-----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, MkrN0lG7iRXraFQ4OAY5Y2zTJjV+zPat19v7ouUG0uUGP1aOA3inXSoQh8RwRwdI SsWkXHwrfuo7zORNTvFjWw== 0001019687-03-000612.txt : 20030331 0001019687-03-000612.hdr.sgml : 20030331 20030328184939 ACCESSION NUMBER: 0001019687-03-000612 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERSISTENCE SOFTWARE INC CENTRAL INDEX KEY: 0001084400 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943138935 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25857 FILM NUMBER: 03626747 BUSINESS ADDRESS: STREET 1: 1720 SOUTH AMPHLETT BLVD., 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503417733 MAIL ADDRESS: STREET 1: 1720 S. AMPHLETT BLVD, 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94402 10-K 1 persistence_10k-123102.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-K _______________ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 1934 FROM 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $4.0 million as of February 28, 2003 based upon the closing sale price on the Nasdaq National Market reported for such date of $0.25 per share. Shares of Common Stock held by each officer and director and by each person who owns 10% of more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 24,044,735 shares of the registrant's Common Stock issued and outstanding as of February 28, 2003. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held on June 5, 2003. ================================================================================ We own or have rights to trademarks or trade names that we use in conjunction with the sale of our products and services. "Persistence," as well as the logo for "Live Object Cache," are registered trademarks owned by us. We have registrations pending for the use of our logo with "Persistence." "PowerTier," "EdgeXtend" and "The Engine for E-Commerce" are also trademarks of ours. This annual report on Form 10-K also makes reference to trademarks and trade names of other companies that belong to them. Our website is www.persistence.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q current reports on Form 8-K, and amendments to those reports available free of charge as soon as reasonably practicable as we file these reports with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS. COMPANY OVERVIEW Persistence provides a suite of Data Services products that sit between existing databases - such as Oracle and DB2 - and application servers - such as BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure these products, creating a "Data Services" layer that positions business information for more efficient access for users, dramatically reduces network traffic and data latency, and results in better application performance at a much lower infrastructure cost. Persistence integrated Data Services include: object-relational mapping, transactional caching, guaranteed synchronization, "uninterruptible" application fail over and rule-based client notification. Persistence's Data Services are also cross-platform, providing a "data bridge" between J2EE, .Net, Java and C++ applications. Persistence caching solutions help systems "remember" answers from each processing step. When the system receives a request for which it has an answer, it can respond immediately, without traveling to back-end databases to generate an answer. Synchronization technology ensures that these cached answers are always accurate, even as the source data changes. Customer profile management, logistics, exchanges, trading desks, and supply chain management systems are just a few examples of query-intensive online systems that can realize significant increases in capacity and performance through online caching. Customers are able to more effectively manage enterprise data through re-architecting their IT infrastructure using Persistence Data Services products. Persistence Data Services solutions result in real-time, highly scalable, distributed applications without incurring the high costs of additional hardware and replicated databases. Decision makers and customers located at any location can now have an immediate "business visibility" into their data, that is, an up-to-date view into the data that they need, when and where they need it. Enterprises are creating competitive advantage by achieving the goal of the zero-latency enterprise through Data Services, the immediate distribution and management of business information. Delivering real-time data enhances employee productivity, improves operations, and enables improved relationships with customers. Data Services also ensures business continuity by providing immediate fail-over options preventing data center outages from interrupting business processing. Our EDGEXTEND data services software for Sun Microsystems' full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or EJB) application servers, C++ and .NET application servers offers a data architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft ..NET, plus C++ application servers to support highly distributed and transaction-oriented applications both within data centers and in remote locations. Our DIRECTALERT product is a proactive, personalized client caching and notification reporting product for zero latency applications which extends the reach of enterprise systems to small form-factor devices such as mobile phones, wireless PDAs, and digital set-top boxes. Major customers in 2002 consisted of Air France, Applied Biosystems, Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola, NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney. 2 INDUSTRY