (5) days prior to the otherwise scheduled beginning of the first Purchase Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. (b) The subscription agreement shall set forth the Employee's participation election, either in the form of a designation of the percentage of the Employee's Compensation the Employee elects to have deducted from his or her pay on each pay day during the Offering Period and credited to his or her account under the Plan to be used to purchase shares on the Purchase Date for each of the relevant Purchase Periods, which percentage shall be not less than one percent (1%) and not more than twenty percent (20%), or, if permitted by the Board, in the form of a designation of the number of whole shares the Employee elects to purchase at the end of each Purchase Period with respect to the Offering Period, up to such maximum number of shares as the Board may establish from time to time before an Offering Date. (c) A participant's subscription shall be effective for each successive Offering Period in which he or she is eligible to participate, unless the participant withdraws in accordance with Section 11(a). (d) In addition to the limits on an Employee's participation in the Plan set forth herein, the Board may establish limits on the number of shares an Employee may elect to -4- 5 purchase with respect to any Offering Period if such limit is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 6. GRANT OF OPTION. On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price, provided, however, that the maximum number of Shares an Employee may purchase during each Purchase Period shall be 2,500 Shares (subject to adjustment pursuant to Section 20 below), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 9(b). 7. METHOD OF PAYMENT OF CONTRIBUTIONS. (a) PAYROLL DEDUCTIONS. (i) If an Employee's participation election is in the form of an election to contribute a percentage of his or her Compensation through payroll deductions, or if an Employee otherwise elects to make contributions to the Plan through payroll deductions of a specified percentage of his or her Compensation as permitted by the Board with respect to an Employee's participation election in the form of an election to purchase a designated number of shares at the end of each Purchase Period, such payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid in the Offering Period to which such subscription agreement and payroll deduction authorization is applicable, unless sooner terminated by the participant as provided in Section 11. All payroll deductions made by a participant shall be credited to his or her account under the Plan. (ii) A participant may discontinue his or her participation in the Plan as provided in Section 11, or on one occasion only during an Offering Period may increase and on one occasion only during an Offering Period decrease the rate of his or her payroll deductions with respect to the Offering Period by completing and filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The change in rate shall be effective as of the beginning of the next calendar month commencing ten (10) or more business days after the date the new subscription is filed. (iii) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased by the Company to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 11. (b) CASH OR STOCK CONTRIBUTIONS. To the extent permitted by the Board, a participant may make contributions to the Plan for purchase of shares in cash or by tendering Company stock or by election to receive shares representing the difference between the Purchase Price and the Fair Market Value of the shares, less applicable withholding. Any such cash or -5- 6 stock contribution, or any election to receive net shares, must be received by the Company in accordance with procedures and at such times as established by the Board, and a participant's failure to make such contributions or such an election within the time required, to the extent the aggregate Purchase Price of the number of shares the participant has an option to purchase on the Purchase Date exceeds payroll deduction contributions made by the participant as of the Purchase Date, shall be deemed a withdrawal from the Offering Period with respect to shares subject to the option not purchased on the applicable Purchase Date and with respect to all other Purchase Periods in such Offering Period. 8. WITHHOLDING TAX OBLIGATIONS. At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for payment to the Company of the Company's federal, state or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by the participant. 9. EXERCISE OF OPTION. (a) Unless a participant withdraws from the Plan as provided in Section 11, his or her option for the purchase of Shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of full Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. (b) If the Board determines that, on a given Purchase Date, the number of Shares with respect to which options are to be exercised may exceed (i) the number of Shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period (after deduction of all Shares for which options have been exercised or are then outstanding), or (ii) the number of shares available for sale under the Plan on such Purchase Date (after deduction of all Shares for which options have been exercised or are then outstanding), the Board may, in its sole discretion, provide that the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, shall be allocated pro rata, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date and (x) continue all Offering Periods then in effect or (y) pursuant to Section 21 below, terminate any or all Offering Periods then in effect. The Board may direct that the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence be allocated pro rata, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's stockholders subsequent to such Offering Date. -6- 7 (c) Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of Shares at the termination of each Purchase Period which is insufficient to purchase a full Share shall be carried over to the next Purchase Period if the Employee continues to participate in the Plan, or if the Employee does not continue to participate, shall be returned to the participant. Any other amounts left over in a participant's account after a Purchase Date shall be returned to the participant. 10. RIGHTS AS STOCKHOLDER; DELIVERY OF CERTIFICATE. (a) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (b) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. (c) As promptly as practicable after each Purchase Date of each Offering Period, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the Shares purchased upon exercise of his or her option. 11. VOLUNTARY WITHDRAWAL. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to each Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current Offering Period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during and with respect to such Offering Period. (b) A participant's voluntary withdrawal from the Plan with respect to an Offering Period will not have any effect upon his or her eligibility to participate in a succeeding Offering Period or in any similar plan which may hereafter be adopted by the Company. 12. AUTOMATIC WITHDRAWAL. (a) REDUCTION OF HOURS. In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (b) TERMINATION OF EMPLOYMENT. Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period (other than on account of death), he or she will be automatically withdrawn from the Plan effective as of the date of such termination of his or her Continuous Status as an Employee, the Contributions -7- 8 credited to his or her account will be returned to him or her, and his or her option will be automatically terminated. (c) DEATH OF PARTICIPANT. Upon the death of a participant prior to the Purchase Date of an Offering Period, he or she will be automatically withdrawn from the Plan, the Contributions credited to his or her account will be returned to the person or persons entitled thereto under Section 16, and his or her option will be automatically terminated. (d) REDUCTION IN FAIR MARKET VALUE. To the extent permitted by any applicable laws, regulations or stock exchange rules, if the Fair Market Value of the Shares on a Purchase Date of an Offering Period (other than the final Purchase Date of such Offering Period) is less than the Fair Market Value of the Shares on the Offering Date for such Offering Period, then every participant shall automatically (i) be withdrawn from such Offering Period at the close of such Purchase Date and after the acquisition of Shares for such Purchase Period, and (ii) be enrolled in the first Offering Period commencing subsequent to such Purchase Date. Participants shall automatically be withdrawn as of July 31, 1999 from the Offering Period beginning on the IPO Date and re-enrolled in the Offering Period beginning on August 1, 1999 if the Fair Market Value of the Shares on the IPO Date is greater than the Fair Market Value of the Shares on July 31, 1999, unless a participant notifies the Administrator prior to July 31, 1999 that he or she does not wish to be withdrawn and re-enrolled. All payroll deductions accumulated in a participant's account as of a withdrawal date pursuant to this Section 12(d) shall be returned to the participant. 13. INTEREST. No interest shall accrue on the Contributions of a participant in the Plan. 14. STOCK. The maximum number of Shares which shall be made available for sale under the Plan shall be 600,000 Shares, plus an annual increase on the first day of each of the Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004, equal to the lesser of (A) 250,000 Shares, (B) 1% of the Shares outstanding on the last day of the immediately preceding fiscal year, or (C) such lesser number of Shares as is determined by the Board, subject to adjustment upon changes in capitalization of the Company as provided in Section 20. 15. ADMINISTRATION. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 16. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any Shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of a Purchase Period but prior to delivery to him or her of such Shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event -8- 9 of such participant's death prior to the Purchase Date of an Offering Period. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. Such designation of beneficiary may be changed by the participant (with the consent of his or her spouse, if any) at any time by written notice effective upon receipt by the Company of such notice. (b) In the absence of a beneficiary validly designated in accordance with Section 16(a) who is living at the time of such participant's death, upon the death of the participant the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 17. TRANSFERABILITY. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the participant (other than by will, the laws of descent and distribution, or as provided in Section 16). Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 11. 18. USE OF FUNDS. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 19. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 20. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of Shares covered by each option under the Plan which has not yet been exercised and the number of Shares which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the maximum number of shares of Common Stock which may be purchased by a participant in a Purchase Period, the number of shares of Common Stock set forth in Section 14 above, and the price per Share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company, which such increase or decrease occurs after the effective date of this Plan; provided, -9- 10 however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) CORPORATE TRANSACTIONS. In the event of a dissolution or liquidation of the Company, any Purchase Period and Offering Period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, each Purchase Period and Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as of which date any Purchase Period and Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 11. For purposes of this Section 20(b), an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the Corporate Transaction if the holder had been, immediately prior to the Corporate Transaction , the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided in Section 20(a)); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the Corporate Transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. -10- 11 21. AMENDMENT AND TERMINATION. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 20, no such amendment or termination of the Plan may affect options previously granted, provided that the Plan or an Offering Period may be terminated by the Board on a Purchase Date or by the Board's setting a new Purchase Date with respect to an Offering Period and Purchase Period then in progress if the Board determines that termination of the Plan and/or the Offering Period is in the best interests of the Company and the stockholders or if continuation of the Plan and/or the Offering Period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally accepted accounting rules applicable to the Plan. Except as provided in Section 20 and this Section 21, no amendment to the Plan shall make any change in any option previously granted which adversely affects the rights of any participant. In addition, to the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation) or Rule 16b-3 under the Exchange Act, the Company shall obtain stockholder approval in such a manner and to such a degree as so required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods and Purchase Periods, limit the frequency and/or number of changes in the amount withheld from a participant's Compensation during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 22. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares -11- 12 are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the IPO Date. It shall continue in effect for a term of twenty (20) years unless sooner terminated under Section 21. 25. ADDITIONAL RESTRICTIONS OF RULE 16b-3. The terms and conditions of options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -12- 13 PERSISTENCE SOFTWARE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the Persistence Software, Inc. 1999 Employee Stock Purchase Plan (the "Plan") commencing with the Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 20% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on each Purchase Date of an Offering Period unless I otherwise withdraw from the Offering Period prior to a Purchase Date by giving written notice to the Company for such purpose. 4. I understand that I may decrease the rate of my Contributions on one occasion only during any Offering Period, and that I may increase the rate of my Contributions on one occasion only during any Offering Period, by completing and filing a new Subscription Agreement with such decrease or increase, as the case may be, taking effect as of the beginning of the calendar month following the date of filing of the new Subscription Agreement, if filed at least ten (10) business days prior to the beginning of such month. I also understand that I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period in which I am eligible to participate commencing after the new Subscription Agreement is filed. 5. I understand that I may discontinue my participation in an Offering Period at any time prior to a Purchase Date as provided in Section 11 of the Plan, and that if I do so I will not be permitted to renew participation in such Offering Period. 14 I UNDERSTAND THAT UNLESS I DISCONTINUE MY PARTICIPATION IN AN OFFERING PERIOD AS PROVIDED IN SECTION 11 OF THE PLAN OR CHANGE THE RATE OF DEDUCTIONS BY FILING A NEW SUBSCRIPTION AGREEMENT, MY ELECTION MADE UNDER THIS SUBSCRIPTION AGREEMENT WILL CONTINUE TO BE EFFECTIVE FOR EACH SUCCESSIVE OFFERING PERIOD COMMENCING AFTER THE TERMINATION OF AN OFFERING PERIOD IN WHICH I HAVE PARTICIPATED. 6. I have received a copy of the Company's most recent description of the Plan and a copy of the complete "Persistence Software, Inc. 1999 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 7. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): ------------------------------------ ------------------------------------ 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan: NAME: (Please print) ------------------------------------ (First) (Middle) (Last) - -------------------- ------------------------------------- (Relationship) (Address) ------------------------------------- Summary of Tax Treatment on Sale of Shares The following information regarding the federal tax treatment on sale of shares acquired under the Plan is only a summary and is subject to change, and is not intended to represent or provide tax advice to the participant, his or her spouse or beneficiaries. You should consult a tax advisor concerning the tax implications of the purchase and sale of stock under the Plan. If any shares received pursuant to the Plan are sold or otherwise disposed of within two (2) years after the first day of the Offering Period during which I purchased such shares or within one (1) year after the Purchase Date, the excess of the fair market value of the shares on the Purchase Date over the price paid for the shares on such Purchase Date will be treated for federal income tax purposes as ordinary compensation income at the time of such disposition, regardless of the amount received on sale or other disposition of the shares, even if such amount is less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. -2- 15 If any shares received pursuant to the Plan are sold or otherwise disposed of at any time after expiration of the 2-year and 1-year holding periods, the lesser of 15% of the fair market value of the shares on the Offering Date or the excess of the fair market value of the shares at the time of such sale or disposition over the price paid for the shares on the Purchase Date will be treated for federal income tax purposes as ordinary compensation income. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. 9. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of shares within two (2) years after the first day of the Offering Period during which I purchased such shares or within one (1) year after the Purchase Date, and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 10. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE:______________________ SOCIAL SECURITY #:______________ DATE:___________________________ SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse): ________________________________ (Signature) ________________________________ (Print name) -3- 16 PERSISTENCE SOFTWARE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, __________________________, hereby elect to withdraw my participation in the Persistence Software, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the Offering Period commencing ____________. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me with respect to the Offering Period from which I have hereby withdrawn. I further understand and agree that I will be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement prior to the commencement of such Offering Period in accordance with procedures established by the Company. Dated:___________________ ____________________________ Signature of Employee ____________________________ Social Security Number EX-10.8 9 1999 DIRECTORS' STOCK OPTION PLAN 1 EXHIBIT 10.8 PERSISTENCE SOFTWARE, INC. 1999 DIRECTORS' STOCK OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "BOARD" means the Board of Directors of the Company. (b) "CHANGE OF CONTROL" means a sale of all or substantially all of the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMON STOCK" means the Common Stock of the Company. (e) "COMPANY" means Persistence Software, Inc., a Delaware corporation. (f) "CONTINUOUS STATUS AS A DIRECTOR" means the absence of any interruption or termination of service as a Director. (g) "CORPORATE TRANSACTION" means a dissolution or liquidation of the Company, a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (h) "DIRECTOR" means a member of the Board. (i) "EMPLOYEE" means any person, including any officer or Director, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. DIRECTOR 2 (k) "OPTION" means a stock option granted pursuant to the Plan. All options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code). (l) "OPTIONED STOCK" means the Common Stock subject to an