-----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, Rl9QUOC41kuwhrV6ab5ZhMfUg/19ImOwKwFCz5jHN9PQEdeXUYOIF2GCXGDMzA8i +tl8rBtbUnlYWdT22koDCg== 0001019687-02-002148.txt : 20021114 0001019687-02-002148.hdr.sgml : 20021114 20021114155227 ACCESSION NUMBER: 0001019687-02-002148 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERSISTENCE SOFTWARE INC CENTRAL INDEX KEY: 0001084400 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943138935 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25857 FILM NUMBER: 02825077 BUSINESS ADDRESS: STREET 1: 1720 SOUTH AMPHLETT BLVD., 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503417733 10-Q 1 persistence_10q-093002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-25857 ================================================================================ PERSISTENCE SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3138935 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1720 SOUTH AMPHLETT BLVD., THIRD FLOOR SAN MATEO, CALIFORNIA 94402 (Address of principal executive offices, including zip code) (650) 372-3600 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 31, 2002, there were 20,231,266 shares of the registrant's Common Stock outstanding. INDEX
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 7 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. 24 ITEM 4. CONTROLS AND PROCEDURES. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 25 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 25 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 25 ITEM 5. OTHER INFORMATION. 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 26 SIGNATURES 27 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
AS OF ----------------------- SEP. 30, DEC. 31, 2002 2001 --------- --------- Assets: Current assets: Cash and cash equivalents $ 6,809 $ 7,411 Accounts receivable, net 2,516 4,106 Prepaid expenses and other current assets 530 656 --------- --------- Total current assets 9,855 12,173 Property and equipment, net 484 796 Purchased intangibles, net 412 722 Other assets 66 64 --------- --------- Total assets $ 10,817 $ 13,755 ========= ========= Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 567 $ 1,070 Accrued compensation and related benefits 911 892 Other accrued liabilities 820 457 Deferred revenues, current portion 2,534 2,124 Current portion of long-term obligations 799 847 --------- --------- Total current liabilities 5,631 5,390 Long-term liabilities: Long-term obligations 151 421 Long-term portion of deferred revenues 396 -- --------- --------- Total long-term liabilities 547 421 --------- --------- Total liabilities 6,178 5,811 --------- --------- Stockholders' equity: Preferred stock -- -- Common stock 64,145 64,036 Deferred stock compensation (42) (119) Notes receivable from stockholders -- (54) Accumulated deficit (59,473) (55,930) Accumulated other comprehensive loss 9 11 --------- --------- Total stockholders' equity 4,639 7,944 --------- --------- Total liabilities and stockholders' equity $ 10,817 $ 13,755 ========= ========= See notes to condensed consolidated financial statements. 3
PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEP. 30, SEP. 30, SEP. 30, SEP. 30, 2002 2001 2002 2001 ---------- ---------- ----------- ---------- Revenues: Licenses $ 2,825 $ 3,114 $ 7,762 $ 7,783 Service 1,319 2,056 4,273 7,004 ---------- ---------- ---------- ---------- Total revenues 4,144 5,170 12,035 14,787 ---------- ---------- ---------- ---------- Cost of revenues: Licenses 75 1 177 7 Service 691 975 2,218 3,337 ---------- ---------- ---------- ---------- Total cost of revenues 766 976 2,395 3,344 ---------- ---------- ---------- ---------- Gross profit 3,378 4,194 9,640 11,443 ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing 1,848 3,739 6,868 11,906 Research and development, excluding amortization of purchased intangibles 1,040 1,229 3,196 4,560 General and administrative 798 1,464 2,644 4,232 Amortization and impairment of purchased intangibles 126 245 480 3,422 Restructuring costs -- 200 -- 1,673 ---------- ---------- ---------- ---------- Total operating expenses 3,812 6,877 13,188 25,793 Loss from operations (434) (2,683) (3,548) (14,350) Interest income 20 55 75 374 Interest and other expense (35) (41) (70) (86) ---------- ---------- ---------- ---------- Net loss $ (449) $ (2,669) $ (3,543) $ (14,062) ========== ========== ========== ========== Basic and diluted net loss per share $ (0.02) $ (0.13) $ (0.18) $ (0.71) ========== ========== ========== ========== Shares used in calculating basic and diluted net loss per Share 20,201 19,971 20,148 19,893 ========== ========== ========== ========== See notes to condensed consolidated financial statements. 4
PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED ------------------------------- SEP. 30, 2002 SEP. 30, 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,543) $ (14,062) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 935 1,895 Impairment of purchased intangibles -- 1,988 Amortization of deferred stock compensation 77 208 Loss on sale of fixed assets -- 154 Change in allowance for doubtful accounts 500 (921) Changes in operating assets and liabilities: Accounts receivable 1,090 2,948 Prepaid expenses and other currents assets 125 (144) Accounts payable (503) (654) Accrued compensation and related benefits 20 (1,684) Other accrued liabilities 362 (298) Deferred revenues 806 (270) ----------- ---------- Net cash used in operating activities (131) (10,840) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of short-term investments -- 5,387 Purchase of property and equipment (122) (83) Proceeds from sale of property and equipment -- 81 Acquisition of purchased intangibles (158) -- Increase in other assets -- 36 ----------- ---------- Net cash provided by/(used in) investing activities (280) 5,419 ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock, net of repurchases 109 249 Collection of notes receivable from stockholders 54 40 Repayment of capital lease obligations (23) (35) Repayment of obligations incurred to acquire purchased intangibles (215) (415) Borrowing under loan agreement 149 122 Repayment under loan agreement (263) (286) ----------- ---------- Net cash used in financing activities (189) (325) ----------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2) (19) ----------- ---------- CASH AND CASH EQUIVALENTS: Net decrease (602) (5,766) Beginning of period 7,411 14,103 ----------- ---------- End of period $ 6,809 $ 8,337 =========== ========== NONCASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired by capital leases $ 34 $ -- =========== ========== Purchased intangibles acquired under long-term obligations $ -- $ (150) =========== ========== Release of compensatory stock arrangements $ -- $ 278 =========== ========== Compensatory stock arrangements $ -- $ (53) =========== ========== See notes to condensed consolidated financial statements. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS Persistence Software solves data access problems for distributed and real-time systems. Persistence solutions help deliver better business visibility for applications that require current information about customers, products and suppliers. Persistence is a provider of data services software for distributed data access and management, providing our customers, including Global 2000 corporations, with the data management infrastructure that cost-effectively delivers vital information to professionals throughout the enterprise so actions can be taken to streamline business processes. Persistence provides a suite of data management products that sit between existing databases - such as Oracle and DB/2 - and application servers - such as WebLogic and WebSphere. Developers can configure these products to structure and position business information more efficiently, improving application server performance and simplifying application distribution while reducing database costs. 2. BASIS OF PRESENTATION The condensed consolidated financial statements included in this filing on Form 10-Q as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2001 balance sheet was extracted from audited financial statements as of and for the year ended that date, but does not include all disclosures required by generally accepted accounting principles for complete financial statements. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K as of and for year ended December 31, 2001 filed with the Securities and Exchange Commission. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's condensed consolidated financial position as of September 30, 2002, its condensed consolidated results of operations for the three and nine month periods ended September 30, 2002 and 2001, and its cash flows for the nine month periods ended September 30, 2002 and 2001, have been made. The results of operations and cash flows for any interim period are not necessarily indicative of the operating results and cash flows for any future interim or annual periods. 3. NET LOSS PER SHARE Basic net loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding for the period (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. The effect of any potentially dilutive securities is excluded as they are anti-dilutive in relation to the Company's net losses. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEP. 30, SEP. 30, ---------------------------- ----------------------------- 2002 2001 2002 2001 ---------- ---------- ----------- ---------- Net loss (numerator), basic and diluted $ (449) $ (2,669) $ (3,543) $ (14,062) ========== ========== =========== ========== Shares (denominator): Weighted average common shares outstanding 20,201 19,985 20,148 19,923 Weighted average common shares outstanding subject to repurchase -- (14) -- (30) ---------- ---------- ----------- ---------- Shares used in computation, basic and diluted 20,201 19,971 20,148 19,893 ========== ========== =========== ========== Net loss per share, basic and diluted $ (0.02) $ (0.13) $ (0.18) $ (0.71) ========== ========== =========== ==========
6 As of September 30, 2002 and 2001, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share in the periods presented, as their effect would have been anti-dilutive. Such outstanding securities consist of the following (in thousands): SEP. 30, SEP. 30, 2002 2001 -------- -------- Shares of common stock subject to repurchase -- 5 Outstanding options 3,936 1,436 Outstanding warrants 80 80 -------- -------- Total 4,016 1,521 -------- -------- 4. COMPREHENSIVE INCOME The components of comprehensive loss, consisting of the Company's reported net loss and unrealized gains or losses in the translation of foreign currencies, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEP. 30, SEP. 30, ---------------------------- ----------------------------- 2002 2001 2002 2001 ---------- ----------- ----------- ---------- Net loss $ (449) $ (2,669) $ (3,543) $ (14,062) Other comprehensive income (loss) (8) 73 (2) (19) ---------- ----------- ----------- ---------- Total comprehensive loss $ (457) $ (2,596) $ (3,545) $ (14,081) ========== =========== =========== ==========
5. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company adopted SFAS No. 142 for the fiscal year beginning January 1, 2002. The impact of adopting this standard was not material to our financial statements as the Company does not currently carry any goodwill or intangible assets with indefinite lives. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale whether previously held and used or newly acquired, and broadens the presentation of discounted operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted the provisions of SFAS No. 144 as of January 1, 2002. The impact of adopting SFAS No. 144 did not have a material effect on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" (Issue 94-3). The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the Company's timing of recognizing future restructuring costs as well as the amounts recognized. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements as of December 31, 2001 and 2000 and for each of the years ended December 31, 2001, 2000 and 1999, included in our Annual Report on Form 10-K as of and for the year ended December 31, 2001 filed with the Securities 7 and Exchange Commission. In addition, this Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," "targeting," and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Additional Factors That May Affect Future Results" and those appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K as of and for the year ended December 31, 2001 filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. OVERVIEW Persistence Software solves data access problems for distributed and real-time systems. Persistence's solutions help deliver better business visibility for applications that require current information about customers, products and suppliers. Persistence provides a suite of data management products that sit between existing databases - such as Oracle and DB2 - and application servers - such as WebLogic and WebSphere. Developers can configure these products to structure and position business information more efficiently, improving application server performance and simplifying application distribution while reducing database costs. By effectively managing enterprise data, users achieve the benefit of "business visibility" - the ability to manage their business in real time with data and applications where they need them, when they need them. By caching data, or moving information stored in back-end computer systems closer to users, our software dramatically reduces network traffic and data latency, resulting in both better application performance and faster transaction processing. Our EDGEXTEND data management infrastructure product for Sun Microsystems' full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or EJB) application servers offers a data architecture for IBM's WebSphere and BEA's WebLogic application servers to support highly distributed and transaction-oriented applications both within data centers and in remote locations. Our DIRECTALERT product is a proactive, personalized client caching and notification solution for zero latency applications which extends the reach of enterprise systems to small form-factor devices such as mobile phones, wireless PDAs, and digital set-top boxes. Our POWERTIER application servers support both C++ and J2EE standards to enable businesses to deploy sophisticated C++ or Java applications, which readily scale and accommodate rapidly increasing numbers of users. Our DYNAMAI Web content accelerator improves the speed and scalability of electronic commerce Web sites that rely heavily on dynamically generated content using technologies such as Java Server Pages and Active Server Pages. Major customers include Applied Biosystems, Cablevision, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola, Nokia, Reuters Financial Software and Salomon Smith Barney. Our revenues, which consist of software license revenues and service revenues, totaled $12.0 million in the nine months ended September 30, 2002, and $14.8 million in the nine months ended September 30, 2001. Revenues for 2001 totaled $19.4 million, 2000 totaled $25.3 million, and 1999 totaled $14.4 million. 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 applications servers in 1997 and only commenced selling DYNAMAI in 2000 and EDGEXTEND and DIRECT ALERT in 2002, we have a limited operating history in the application server and data management markets. We currently expect that sales of our older POWERTIER products will continue to contribute significantly to our revenues, but that sales of our newer EDGEXTEND and DIRECTALERT products will contribute a growing percentage of our revenues over the next several quarters. We market our software and services primarily through our direct sales organizations in the United States, the United Kingdom, Germany and Hong Kong. Revenues from licenses and services to customers outside the United States were $3.7 million in the nine months ended September 30, 2002, and $5.6 million in the nine months ended September 30, 2001. Revenues from outside the United States totaled $7.4 million in 2001, $7.2 million in 2000, and $4.1 million in 1999. Our future success will depend, in part, on our successful development of international markets for our products. Historically, we have received a substantial portion of our revenues from sales to a limited number of customers. Sales of products to our top five customers accounted for 62% of revenues in the nine months ended September 30, 2002, 49% of our total revenues in the nine months ended September 30, 2001, 40% of total revenues in 2000, and 35% of total revenues in 1999. In addition, the identity of our top five customers has changed from year to year. In the future, it is likely that a relatively few large customers could continue to account for a relatively large proportion of our revenues. 8 To date, we have sold our products primarily through our direct sales force, and we will need to continue to hire sales people, in particular those with expertise in channel sales, in order to meet our sales goals. In addition, our ability to achieve significant revenue growth will depend in large part on our success in establishing and leveraging relationships with OEM partners and other resellers. We recognize revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition," as amended by Statements of Position 98-4 and 98-9. Future implementation guidance relating to these standards or any future standards may result in unanticipated changes in our revenue recognition practices, and these changes could affect our future revenues and earnings. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulleting ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on the recognition, presentation and disclosure of revenue in the financial statements. SAB No. 101 outlines basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. We recognize license revenues upon shipment of the software if collection of the resulting receivable is probable, an agreement has been executed, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. Undelivered elements in these arrangements typically consist of services or additional software products. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. We recognize revenues from customer training, support and professional 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 at which such elements are sold separately, or, when not sold separately, the price established by management having the relevant authority to make such decision. Arrangements that require significant modification or customization of software are recognized under the percentage of completion method. Since inception, we have incurred substantial research and development costs and have invested heavily in our sales, marketing and professional services organizations to build an infrastructure to support our long-term growth strategy. We had 81 employees as of December 31, 2001 and 71 as of September 30, 2002, representing a decrease of 12%. In 2001, we restructured operations (including a reduction in staff) and experienced turnover in staff, which resulted in an overall reduction in the number of employees. We have incurred net losses in each quarter from 1996 until March 2002, we had a modest profit for the quarter ended June 30, 2002 and we incurred a net loss for the quarter ended September 30, 2002. As of September 30, 2002, we had an accumulated deficit of $59.5 million. We are currently targeting that sales and marketing expenses, research and development expenses, and general and administrative expenses for 2002 will be below 2001 spending levels. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicative of future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. We may not achieve profitability in the future. Our success depends significantly upon broad market acceptance of our recently introduced EDGEXTEND and DIRECTALERT products. Our performance will also depend on the level of capital spending in our target market of customers and on the growth and widespread adoption of the market for data services and data integration. RESULTS OF OPERATIONS THREE MONTHS (THIRD QUARTERS) ENDED SEPTEMBER 30, 2002 AND 2001 Revenues Our total revenues were $4.1 million for the three months ended September 30, 2002 and $5.2 million for the three months ended September 30, 2001 representing a decrease of 20%. International revenues were $2.1 million for the three months ended September 30, 2002 and $1.2 million for the three months ended September 30, 2001, representing an increase of 75%. For the three months ended September 30, 2002, Fiducia AG and Cablevision accounted for 28% and 22% of total revenues, respectively. For the three months ended September 30, 2002, sales of products and services to our top five customers accounted for 73% of total revenues. For the three months ended September 30, 2001, sales of products and services to our top five customers accounted for 66% of total revenues. License Revenues. License revenues consist of licenses of our software products, which generally are priced based on the number of users or servers. License revenues were $2.8 million for the three months ended September 30, 2002 and $3.1 million for the three months ended September 30, 2001, representing a 9 decrease of 9%. The decrease in software license revenues was due to decreased spending on IT infrastructure products by our target customers. License revenues represented 68% of total revenues for the three months ended September 30, 2002 and 60% of total revenues for the three months ended September 30, 2001. Due to the economic uncertainty in information technology purchasing demand, we do not expect license reveneues to increase in the fourth quarter of 2002. Service Revenues. Service revenues consist of professional services consulting, technical support and training. Our service revenues were $1.3 million for the three months ended September 30, 2002 and $2.1 million for the three months ended September 30, 2001, representing a decrease of 36%. The decrease in service revenues was primarily due to a decline in consulting service contracts in 2002. Service revenues represented 32% of total revenues for the three months ended September 30, 2002 and 40% of total revenues for the three months ended September 30, 2001. Cost of Revenues Cost of License Revenues. Cost of license revenues consists of royalty charges, packaging, documentation and associated shipping costs. Our cost of license revenues was $75,000 for the three months ended September 30, 2002 and $1,000 for the three months ended September 30, 2001. As a percentage of license revenues, cost of license revenues were 3% for the three months ended September 30, 2002 and 1% for the three months ended September 30, 2001. This increase was largely due to increased royalty charges for technology licensed from a major vendor. Cost of license revenues may vary between periods depending on the sales of any licensed third party products. Cost of Service Revenues. Cost of service revenues consists of personnel, contractors and other costs related to the provision of professional services, technical support and training. Our cost of service revenues was $691,000 for the three months ended September 30, 2002 and $975,000 for the three months ended September 30, 2001, representing a decrease of 29%. This decrease was primarily due to a reduction in our use of external consultants in 2002 as a result of the decline in our consulting service contracts. As a percentage of service revenues, cost of service revenues were 52% for the three months ended September 30, 2002 and 47% for the three months ended September 30, 2001. 