BACKGROUND Today's Information Technology managers are faced with many challenges as they attempt to scale their existing infrastructure to meet the ever increasing demands of their users. They are asked to support more users with better response times, but without a commensurate increase in resources, both people and money, to meet these challenges. The solutions of past years - replicated data centers - are no longer a cost-effective option for most IT professionals. Consequently, they are looking for alternative technology strategies to meet the performance demands of their corporate enterprise systems and reduce the associated operating costs. As systems scale to meet growing demands, companies are finding that many of their systems are reaching their technological limitations. While network bandwidth can be a problem, more frequently the absence of real-time data being available to distributed users on the network is the real limitation on application performance, resulting in: o SLOW RESPONSE TIMES: Many enterprise applications were not designed to scale to handle large numbers of concurrent users. Users accessing these systems often experience lengthy delays as the number of concurrent users increases. o BUSINESS CONTINUITY: Disaster recovery and fail-over capability are crucial for systems required to operate 24 hours a day, 7 days a week. Users accessing these systems at peak volume can experience frequent system crashes. o LIMITED SCALABILITY: As applications are deployed to more and more remote users in a system in order to improve the productivity of those users, the customer needs a system that will scale easily without the need and expense of additional data centers is essential. In large part, the problems facing enterprises today are derived from the continuing evolution and increasing sophistication of enterprise applications. Simple applications supporting back office systems typically had few users accessing limited amounts of data. As decision-making based on real-time, frequently changing data was moved farther out to the edge of the enterprise, the need for vital information to support these business-critical applications became paramount. In addition, the need to keep the cost of these systems to a minimum provided an additional challenge to the system architects. Traditional system architectures and approaches cannot completely solve the problem. A new distributed data services infrastructure is required. The next generation of enterprise applications will require a fundamentally new data management infrastructure, which will allow application servers to scale in order to meet the demands of an ever increasing user base and to be deployed without the need for an expensive back end IT infrastructure. These platforms must provide: o REAL-TIME SCALABILITY: accommodate up to thousands of end users with consistent sub-second response times; o HIGH AVAILABILITY: handle system failures without interruption and without losing critical information for potentially thousands of concurrent users; o RAPID ADAPTABILITY: allow companies to continuously improve their business processing through automated development and management of differentiated business-critical applications; and o EDGE COMPUTING: enable businesses to extend their processing across organizational boundaries, support employees, remote users and even partners and customers. PERSISTENCE PRODUCTS Our EdgeXtend family of products provides a data services software infrastructure that is specifically designed to enable high volume, high performance, distributed applications. Our products, EDGEXTEND for IBM WebSphere, EDGEXTEND for BEA WebLogic, EDGEXTEND for C++ and EDGEXTEND for Microsoft .NET, address the scalability, availability and adaptability demands that typically occur when delivering business solutions for high demand, globally distributed enterprise business applications. Our products offer the following key benefits: 3 REAL-TIME RESPONSE FOR THOUSANDS OF CONCURRENT USERS. Our EDGEXTEND products were designed specifically to accommodate high volume transaction processing and the data integrity requirements of distributed applications. EDGEXTEND utilizes caching technology. Caching is a process in which select data is copied out of back-end systems and into the server cache, which allows the data to be shared and manipulated by multiple users. Replication between EDGEXTEND server caches using the POWERSYNC feature allows a cluster of application servers to provide highly scalable performance as the number of users increases. This architecture helps reduce the workload on back-end systems and accelerates application performance. The effect of this architecture is to minimize unnecessary network traffic and thereby enable high performance and reliability even with significant transaction volumes and rapidly changing data. We believe that our EDGEXTEND products offer superior performance and scalability to support the deployment of large-scale distributed enterprise applications. DRAMATIC REDUCTIONS IN TIME-TO-MARKET FOR ENTERPRISE APPLICATIONS. Our EDGEXTEND products decrease time-to-market and development cycles for sophisticated applications due to our proprietary and patented object-to-relational mapping technology. This technology enables the automatic generation of software code, which minimizes basic, low-level programming tasks, such as security and database access. EDGEXTEND accelerates development by giving developers access to data in a familiar way, as software components, and provides application developers with a framework to rapidly build