Option. (m) "OPTIONEE" means an Outside Director who receives an Option. (n) "OUTSIDE DIRECTOR" means a Director who is not an Employee. (o) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "PLAN" means this 1999 Directors' Stock Option Plan. (q) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (r) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 500,000 Shares of Common Stock (the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option, or any withholding taxes due with respect to such exercise, shall be treated as not issued and shall continue to be available under the Plan. If Shares that were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN. (a) ADMINISTRATOR. Except as otherwise required herein, the Plan shall be administered by the Board. (b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: DIRECTOR -2- 3 (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each person who becomes an Outside Director after the effective date of this Plan (a "New Outside Director") shall automatically be granted an Option to purchase 20,000 Shares (the "First Option") on the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy. (iii) Each New Outside Director shall automatically be granted an Option to purchase 20,000 Shares (the "Second Option") on the first anniversary of the date such New Outside Director first became an Outside Director, provided his or her Continuous Status as a Director has not terminated on such date. (iv) Each New Outside Director shall thereafter automatically be granted an Option to purchase 4,000 Shares (a "Subsequent Option") on the first day of each fiscal year beginning at least two years after the date on which such person first became an Outside Director, provided his or her Continuous Status as a Director has not terminated on such date. (v) Each Outside Director who was an Outside Director prior to the effective date of this Plan shall automatically be granted an Option to purchase 4,000 Shares on the first day of each fiscal year beginning on and after January 1, 2000, provided his or her Continuous Status as a Director has not terminated on such date. (vi) Notwithstanding the preceding provisions hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (vii) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof. (c) TERMS OF THE OPTIONS. The terms of each Option granted hereunder shall be as follows: (i) each Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 below; DIRECTOR -3- 4 (ii) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of each Option, determined in accordance with Section 8 hereof; (iii) each Option shall have a term of ten (10) years from the date of grant thereof unless an Option terminates sooner pursuant to Section 8 below; and (iv) each Option shall be exercisable in its entirety immediately upon grant. (d) POWERS OF THE BOARD. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 7(b) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 7 of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (e) EFFECT OF BOARD'S DECISION. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (f) SUSPENSION OR TERMINATION OF OPTION. If the Chief Executive Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee's right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. ELIGIBILITY. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) above. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in DIRECTOR -4- 5 any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the effectiveness of the registration statement under the Securities Act of 1933, as amended, relating to the Company's initial public offering of securities. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 12 of the Plan. 7. EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option. (b) FAIR MARKET VALUE. The fair market value shall be determined by the Board; provided however that in the event the Common Stock is traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the closing sales price on such system or exchange on the date of grant of the Option (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal, or if there is a public market for the Common Stock but the Common Stock is not traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System). (c) FORM OF CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 8. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) above; provided however that no Options shall be exercisable prior to stockholder approval of the Plan in accordance with Section 16 below has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the DIRECTOR -5- 6 Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. If an Outside Director ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 4(c) has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. Notwithstanding Section 8(b) above, in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 4(c) has expired. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee: (A) during the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, or (B) three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or the date of termination, as applicable. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 4(c) has expired. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination or if he or she does not DIRECTOR -6- 7 exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. 9. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section. 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of Shares of Common Stock set forth in Sections 4(b) above, and the number of Shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company) or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a Corporate Transaction, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation, unless the successor corporation does not agree to assume the outstanding Options or to substitute equivalent options, in which case the Options shall terminate upon the consummation of the transaction. For purposes of this Section 10(b), an Option shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon such Corporate Transaction or Change of Control, each Optionee would be entitled to receive upon DIRECTOR -7- 8 exercise of an Option the same number and kind of shares of stock or the same amount of property, cash or securities as the Optionee would have been entitled to receive upon the occurrence of such transaction if the Optionee had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option at such time (after giving effect to any adjustments in the number of Shares covered by the Option as provided for in this Section 10); provided however that if such consideration received in the transaction was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option to be solely common stock of the successor corporation or its Parent equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (c) CERTAIN DISTRIBUTIONS. In the event of any distribution to the Company's stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option to reflect the effect of such distribution. 11. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 12. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the stockholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 13. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange or Nasdaq rules or regulations to which the Company may be subject and the applicable laws of any other country or jurisdiction DIRECTOR -8- 9 where Options are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time (the "Applicable Laws"). Such compliance shall be determined by the Company in consultation with its legal counsel. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law. 14. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. STOCKHOLDER APPROVAL. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the stockholders of the Company. Such stockholder approval shall be obtained in the manner and to the degree required under the Applicable Laws. DIRECTOR -9- 10 PERSISTENCE SOFTWARE, INC. 1999 DIRECTORS' STOCK OPTION PLAN NOTICE OF STOCK OPTION GRANT <> <> <> You have been granted an option to purchase Common Stock of Persistence Software, Inc. (the "Company") as follows: Date of Grant <> Exercise Price per Share <> Total Number of Shares Granted <> Total Exercise Price <> Expiration Date <> Vesting Schedule This Option may be exercised, in whole or in part, at any time after the Date of Grant and prior to the earlier of the Expiration Date or the end of the Termination Period. Termination Period This Option may be exercised for 90 days after termination of Optionee's Continuous Status as a Director, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan, but in no event later than the Expiration Date as provided above. DIRECTOR 11 By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1999 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement, all of which are attached and made a part of this document. OPTIONEE: PERSISTENCE SOFTWARE, INC. By: Signature Title: Print Name DIRECTOR -2- 12 PERSISTENCE SOFTWARE, INC. NONSTATUTORY STOCK OPTION AGREEMENT 1. GRANT OF OPTION. The Board of Directors of the Company hereby grants to the Optionee named in the Notice of Stock Option Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase a number of Shares, as set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price"'), subject to the terms and conditions of the 1999 Directors' Stock Option Plan (the "Plan"), which is incorporated herein by reference. (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Nonstatutory Stock Option Agreement, the terms and conditions of the Plan shall prevail. 2. EXERCISE OF OPTION. (a) RIGHT TO EXERCISE. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. In the event of Optionee's death, disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. (b) METHOD OF EXERCISE. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; DIRECTOR 13 (b) check; (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. SUSPENSION OR TERMINATION OF OPTION. (a) MISCONDUCT. If the Chief Executive Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee's right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. (b) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. If an Outside Director ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its Expiration Date set forth in the Notice of Stock Option Grant. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. Notwithstanding Section 4(b) above, in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its Expiration Date DIRECTOR -2- 14 set forth in the Notice of Stock Option Grant. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee: (i) During the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as Director for six (6) months after the date of death. Notwithstanding the foregoing, in no event may the Option be exercised after its Expiration Date set forth in the Notice of Stock Option Grant. (ii) Within three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, in no event may the option be exercised after its Expiration Date set forth in the Notice of Stock Option Grant. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination, as provided in Section 4(d)(i) or (ii) above, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. 5. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder) and may be exercised during the lifetime of Optionee only by the Optionee or a transferee permitted by Section 9 of the Plan. The terms of the Plan and this Nonstatutory Stock Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 6. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Nonstatutory Stock Option Agreement. 7. TAX CONSEQUENCES. Set forth below is a brief summary of certain federal tax consequences relating to this Option under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR DIRECTOR -3- 15 HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISING THE OPTION. Since this Option does not qualify as an incentive stock option under Section 422 of the Code, the Optionee may incur regular federal (and state) income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. (b) DISPOSITION OF SHARES. If the Optionee holds the Option Shares for more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. The long-term capital gain will be taxed for federal income tax and purposes at a maximum rate of 20% if the Shares are held more than one year after exercise. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Nonstatutory Stock Option Agreement and fully understands all provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Nonstatutory Stock Option Agreement. PERSISTENCE SOFTWARE, INC. By: <> Title: DIRECTOR -4- 16 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Nonstatutory Stock Option Agreement. ------------------ Spouse of Optionee DIRECTOR 17 EXHIBIT A NOTICE OF EXERCISE To: Persistence Software, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase __________ shares of Persistence Software, Inc. Common Stock, under and pursuant to the Company's 1999 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated _______________, as follows: Grant Number: Date of Purchase: Number of Shares: Purchase Price: Method of Payment of Purchase Price: Social Security No.: The shares should be issued as follows: Name: Address: Signed: Date: DIRECTOR EX-23.1 10 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of Persistence Software, Inc.: We consent to the use in this Amendment No. 1 to Registration Statement No. 333-76867 of Persistence Software, Inc. of our report dated March 2, 1999 (April 21, 1999 as to Note 11) appearing in the Prospectus, which is part of this Registration Statement, and of our report dated March 2, 1999 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California May 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----