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 $1.8 million for the three months ended September 30, 2002 and $3.7 million for the three months ended September 30, 2001, representing a decrease of 51%. This decrease was primarily due to a reduction in staffing and personnel related costs, reduced office space, marketing programs and lower commissions. Sales and marketing expenses represented 45% of total revenues for the three months ended September 30, 2002 and 72% of total revenues for the three months ended September 30, 2001. We are presently targeting that 2002 sales and marketing expense levels will be below 2001 expense levels. Research and Development. Research and development expenses consist primarily of salaries and benefits for software developers, product managers and quality assurance personnel and payments to outside software developers. Our research and development expenses were $1.0 million for the three months ended September 30, 2002 and $1.2 million for the three months ended September 30, 2001, representing a decrease of 15%. This decrease was primarily due to a reduction in both employees and external contract staff. Research and development expense represented 25% of total revenues for the three months ended September 30, 2002 and 24% of total revenues for the three months ended September 30, 2001. We are presently targeting that 2002 research and development expense levels will be below 2001 expense levels. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance, administrative and general management personnel, legal costs, bad debt write-offs and the various costs associated with our status as a public company. Our general and administrative expenses were $798,000 for the three months ended September 30, 2002 and $1.5 million for the three months ended September 30, 2001, representing a decrease of 45%. This decrease was principally related to the termination of patent litigation and related legal fees and settlements. General and administrative expenses represented 19% of total revenues for the three months ended September 30, 2002 and 28% of total revenues for the three months ended September 30, 2001. We are presently targeting that 2002 general and administrative expense levels will be below 2001 expense levels. Amortization of Purchased Intangibles. Amortization of purchased intangibles was $126,000 for the three months ended September 30, 2002 and $245,000 for the three months ended September 30, 2001, representing a decrease of 49%. 10 Interest and Other Income/(Expense). Interest and other income (expense) consists primarily of earnings on our cash, cash equivalents and short-term investment balances, offset by interest expense related to obligations under capital leases and other equipment related borrowings, and various miscellaneous state and foreign taxes and other expenses. Interest and other income (expense) was $(15,000) for the three months ended September 30, 2002 and $14,000 for the three months ended September 30, 2001, representing a decrease of 207%. This decrease was primarily due to a reduction in our cash balances and a reduction in market interest rates. We expect that interest and other income (expense) will decrease as we continue to use the net proceeds from our initial public offering and may continue to be a net expense for the remainder of 2002. Stock-Based Compensation. Certain options granted and common stock issued in the past have been considered to be compensatory, as the estimated fair value for accounting purposes was greater than the stock price as determined by the Board of Directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of September 30, 2002 was $42,000, net of amortization. Deferred stock compensation is being amortized ratably over the vesting periods of these securities. Amortization expense, which is included in operating expenses, was $23,000 in the three months ended September 30, 2002 and $46,000 in the three months ended September 30, 2001. Provision for Income Taxes. Since inception, we have incurred net operating losses for federal and state tax purposes and have only recognized minimal tax provisions within our international subsidiaries. We have placed a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the net deferred tax assets and the level of the valuation allowance. If and when we determine that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Revenues Our total revenues were $12.0 million for the nine months ended September 30, 2002 and $14.8 million for the nine months ended September 30, 2001 representing a decrease of 19%. International revenues were $3.7 million for the nine months ended September 30, 2002 and $5.6 million for the nine months ended September 30, 2001, representing a decrease of 34%. In the nine months ended September 30, 2002, sales to Cablevision accounted for 29% of total revenues and sales to Salomon Smith Barney accounted for 15% of total revenues. For the nine months ended September 30, 2001, sales to Salomon Smith Barney accounted for 16% of total revenues and sales to Cablevision accounted for 11% of total revenues. License Revenues. License revenues consist of licenses of our software products, which generally are priced based on the number of users or servers. License revenues were $7.8 million for the nine months ended September 30, 2002 and $7.8 million for the nine months ended September 30, 2001. License revenues represented 64% of total revenues for the nine months ended September 30, 2002 and 53% of total revenues for the nine months ended September 30, 2001. Service Revenues. Service revenues consist of professional services consulting, customer support and training. Our service revenues were $4.3 million for the nine months ended September 30, 2002 and $7.0 million for the nine months ended September 30, 2001, representing a decrease of 39%. The decrease in service revenues was primarily due to a decline in consulting service contracts in 2002. Service revenues represented 36% of total revenues for the nine months ended September 30, 2002 and 47% of total revenues for the nine months ended September 30, 2001. Cost of Revenues Cost of License Revenues. Cost of license revenues consists of royalty charges, packaging, documentation and associated shipping costs. Our cost of license revenues was $177,000 for the nine months ended September 30, 2002 and $7,000 for the nine months ended September 30, 2001. As a percentage of license revenues, cost of license revenues was 2% for the nine months ended September 30, 2002 and less than 1% for the nine months ended September 30, 2001. This increase was largely due to increased royalty charges by a major vendor. 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 $2.2 million for the nine months ended September 30, 2002 and $3.3 million for the nine months ended September 30, 2001, representing a decrease of 34%. This decrease was primarily due to a reduction in our use of third party consultants in 2002 as a result of the decline in our consulting service contracts. As a percentage of service revenues, cost of service revenues was 52% for the nine months ended September 30, 2002 and 48% for the nine months ended September 30, 2001. 11 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 $6.9 million for the nine months ended September 30, 2002 and $11.9 million for the nine months ended September 30, 2001, representing a decrease of 42%. This decrease was primarily due to a reduction in staffing and personnel related costs, reduced office space, marketing programs and lower commissions. Sales and marketing expenses represented 57% of total revenues for the nine months ended September 30, 2002 and 80% of total revenues for the nine months ended September 30, 2001. We are presently targeting sales and marketing expense levels to be below comparable 2001 expense levels. Research and Development. Research and development expenses consist primarily of salaries and benefits for software developers, product managers and quality assurance personnel and payments to outside software developers. Our research and development expenses were $3.2 million for the nine months ended September 30, 2002 and $4.6 million for the nine months ended September 30, 2001, representing a decrease of 30%. This decrease was primarily due to a reduction in both employees and external contract staff. Research and development expenses represented 27% of total revenues for the nine months ended September 30, 2002 and 31% of total revenues for the nine months ended September 30, 2001. We are presently targeting research and development expense levels to be below comparable 2001 expense levels. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance, administrative and general management personnel, legal costs, bad debt write-offs and the various costs associated with our status as a public company. Our general and administrative expenses were $2.6 million for the nine months ended September 30, 2002 and $4.2 million for the nine months ended September 30, 2001, representing a decrease of 38%. This decrease was principally related to the termination of patent litigation and related legal fees and settlements, reduction in staff and cost management. General and administrative expenses represented 22% of total revenues for the nine months ended September 30, 2002 and 29% of total revenues for the nine months ended September 30, 2001. We are presently targeting general and administrative expense levels to be below comparable 2001 expense levels. Amortization and Impairment of Purchased Intangibles. Amortization and impairment of purchased intangibles was $480,000 for the nine months ended September 30, 2002 and $3.4 million for the nine months ended September 30, 2001. Based on an evaluation of our purchased intangibles at June 30, 2001, we recorded an impairment charge of $2.0 million in June 2001 to write down the carrying value of these assets to their net realizable values, which reflect the expected economic benefits to be derived from the use of these assets. Interest and Other Income/(Expense). Interest and other income/(expense) consists primarily of earnings on our cash, cash equivalent and short-term investment balances, offset by interest expense related to obligations under capital leases and other borrowings. Net interest income was $5,000 for the nine months ended September 30, 2002 and $288,000 for the nine months ended September 30, 2001, representing a decrease of 98%. This decrease was primarily due to a reduction in our cash balances and a reduction in market interest rates. We expect that net interest income will decrease in future periods as we continue to use the net proceeds from our initial public offerings and may continue to be a net expense for the remainder of 2002. Stock-Based Compensation. Certain options granted and common stock issued in the past have been considered to be compensatory, as the estimated fair value for accounting purposes was greater than the stock price as determined by the Board of Directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of September 30, 2002 was $42,000, net of amortization. Deferred stock compensation is being amortized ratably over the vesting periods of these securities. Amortization expense, which is included in operating expenses, was $77,000 in the nine months ended September 30, 2002 and $208,000 in the nine months ended September 30, 2001. Provision For Income Taxes. Since inception, we have incurred net operating losses for federal and state tax purposes and have only recognized minimal tax provisions within our international subsidiaries. We have placed a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the net deferred tax assets and the level of the valuation allowance. If and when we determine that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. 12 QUARTERLY RESULTS OF OPERATIONS Our quarterly operating results have fluctuated significantly in the past, and may continue to fluctuate in the future, as a result of a number of factors, many of which are outside our control. These factors include: o our ability to close relatively large sales on schedule; o delays or deferrals of customer orders or deployments; o delays in shipment of scheduled software releases; o shifts in demand for and market acceptance among our various products, including POWERTIER and our newer products, EDGEXTEND, DIRECTALERT, and DYNAMAI; o introduction of new products or services by us or our competitors; o annual or quarterly budget cycles of our customers or prospective customers; o the level of product and price competition in the application server and data management markets; o our lengthy sales cycle; o our success in maintaining our direct sales force and expanding indirect distribution channels; o the mix of direct sales versus indirect distribution channel sales; o the possible loss of sales people; o the mix of products and services licensed or sold; o the mix of domestic and international sales; and o our success in penetrating international markets and general economic conditions in these markets. The typical sales cycle of our products is long and unpredictable, and is affected by seasonal fluctuations as a result of our customers' fiscal year budgeting cycles and slow summer purchasing patterns in Europe. We typically receive a substantial portion of our orders in the last two weeks of each quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. Our license revenues in the first quarter of 2002 were lower than those in the fourth quarter of 2001. In the future, we expect this trend to continue, with the fourth quarter of each year accounting for the greatest percentage of total revenues for the year and with an absolute decline in revenues from the fourth quarter to the first quarter of the next year. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our business primarily through our initial public offering of common stock in June 1999, which totaled $34.1 million in aggregate net proceeds, and private sales of convertible preferred stock, which totaled $19.9 million in aggregate net proceeds. We have also financed our business through an equipment related loan in the maximum principal amount of $800,000 which has been repaid in full, a second equipment related loan in the amount of $655,000, and borrowings of $149,000 under a third equipment related loan for an amount up to $250,000, and capitalized leases. As of September 30, 2002, we had $6.8 million of cash, cash equivalents and short-term investments and $2.2 million of working capital. 13 Net cash used in operating activities was $131,000 for the nine months ended September 30, 2002 and $10.8 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, cash used in operating activities was attributable primarily to net operating losses and a decrease in accounts payable. Those uses were partially offset by depreciation and amortization, a decrease in accounts receivable and an increase in deferred revenues. For the nine months ended September 30, 2001, cash used in operating activities was attributable primarily to net operating losses. Those uses were partially offset by depreciation and amortization, the impairment of purchased intangibles and a decrease in accounts receivable. Net cash used in investing activities was $292,000 in the nine months ended September 30, 2002 and net cash provided by investing activities was $5.4 million in the nine months ended September 30, 2001. For the nine months ended September 30, 2002, cash used in investing activities was for the purchase of property and equipment and the acquisition of purchased intangibles. For the nine months ended September 30, 2001, cash from investing activities was generated by converting short-term investments into cash and cash equivalents. Net cash used in financing activities was $177,000 in the nine months ended September 30, 2002 and $325,000 in the nine months ended September 30, 2001. For each of the nine months ended September 30, 2002 ad 2001, cash used in financing activities was primarily attributable to loan repayments offset by the sale of common stock as a result of option exercises and borrowings under loan agreements. We have credit facilities with Comerica Bank. Under these credit facilities, the Company has a $5.0 million revolving line of credit facility available through April 30, 2003, an equipment term loan of $655,000 and an equipment loan for an amount up to $250,000 under which drawdowns are available through January 3, 2003. As of September 30, 2002 we had no borrowings outstanding under the revolving line of credit facility. As of September 30, 2002 we had $305,000 outstanding under the equipment term loan of $655,000. We are required to make principal payments of $21,843 per month, plus interest at the bank's base rate plus 0.5% per annum payable in 30 monthly installments. As of September 30, 2002 we had $149,000 outstanding under the equipment loan for an amount up to $250,000. Under this facility, borrowings outstanding on January 3, 2003 will automatically convert to an 18-month term loan having equal monthly payments of principal and interest. Borrowings under the facility will bear interest at the bank's prime rate plus 1.0%. The bank's credit facilities require the Company, among other things, to maintain a minimum tangible net worth of $4.5 million for the quarter ending September 30, 2002 and $5 million thereafter, and a minimum quick ratio (current assets not including inventory less current liabilities excluding deferred revenue) of 2 to 1. As of September 30, 2002, the Company's tangible net worth fell below the minimum tangible net worth ratio then in effect and the bank waived this event. Borrowings under the facilities are collateralized by substantially all of the Company's assets. Currently we have no material commitments for capital expenditures nor do we anticipate a material increase in capital expenditures and lease commitments. If we meet our targets with respect to revenues and accounts receivable collections, we are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through at least September 30, 2003. If we experience difficulties in achieving our revenue targets, our cash and cash equivalents may not be sufficient to meet our anticipated cash needs. Accordingly, our operating plans could be restricted and our business could be harmed. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain 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, our business could be harmed. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS You should carefully consider the following risks in addition to the other information contained in this quarterly report on Form 10-Q. The risks and uncertainties described below are intended to be the ones that are specific to our company or industry and that we deem to be material, but are not the only ones that we face. 14 WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER AND DATA MANAGEMENT MARKETS. Because we only commenced selling application servers in 1997 and only commenced selling DYNAMAI in 2000 and EDGEXTEND and DIRECTALERT in 2002, we have a limited operating history in the application server and data management markets. We thus face the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in the rapidly changing software industry. These risks include: o the timing and magnitude of capital expenditures by our customers and prospective customers; o our need to achieve market acceptance for our new product introductions, including DYNAMAI, DIRECTALERT and EDGEXTEND; o our dependence for revenue from our POWERTIER for C++ product, which was first introduced in 1997 and has achieved only limited market acceptance; o our dependence for revenue from our POWERTIER for J2EE product, which was first introduced in 1998 and has achieved only limited market acceptance; o our need to expand our distribution capability through various sales channels, including a direct sales organization, original equipment manufacturers, third party distributors and systems integrators; o our unproven ability to anticipate and respond to technological and competitive developments in the rapidly changing market for dynamic data management; o our unproven ability to compete in a highly competitive market; o the decline spending levels in the software infrastructure market; o our dependence on the Java programming language, commonly known as J2EE, becoming a widely accepted standard in the transactional application server market; and o our dependence upon key personnel. BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NOT BECOME OR REMAIN PROFITABLE. We may not achieve our targeted revenues, and we may not be able to achieve or maintain profitability in the future. We have incurred net losses each year since 1996. In particular, we incurred losses of $3.5 million in the nine months ended September 30, 2002, $15.1 million in 2001, $16.7 million in 2000 and $11.3 million in 1999. As of September 30, 2002, we had an accumulated deficit of $59.5 million. While we are currently targeting decreases in sales and marketing, research and development, and general and administrative expenses for 2002, as compared to 2001, we will still need to achieve our revenue targets for future growth. Because our product markets are new and evolving, we cannot accurately predict either the future growth rate, if any, or the ultimate size of the markets for our products. WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH GENERATED BY OUR OPERATIONS. Since inception, we have generally had negative cash flow from operations. To date, we have financed our business primarily through sales of common stock and convertible preferred stock and not through cash generated by our operations. We expect to have negative cash flow from operations for the year ended December 31, 2002. WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. Based upon our current forecasts and estimates, including revenues and accounts receivable collections, we are targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least September 30, 2003. However, we may need to raise additional funds prior to that time. We face several risks in connection with this possible need to raise additional capital: 15 o the issuance of additional securities could result in: o debt securities with rights senior to the common stock; o dilution to existing stockholders as a result of issuing additional equity or convertible debt securities; o debt securities with restrictive covenants that could restrict our ability to run our business as desired; or o securities issued on disadvantageous financial terms. o the failure to procure needed funding could result in: o delisting from the Nasdaq SmallCap Market; o a dramatic reduction in scope in our planned product development or marketing efforts; or o an inability to respond to competitive pressures or take advantage of market opportunities. If we are unable to obtain additional financing as and when needed and on acceptable terms, we may be required to reduce the scope of our planned product development and marketing efforts, which could jeopardize our business. THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future as a result of a number of factors, many of which are outside our control. In prior years, we have often experienced an absolute decline in revenues from the fourth quarter to the first quarter of the next year. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following: o our ability to close relatively large sales on schedule; o delays or deferrals of customer orders or deployments; o delays in shipment of scheduled software releases; o shifts in demand for and market acceptance among our various products, including POWERTIER and our newer products, EDGEXTEND, DIRECTALERT, and DYNAMAI; o introduction of new products or services by us or our competitors; o annual or quarterly budget cycles of our customers or prospective customers; o the level of product and price competition in the application server and data management markets; o our lengthy sales cycle; o our success in maintaining our direct sales force and expanding indirect distribution channels; o the mix of direct sales versus indirect distribution channel sales; o the possible loss of sales people; 16 o the mix of products and services licensed or sold; o the mix of domestic and international sales; and o our success in penetrating international markets and general economic conditions in these markets. We typically receive a substantial portion of our orders in the last two weeks of each fiscal quarter because our customers often delay purchases of our products to the end of the quarter to gain price concessions. Also, we tend to experience slower sales patterns in Europe in the third quarter. Because a substantial portion of our costs are relatively fixed and based on anticipated revenues, a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs and could adversely affect our operating results. OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO IT IS DIFFICULT TO FORECAST OUR REVENUES. Any delay in sales of our products or services could cause our quarterly revenues and operating results to fluctuate. The typical sales cycle of our products is long and unpredictable and requires both a significant capital investment decision by our customers and our education of prospective customers regarding the use and benefits of our products. Our sales cycle is generally between three and nine months. A successful sales cycle typically includes presentations to both business and technical decision makers, as well as a limited pilot program to establish a technical fit. Our products typically are purchased as part of a significant enhancement to a customer's information technology system. The implementation of our products involves a significant commitment of resources by prospective customers. Accordingly, a purchase decision for a potential customer typically requires the approval of several senior decision makers. Our sales cycle is affected by the business conditions of each prospective customer, as well as the overall economic climate for technology-related capital expenditures. Due to the relative importance of many of our product sales, a lost or delayed sale could adversely affect our quarterly operating results. Our sales cycle is affected by seasonal fluctuations as a result of our customers' fiscal year budgeting cycles and slow summer purchasing patterns in Europe. WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES. Historically, we have received a substantial portion of our revenues from product sales to a limited number of customers. In addition, the identity of our top five customers has changed from year to year. In the nine months ended September 30, 2002, sales of products and services to our top five customers accounted for 62% of total revenue with Cablevision and Salomon Smith Barney accounting for 29% and 15% of total revenues, respectively. In the nine months ended September 30, 2001, sales of products and services to our top five customers accounted for 49% of total revenues with Salomon Smith Barney and Cablevision accounted for 16% and 11% of total revenues, respectively. In the year ended December 31, 2001, sales of products and services to Salomon Smith Barney accounted for 15% of total revenues, sales to Cablevision accounted for 11% of total revenues and sales to our top five customers accounted for 45% of total revenues. In the year ended December 31, 2000, sales of products and services to Salomon Smith Barney accounted for 16% of total revenues and sales to our top five customers accounted for 40% of total revenues. In the year ended December 31, 1999, sales of products and services to Cisco accounted for 13% of our total revenues, and sales of products and services to our top five customers accounted for 35% of total revenues. If we lose a significant customer, or fail to increase product sales to an existing customer as planned, we may not be able to replace the lost revenues with sales to other customers. In addition, because our marketing strategy is to concentrate on selling products to industry leaders, any loss of a customer could harm our reputation within the industry and make it harder for us to sell our products to other companies in that industry. The loss of, or a reduction in sales to, one or more significant customers would likely result in a decrease in our revenues. WE ARE CURRENTLY TARGETING THAT A MATERIAL PORTION OF OUR REVENUES WILL BE DERIVED FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND, HOWEVER THERE ARE TECHNICAL AND MARKET RISKS ASSOCIATED WITH NEW PRODUCTS. Sales of our EDGEXTEND products currently represent a material percentage of our revenues. New products, like EDGEXTEND, often contain errors or defects, particularly when first introduced. Any errors or defects could be serious or difficult to correct and could result in a delay of product release or adoption resulting in lost revenues or a delay in gaining market share, which could harm our revenues and reputation. In addition, market adoption is often slower for newer products, like EDGEXTEND, than for existing products. Because we are focusing our marketing and sales efforts on our newer EDGEXTEND data management product, any failure in market adoption of this product could affect our business. 17 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 certain portions of our marketing efforts on our POWERTIER for J2EE application server and EDGEXTEND products, which are based on three relatively new technologies, which have not been widely adopted by a large number of companies. These three technologies are a distributed object computing architecture, Sun Microsystems' Java programming language and J2EE (formerly 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 and our EDGEXTEND products. J2EE 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 conformed to the EJB standard. Sun Microsystems released the EJB standard in 1998, and thus far EJB has had limited market acceptance. Since our POWERTIER for J2EE product and our EDGEXTEND products depend upon the specialized J2EE standard, we face a limited market compared to competitors who may offer application servers based on more widely accepted standards, including the Java programming language. We expect a material portion of our future revenues will come from sales of products based on the J2EE standard. Thus, our success depends significantly upon broad market acceptance of distributed object computing in general, and Java application servers in particular. If J2EE does not become a widespread programming standard for application servers, our revenues and business could suffer. IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS. The market for our products and services is characterized by rapid technological change, dynamic customer demands and frequent new product introductions and enhancements. Customer requirements for products can change rapidly as a result of innovation in software applications and hardware configurations and the emergence or adoption of new industry standards, including Internet technology standards. We may need to increase our research and development investment over our current targeted spending levels to maintain our technological leadership. Our future success depends on our ability to continue to enhance our current products and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments. For example, as Sun Microsystems introduces new J2EE specifications, we may need to introduce new versions of POWERTIER for J2EE 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. Our EDGEXTEND for WebSphere product was released in March 2002 and our EDGEXTEND for WebLogic product was released in August 2002. Any delays in releasing future enhancements to these products or new products on a generally available basis may materially effect our future revenues. BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES. We must maintain a strong direct sales team to generate revenues. In the last several years, we have experienced significant turnover in our sales team, and in the third quarter of 2001, we implemented a reduction in force and substantially reorganized our sales team. In order to meet our future sales goals, we may need to hire more salespeople for both our domestic and international sales efforts. In the past, newly hired employees have required training and approximately six to nine months experience to achieve full productivity. Like many companies in the software industry, we are likely to continue to experience turnover in our sales force. As a result of our restructuring and employee turnover, a number of our sales people are relatively new and we may not meet our sales goals. In addition, our recently hired employees may not become productive, and we may not be able to hire enough qualified individuals in the future. 18 BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES CHANNEL THROUGH OEM PARTNERS AND OTHER RESELLERS, ANY FAILURE TO DEVELOP THIS CHANNEL MAY RESULT IN LOWER REVENUES. To date, we have sold our products primarily through our direct sales force, but our ability to achieve revenue growth will depend in large part on our success in establishing and leveraging relationships with OEM partners and third parties. It may be difficult for us to establish these relationships, and, even if we establish these relationships, we will then depend on the sales efforts of these third parties. In addition, because these relationships are nonexclusive, these third parties may choose to sell application servers, data management products or other alternative solutions offered by our competitors, and not our products. If we fail to successfully build our third-party distribution channels or if our third party partners do not perform as expected, our business could be harmed. BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES. Because our products are often incorporated into multi-million dollar enterprise projects, we depend on the successful and timely completion of these large projects to fully deploy our products and achieve our revenue goals. These enterprise projects often take many years to complete and can be delayed by a variety of factors, including general or industry-specific economic downturns, our customers' budget constraints, other customer-specific delays, problems with other system components or delays caused by the OEM or other third-party partners who may be managing the system deployment. If our customers cannot successfully implement large-scale deployments, or they determine for any reason that our products cannot accommodate large-scale deployments or that our products are not appropriate for widespread use, our business could suffer. In addition, if an OEM or other third-party partner fails to complete a project utilizing our product for a customer in a timely manner, our revenues or business reputation could suffer. BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR THEIR OWN PRODUCTS. Because Sun Microsystems controls the J2EE standard, we need to maintain a good working relationship with Sun Microsystems if we decide to develop future versions of POWERTIER for J2EE, as well as additional products using J2EE, that will gain market acceptance. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents, and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell some competing products that would, in the absence of this license agreement, infringe our patents. Because Sun Microsystems controls the J2EE standard, it could develop the J2EE standard in a more proprietary way to favor a product offered by its subsidiary, i-Planet, or a third party, which could make it much harder for us to compete in the J2EE 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, ..NET, which includes an application server product. If this standard gains widespread market acceptance over the J2EE 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 or change purchasing decisions. We expect that Microsoft's presence in the application server market will increase competitive pressure in this market. WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE. The markets for our products are intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors in our markets are: o performance, including scalability, integrity and availability; o ability to provide a competitive return on investment to the customer; 19 o flexibility; o use of standards-based technology (e.g. J2EE); o ease of integration with customers' existing enterprise systems; o ease and speed of implementation; o quality of support and service; o security; o company reputation and perception of viability; and o price. Our competitors for POWERTIER include BEA Systems (WebLogic), IBM (WebSphere), Oracle (OAS) and i-Planet (Sun Microsystems). Many customers may not be willing to purchase our POWERTIER platform because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors in the application server markets have preexisting customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. In addition, some competitors offer products that are less complex than our POWERTIER products and require less customization to implement with potential customers' existing systems. Thus, potential customers engaged in simpler business-to-business e-commerce transactions may prefer these "plug-and-play" products to our more complex offerings. Moreover, there are other very large and established companies, including Microsoft, who offer alternative solutions and are thus indirect competitors. Further, many companies have already supported, or have announced their intention to support J2EE, and may compete against us in the future. These competitors and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. In addition, in the POWERTIER for C++ market, potential customers may build their own custom application servers, so we effectively compete against our potential customers' internal information technology departments. We are targeting that future revenues will contain less revenue from our POWERTIER products and more from our EDGEXTEND and DIRECTALERT products. In the EDGEXTEND market, alternative technology is available from a variety of sources. Companies such as Versant, webGain and Excelon are middleware vendors that offer alternative data management solutions that directly target EDGEXTEND's market. In addition, many prospective customers may build their own custom solutions. In the DIRECTALERT market, alternative approaches are provided by a variety of sources, including the potential for internal development. Company vendors such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software which may evolve into competitive products. Vendors such as webMethods and Business Objects provide alternative architectures for business intelligence information. DIRECTALERT is based on licensed technology, which the Company is licensed to distribute on a non-exclusive basis. In the DYNAMAI market, similar dynamic Web content acceleration technology is available from a variety of sources, including but not limited to internal development, application server vendors such as Oracle, electronic commerce software vendors such as Intershop and ATG, content delivery networks such as Akamai and epicRealm, and emerging software and hardware appliance vendors such as Chutney and Cachier, who are directly targeting Dynamai's market. IF THE MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS AND SERVICES DO NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR REVENUES COULD DECLINE. Our performance and future success will depend on the growth and widespread adoption of the markets for infrastructure software for networks and web-based products and services. If these markets do not develop in the manner we currently envision, our business could be harmed. Moreover, critical issues concerning the commercial use of the Internet, including security, cost, accessibility and quality of network service, remain unresolved and may negatively affect the growth of the Internet as a platform for conducting various forms of electronic commerce. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased activity or due to increased government regulation. 20 OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS. Achieving our planned revenue targets and other financial objectives will place significant demands on our management and other resources. Our ability to manage our resources effectively will require us to continue to develop and improve our operational, financial and other internal systems and controls, as well as our business development capabilities, and to train, motivate and manage our employees. If we are unable to manage our resources effectively, we may not be able to retain key personnel and the quality of our services and products may suffer. OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY EMPLOYEES. Our future success depends on the ability of our management to operate effectively, both individually and as a group. We are substantially dependent upon the continued service of our existing executive personnel, especially Christopher T. Keene, our Chief Executive Officer. We do not have a key person life insurance policy covering Mr. Keene or any other officer or key employee. Our success will depend in large part upon our ability to attract and retain highly-skilled employees, particularly sales personnel and software engineers. If we are not successful in attracting and retaining these skilled employees, our sales and product development efforts would suffer. In addition, if one or more of our key employees resigns to join a competitor or to form a competing company, the loss of that employee and any resulting loss of existing or potential customers to a competitor could harm our business. If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR SOFTWARE MAY BE DELAYED. Complex software products often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Our products have in the past contained and may in the future contain errors and defects, which may be serious or difficult to correct and which may cause delays in subsequent product releases. Delays in shipment of scheduled software releases or serious defects or errors could result in lost revenues or a delay in market acceptance, which could have a material adverse effect on our revenues and reputation. WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS. Because our customers use our products for important business applications, errors, defects or other performance problems could result in financial or other damages to our customers. They could pursue claims for damages, which, if successful, could result in our having to make substantial payments. Although our purchase agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions. A product liability claim brought against us, even if meritless, would likely be time consuming and costly for us to litigate or settle. A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS. Our future success will depend, in part, on our successful development of international markets for our products. Approximately 31% of our revenues came from sales of products and services outside of the United States for the nine months ended September 30, 2002, and approximately 38% of our revenues came from sales of products and services outside of the United States for the nine months ended September 30, 2001. Approximately 38% of our revenues came from sales of products and services outside of the United States during the year ended December 31, 2001, and approximately 28% of our revenues came from sales of products and services outside of the United States during the year ended December 31, 2000. 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: 21 o difficulties of staffing, funding and managing foreign operations; o future dependence on the sales efforts of our third party distributors to expand business; o longer payment cycles typically associated with international sales; o tariffs and other trade barriers; o failure to comply with a wide variety of complex foreign laws and changing regulations; o exposure to political instability, terrorism and economic downturns; o failure to localize our products for foreign markets; o restrictions under U.S. law on the export of technologies; o potentially adverse tax consequences; o reduced protection of intellectual property rights in some countries; and o currency fluctuations. The majority of our product sales outside the United States are denominated in U.S. dollars. We do not currently engage in any hedging transactions to reduce our exposure to currency fluctuations as a result of our foreign operations. We are not currently ISO 9000 compliant, nor are we attempting to meet all foreign technical standards that may apply to our products. Our failure to develop our international sales channel as planned could cause a decline in our revenues. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION MAY BE IMPAIRED. Our success depends on our ability to protect our proprietary rights to the technologies used in our products, and yet the measures we are taking to protect these rights may not be adequate. If we are not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and services, which could harm our business. We rely on a combination of patents, copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary technology, but these legal means afford only limited protection. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs and diversion of management attention and resources. WE MAY BE SUED FOR PATENT INFRINGEMENT. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows. For example, we may be inadvertently infringing a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware, which will cause us to be infringing when it issues in the future. To address these patent infringement claims, we may have to enter into royalty or licensing agreements on disadvantageous commercial terms. Alternatively, we may be unable to obtain a necessary license. A successful claim of product infringement against us, and our failure to license the infringed or similar technology, would harm our business. In addition, any infringement claims, with or without merit, would be time-consuming and expensive to litigate or settle and would divert management attention from administering our core business. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. If our current stockholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market, the market price of our common stock could fall. In addition, these sales of common stock could impede our ability to raise funds at an advantageous price, or at all, through the sale of securities. As of September 30, 2002, we had approximately 20,231,266 shares of common stock outstanding. Virtually all of our shares, other than shares held by affiliates, are freely tradable. In addition, shares held by affiliates are tradable, subject to the volume and other restrictions of Rule 144. 22 WE HAVE RECEIVED A NOTICE FROM NASDAQ THAT THE COMPANY WILL BE REVIEWED FOR COMPLIANCE WITH CERTAIN LISTING REQUIREMENTS BY DECEMBER 2, 2002 AND THAT OUR STOCK MAY BE DELISTED FORM THE NASDAQ SMALLCAP MARKET IF WE ARE NOT IN COMPLIANCE. We have received a notice from Nasdaq that if our stock does not meet the minimum $1.00 closing bid requirement for at least ten consecutive trading days prior to December 2, 2002, the Nasdaq staff will determine whether we meet the initial listing criteria for the Nasdaq SmallCap Market, which in our case means that we will need to have stockholders' equity of at least $5 million. If we have stockholders' equity of at least $5 million on December 2, 2002, we expect that we will be granted an additional 180 calendar day grace period to demonstrate compliance with the $1.00 minimum bid requirement. If we do not have stockholders' equity of at least $5 million on December 2, 2002, we understand that the Nasdaq stall will notify us that our securities will be delisted from the Nasdaq SmallCap Market and that the Company will have a right to appeal this decision. We currently have stockholders' equity $4.6 million, just under the listing requirement and are in the process of taking actions in an effort to come into compliance with this listing criterion. If we receive a delisting notice from Nasdaq, we intend to appeal it because the maintenance of our Nasdaq SmallCap Market listing is important to us. If our stock is delisted from the Nasdaq SmallCap Market, it would trade on the "bulletin board," which is a dramatically less liquid market. A delisting from the Nasdaq SmallCap Market could affect our Company reputation and the ability of certain investors to purchase our stock. THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A TAKEOVER. Provisions in our certificate of incorporation, bylaws and Delaware law may discourage, delay or prevent a merger or other change in control that a stockholder may consider favorable. These provisions may also discourage proxy contests or make it more difficult for stockholders to take corporate action. These provisions include the following: o establishing a classified board in which only a portion of the total board members will be elected at each annual meeting; o authorizing the board to issue preferred stock; o prohibiting cumulative voting in the election of directors; o limiting the persons who may call special meetings of stockholders; o prohibiting stockholder action by written consent; and o establishing advance notice requirements for nominations for election of the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE OUR STOCKHOLDERS. As part of our business strategy, we expect to review acquisition prospects that we believe would be advantageous to the development of our business. While we have no current agreements or negotiations underway with respect to any major acquisitions of third-party technology, we may make acquisitions of businesses, products or technologies in the future. If we make any acquisitions, we could take any or all of the following actions, any of which could materially and adversely affect our financial results and the price of our common stock: o issue equity securities that would dilute existing stockholders' percentage ownership; o incur substantial debt; o assume contingent liabilities; or o take substantial charges in connection with the impairment of goodwill and amortization of other intangible assets. 23 Acquisitions also entail numerous risks, including: o difficulties in assimilating acquired operations, products and personnel with our pre-existing business; o unanticipated costs; o diversion of management's attention from other business concerns; o adverse effects on existing business relationships with suppliers and customers; o risks of entering markets in which we have limited or no prior experience; and o potential loss of key employees from either our preexisting business or the acquired organization. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business. WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THE COMPANY'S INITIAL PUBLIC OFFERING OF COMMON STOCK, AND THUS MAY USE THE REMAINING NET PROCEEDS TO FUND GENERAL OPERATIONS, FOR ACQUISITIONS OR FOR OTHER CORPORATE PURPOSES. We have not designated any specific use for the net proceeds of our initial public offering of common stock. As a result, our management and board of directors have broad discretion in spending the remaining net proceeds of that offering. We currently expect to use the remaining net proceeds primarily for working capital and general corporate purposes, funding product development and funding our sales and marketing organization. In addition, we may use a portion of the remaining net proceeds for further development of our product lines through acquisitions of products, technologies and businesses. ITEM 3. QUANTITATIVE AND QUALITATIVE 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 our cash equivalents are invested in short-term investment accounts. If market interest rates had changed by approximately ten percent in at September 30, 2002, our financial results would have changed by approximately $4,000. Foreign Currency Fluctuations. We operate in several international locations using local currencies for the payment of employees and suppliers, however, we did not have any significant net balances that are due or payable in foreign currencies at September 30, 2002. A hypothetical ten percent change in foreign currency rates at September 30, 2002 would have changed the results of operations by approximately $17,000. We do not hedge any of our foreign currency exposures. ITEM 4. CONTROLS AND PROCEDURES. Within 90 days prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and the design of our disclosure controls and procedures may not achieve our stated goals under all potential future conditions, regardless of how remote. No significant changes were made to the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is not currently subject to any material legal proceedings, though it may from time to time become a party to various legal proceedings that arise in the ordinary course of business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (d) Use of Proceeds Our registration statement on Form S-1, SEC File No. 333-76867, for our initial public offering of common stock became effective on June 24, 1999. We registered and sold an aggregate of 3,450,000 shares of common stock under the registration statement at a per share price of $11.00. Our underwriters were BancBoston Robertson Stephens, U.S. Bancorp Piper Jaffray, and Soundview Technology Group. Offering proceeds, net of aggregate underwriting commissions and discounts of $2.7 million and other offering transaction expenses of $1.1 million, were $34.1 million. None of the underwriting commissions and discounts or other offering transaction expenses were direct or indirect payments to our directors, officers, or holders of 10% or more of our stock. From June 24, 1999 through September 30, 2002, we have used the net offering proceeds as follows: Working capital expenditures....................... $ 20.6 million Acquiring property and equipment................... 2.4 million Acquiring technologies............................. 3.1 million --------------- 26.1 million Repayment of equipment related loans............... 1.2 million Cash and cash equivalents.......................... 6.8 million --------------- $ 34.1 million =============== Each of the above amounts represents our best estimate of our use of the net proceeds. None of the net offering proceeds were paid directly or indirectly to our directors, officers, or holders of 10% or more of our stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we are required to disclose the non-audit services approved by our Audit Committee to be performed by Deloitte & Touche LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. Deloitte & Touche LLP does not provide any non audit services for the company. 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS: 10.17 Second Amendment to the Restated Loan and Security Agreement between Persistence Software and Comerica Bank. 10.18 Third Amendment to the Restated Loan and Security Agreement between Persistence Software and Comerica Bank. 99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K: None. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PERSISTENCE SOFTWARE, INC. By: /s/ Christine Russell ------------------------ CHRISTINE RUSSELL CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Date: November 14, 2002 27 CERTIFICATIONS I, Christopher T. Keene, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Persistence Software, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ CHRISTOPHER T. KEENE ------------------------- Christopher T. Keene Chief Executive Officer 28 CERTIFICATIONS I, Christine Russell, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Persistence Software, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ CHRISTINE RUSSELL ----------------------- Christine Russell Chief Financial Officer 29 EXHIBIT INDEX Exhibit No. - ----------- 10.17 Second Amendment to the Restated Loan and Security Agreement between Persistence and Comerica Bank. 10.18 Third Amendment to the Restated Loan and Security Agreement between Persistence and Comerica Bank. 99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 30 EX-10.17 3 persistence_10qex10-17.txt EXHIBIT 10.17 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- This Second Amendment to Loan and Security Agreement is entered into as of July 3, 2002 (the "Amendment"), by and between COMERICA BANK - CALIFORNIA ("Bank") and PERSISTENCE SOFTWARE, INC. ("Borrower"). RECITALS -------- Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of March 6, 2002, as amended from time to time including, but not limited to, by that certain First Amendment to Loan and Security Agreement dated as of May 6, 2002 (collectively, the "Agreement"). The parties desire to amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. The following defined terms in Section 1.1 of the Agreement are hereby added or amended to read as follows: ""Credit Extension" means each Advance, Term Advance, Letter of Credit, Equipment Advance or any other extension of credit by Bank for the benefit of Borrower hereunder." ""Equipment Advance" has the meaning set forth in Section 2.1(d)." ""Equipment Line" means a credit extension of up to Two Hundred Fifty Thousand Dollars ($250,000)." ""Equipment Maturity Date" means June 3, 2004." 2. A new Section 2.1(d) is hereby added to the Agreement to read as follows: "(d) EQUIPMENT ADVANCES. (i) Subject to and upon the terms and conditions of this Agreement, at any time from July 3, 2002 through January 3, 2003, Bank agrees to make advances (each an "Equipment Advance" and, collectively, the "Equipment Advances") to Borrower in an aggregate amount not to exceed the Equipment Line. The amount of each Equipment Advance requested by Borrower shall be a minimum of Fifty Thousand Dollars ($50,000). Each Equipment Advance shall not exceed one hundred percent (100%) of the invoice amount of equipment and Soft Costs (as defined herein) approved by Bank from time to time (which Borrower shall, in any case, have purchased within ninety (90) days of the date of the corresponding Equipment Advance), excluding taxes, shipping, insurance, warranty charges, freight discounts, installation and maintenance expenses. Notwithstanding the foregoing, the aggregate amount of all Equipment Advances for Soft Costs (as defined herein) shall not exceed twenty percent (20%) of the Equipment Line. "Soft Costs" as used in this Agreement shall mean software and other non-hardware expenses including taxes, installation, tenant improvements and other Soft Costs as approved by Bank from time to time. (ii) Interest shall accrue from the date of each Equipment Advance at the rate specified in Section 2.3(a), and shall be payable monthly on the first (1st) calendar day of each month so long as any Equipment Advances are outstanding. Any Equipment Advances that are outstanding on January 3, 2003 shall be payable in eighteen (18) equal 1 monthly installments of principal, plus all accrued interest, beginning on February 1, 2003, and continuing on the same day of each month thereafter through the Equipment Maturity Date, at which time all amounts owing under this Section 2.1(d) and any other amounts owing under this Agreement shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Equipment Advances without penalty or premium. (iii) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time three (3) Business Days before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of [EXHIBIT B]. The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for any Equipment to be financed The amount of each Equipment Advance requested by Borrower shall be a minimum of Fifty Thousand Dollars ($50,000)." 3. A new Section 2.3(a)(iii) is hereby added to the Agreement to read as follows: "(iii) INTEREST RATES. Except as set forth in Section 2.3(b), the Equipment Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to one percent (1.00%) above the Prime Rate." 4. Unless otherwise defined herein, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of the Agreement and all instruments, documents and agreements entered into in connection with the Agreement. 5. Borrower represents and warrants that: (i) the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, (ii) that Borrower is in compliance with the intellectual property registration requirements set forth in Section 6.10 of the Agreement and that Borrower has notified Bank of such required registrations in compliance with Section 6.3 of the Agreement and (iii) that no Event of Default has occurred and is continuing. 6. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 7. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Amendment, duly executed by Borrower; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Amendment; (c) an extension fee equal to One Thousand Dollars ($1,000), which shall be nonrefundable as of the date of this Amendment and which Bank shall charge against any of Borrower's deposit accounts with Bank on the date of this Amendment, plus an amount equal to all Bank Expenses incurred through the date of this Amendment; and (d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] 2 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. PERSISTENCE SOFTWARE, INC. By: /s/ ANDREW OLDING --------------------------------- Title: Corporate Controller COMERICA BANK - CALIFORNIA By: /s/ GUY SIMPSON --------------------------------- Title: Assistant Vice President 3 CORPORATE RESOLUTIONS TO BORROW - -------------------------------------------------------------------------------- BORROWER: PERSISTENCE SOFTWARE, INC. - -------------------------------------------------------------------------------- I, the undersigned Secretary or Assistant Secretary of PERSISTENCE SOFTWARE, INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Articles of Incorporation, as amended, and the Restated Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITION ACTUAL SIGNATURES ----- -------- ----------------- - ------------------------ -------------------------- -------------------------- - ------------------------ -------------------------- -------------------------- - ------------------------ -------------------------- -------------------------- - ------------------------ -------------------------- -------------------------- acting for and on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Comerica Bank-California ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents of the Corporation and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation. EXECUTE AMENDMENT TO LOAN DOCUMENTS. To execute and deliver to Bank that certain Second Amendment to Loan and Security Agreement dated as of July _____, 2002 (the "Amendment") and any other agreement entered into between Corporation and Bank in connection with the Agreement or that certain Amended and Restated Loan and Security Agreement dated as of March 6, 2002, all as amended or extended from time to time (collectively, with the Amendment, the "Loan Documents"), and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for the Loan Documents, or any portion thereof. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Documents, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Documents. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. 4 LETTERS OF CREDIT. To execute letter of credit applications and other related documents pertaining to Bank's issuance of letters of credit. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on July ______, 2002 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED AND ATTESTED BY: X _________________________________ - -------------------------------------------------------------------------------- 5 EX-10.18 4 persistence_10qex10-18.txt EXHIBIT 10.18 THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- This Third Amendment to Loan and Security Agreement is entered into as of July 17, 2002 (the "Amendment"), by and between COMERICA BANK - CALIFORNIA ("Bank") and PERSISTENCE SOFTWARE, INC. ("Borrower"). RECITALS -------- Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of March 6, 2002, as amended from time to time including, but not limited to, by that certain First Amendment to Loan and Security Agreement dated as of May 6, 2002 and by that certain Second Amendment to Loan and Security Agreement dated as of July 3, 2002 (collectively, the "Agreement"). The parties desire to amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. Each reference to "$200,000" in Sections 2.1(a)(i), 2.2, 6.3, 6.8, and 6.9 of the Agreement is hereby amended to read "$400,000". 2. Section 2.1(c)(i) of the Agreement is hereby amended in its entirety to read as follows: (c) LETTERS OF CREDIT. (i) Subject to the terms and conditions of this Agreement, at any time prior to the Revolving Maturity Date, Bank agrees to issue or cause to be issued letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, the "Letters of Credit") in an aggregate outstanding face amount not to exceed the Revolving Line MINUS the aggregate amount of the outstanding Advances at any time, provided (i) that the aggregate face amount of all outstanding Letters of Credit shall not exceed $400,000 and (ii) that at any time the aggregate amount of the outstanding Advances plus the aggregate undrawn face amount of all outstanding Letters of Credit is in excess of $400,000, the aggregate amount of the outstanding Advances plus the aggregate undrawn face amount of all outstanding Letters of Credit shall not exceed the Borrowing Base. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard application and letter of credit agreement (the "Application"), which Borrower hereby agrees to execute, including Bank's standard fee equal to 1.0% per annum of the face amount of each Letter of Credit. On any drawn but unreimbursed Letter of Credit, the unreimbursed amount shall be deemed an Advance under Section 2.1(a). Prior to the Revolving Maturity Date, Borrower shall secure in cash all obligations under any outstanding Letters of Credit on terms acceptable to Bank. 3. EXHIBIT C to the Agreement is hereby amended and replaced in its entirety by EXHIBIT C attached hereto. 4. EXHIBIT D to the Agreement is hereby amended and replaced in its entirety by EXHIBIT D attached hereto. 5. Unless otherwise defined herein, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of the Agreement and all instruments, documents and agreements entered into in connection with the Agreement. 1 6. Borrower represents and warrants that: (i) the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, (ii) that Borrower is in compliance with the intellectual property registration requirements set forth in Section 6.10 of the Agreement and that Borrower has notified Bank of such required registrations in compliance with Section 6.3 of the Agreement and (iii) that no Event of Default has occurred and is continuing. 7. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 8. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Amendment, duly executed by Borrower; (b) a modification fee equal to Two Hundred Fifty Dollars ($250), which shall be nonrefundable as of the date of this Amendment and which Bank shall charge against any of Borrower's deposit accounts with Bank on the date of this Amendment, plus an amount equal to all Bank Expenses incurred through the date of this Amendment; and (c) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] 2 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. PERSISTENCE SOFTWARE, INC. By: /s/ ANDREW OLDING --------------------------------- Title: Corporate Controller COMERICA BANK - CALIFORNIA By: /s/ GUY SIMPSON --------------------------------- Title: Assistant Vice President 3
EXHIBIT C --------- BORROWING BASE CERTIFICATE - ---------------------------------------------------------------------------------------------------------------- Borrower: PERSISTENCE SOFTWARE, INC. Lender: Comerica Bank-California Commitment Amount: $5,000,000 - ---------------------------------------------------------------------------------------------------------------- ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of ___ $___________ 2. Additions (please explain on reverse) $___________ 3. TOTAL ACCOUNTS RECEIVABLE $___________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $___________ 5. Balance of 25% over 90 day accounts $___________ 6. Concentration Limits $___________ 7. Foreign Accounts $___________ 8. Governmental Accounts $___________ 9. Contra Accounts $___________ 10. Demo Accounts $___________ 11. Intercompany/Employee Accounts $___________ 12. Other (please explain on reverse) $___________ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $___________ 14. Eligible Accounts (#3 minus #13) $___________ 15. LOAN VALUE OF ACCOUNTS (greater of $400,000 or 70% of #14) $___________ BALANCES 16. Maximum Loan Amount $___________ 17. Total Funds Available [Lesser of #16 or #15] $___________ 18. Present balance owing on Line of Credit $___________ 19. Outstanding under Sublimits (Letters of Credit) $___________ 20. RESERVE POSITION (#17 minus #18 and #19) $___________ THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THE FOREGOING IS TRUE, COMPLETE AND CORRECT, AND THAT THE INFORMATION REFLECTED IN THIS BORROWING BASE CERTIFICATE COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THE LOAN AND SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND COMERICA BANK-CALIFORNIA. PERSISTENCE SOFTWARE, INC. By: ________________________________ Authorized Signer 4
EXHIBIT D COMPLIANCE CERTIFICATE TO: COMERICA BANK - CALIFORNIA FROM: PERSISTENCE SOFTWARE, INC. The undersigned authorized officer of PERSISTENCE SOFTWARE, INC. hereby certifies that in accordance with the terms and conditions of the Amended and Restated Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN. REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- Financial statements Quarterly within 45 days (monthly w/in 20 Yes No days if Line exposure > $400,000) Annual (CPA Audited) FYE within 90 days Yes No 10K and 10Q When filed Yes No A/R Audit Semi-Annual Yes No A/R & A/P Agings, Borrowing Base Cert. Monthly within 15 days if Line exposure > Yes No $400,000 IP Report Quarterly within 45 days Yes No Total amount of Borrower's cash and investments Amount: $________ Yes No Total amount of Borrower's cash and investments Amount: $________ Yes No maintained with Bank FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ -------- Maintain on a Quarterly / Monthly* Basis: Minimum Quick Ratio 2.00:1.00 _____:1.00 Yes No Minimum Tangible Net Worth $4,000,000** $________ Yes No
* These covenants shall be measured as of the last day of each quarter, provided that, at any time that the aggregate amount of the outstanding Advances plus the aggregate undrawn face amount of all outstanding Letters of Credit is in excess of $400,000, this covenant shall be measured as of the last day of each month. ** On a consolidated basis, Borrower shall maintain a Tangible Net Worth of at least the following amounts (i) for the quarter ending June 30, 2002, $4,000,000 plus the Additional TNW Amount as of the date of measurement, if any, (ii) for the quarter ending September 30, 2002, the greater of (A) $4,500,000 and (B) $4,000,000 plus the Additional TNW Amount as of the date of measurement, if any, and (iii) thereafter, the greater of (A) $5,000,000 and (B) $4,000,000 plus the Additional TNW Amount as of the date of measurement, if any. As used herein, "Additional TNW Amount" means an amount equal to (i) 50% of Borrower's net income from the Closing Date through the date of measurement plus (ii) 75% of any proceeds received by Borrower from the sale or issuance of its equity securities from the Closing Date through the date of measurement.
------------------------------------------------------------------- COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY Received by: _________________________________________________ Sincerely, AUTHORIZED SIGNER Date: ________________________________________________________ _____________________________________________ Verified: ____________________________________________________ SIGNATURE AUTHORIZED SIGNER _____________________________________________ Date: ________________________________________________________ TITLE Compliance Status Yes No _____________________________________________ DATE -------------------------------------------------------------------
5 EX-99.1 5 persistence_10qex99-1.txt EXHIBIT 99.1 PERSISTENCE SOFTWARE, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Persistence Software, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher T. Keene, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ Christopher T. Keene - ------------------------ Christopher T. Keene Chief Executive Officer November 14, 2002 EX-99.2 6 persistence_10qex99-2.txt EXHIBIT 99.2 PERSISTENCE SOFTWARE, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Persistence Software, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christine Russell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ Christine Russell - --------------------- Christine Russell Chief Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----