electronic commerce applications. PROTECTS AND LEVERAGES EXISTING INFORMATION TECHNOLOGY INVESTMENTS. EDGEXTEND enables developers to build new enterprise applications while simultaneously integrating existing back-end systems. EDGEXTEND'S flexible architecture integrates with disparate database servers, web servers and multiple clients, while supporting multiple programming languages and computing platforms. EDGEXTEND provides enhanced flexibility and inter-operability to link existing enterprise applications and systems, allowing businesses to leverage their investments in information technology and extend them to the edge of their enterprise and beyond. OPTIMIZED DISTRIBUTED DATA SERVICES ARCHITECTURE. All our products are built on the core Persistence technologies of Object/Relational Mapping, Dynamic Caching and Cache Synchronization. This technology, called Distributed Dynamic Caching (DDC), allows for a distributed data services architecture that is highly scalable, suitable for high volume transaction oriented applications, and capable of supporting thousands of concurrent users. In addition, this architecture is designed to be implemented in a globally distributed enterprise environment without the need for an expensive back-end infrastructure. It provides for data center type performance without the need for multiple data centers. PERSISTENCE STRATEGY Our goal is to fundamentally restructure how companies extend and leverage their vital business information by enabling a distributed data services infrastructure. INCREASE PARTNERSHIPS WITH INDEPENDENT SOFTWARE VENDORS (ISVS). We intend to continue to develop and expand relationships with ISVs, in particular, IBM WebSphere and BEA WebLogic. Through our EDGEXTEND product for WebSphere and EDGEXTEND for WebLogic we now offer a complementary J2EE product, which leverages the unique data management capability of Persistence's technologies. As part of the IBM and BEA partner programs, we believe that these relationships will provide additional marketing and sales channels for our products and facilitate the successful deployment of customer applications. CONTINUE TO EXPAND OUR GROWING OEM BUSINESS. We intend to become a market leader in providing data services infrastructure software to enable sophisticated enterprise applications. We have worked with several customers who have successfully built their global enterprise applications on core Persistence technologies and are deploying these applications to their customers. We will continue to collaborate with our innovative and advanced customers to develop and deliver product features that address their needs. We believe that this collaboration focuses our overall product development effort and speeds our time-to-market. 4 WORK WITH SYSTEM INTEGRATORS TO DELIVER COMPLETE SOLUTIONS. In addition to extending our technology leadership, we will work with major System Integrators (SI's) such as BearingPoint (formerly KPMG Consulting) and IBM Global Services to provide our customers the most complete data services solutions for their distributed applications. These system integrators will be an extension of, and a complement to, our existing professional services organization. By working with these SI's on joint customer engagements we can leverage their services expertise and customer channel and they can leverage our products and technology to provide unique, differentiated data services solutions. EXPAND PRODUCT PLATFORM TO OFFER COMPLEMENTARY SOLUTIONS. In addition to extending our technology leadership, we intend to broaden and enhance our product platform to incorporate complementary solutions for developing and deploying sophisticated enterprise applications. We will continue to make investments in our research and development organization for many of these product initiatives. We will also consider, from time to time, bolstering these internal efforts with strategic acquisitions, and partnerships with software vendors who have complementary product offerings. The addition of these complementary technologies will enable us to offer a more complete platform for our customers. LEVERAGE INSTALLED CUSTOMER BASE. We believe there are significant opportunities to expand the use of our products throughout our current customer base. This is particularly true for customers who have adopted our technology for a particular part of their business, but who have standardized on IBM's WebSphere or BEA's WebLogic for their mainstream applications. We now have the opportunity to re-engage with those customers on a broader basis as they deploy their applications throughout their enterprise. Through Persistence's distributed data services architecture we can enable our customers to scale and deploy applications without the need for replicated data centers, in some cases, saving them millions of dollars. MAINTAIN OUR INTERNATIONAL PRESENCE. We believe there are significant international opportunities for our products and services, in particular in Europe and Asia. Currently, we have established direct sales operations in the United Kingdom and Germany. In addition to our direct sales operations, we also distribute our products throughout Europe and Asia through distributors and systems integrators. We intend to extend these international third-party distributor and systems integrator relationships. PRODUCTS EDGEXTEND Our EDGEXTEND for WebSphere, EDGEXTEND for WebLogic, and EDGEXTEND for .NET products are designed to make the performance and reliability of Persistence's patented DDC technology available to applications running on IBM's WebSphere and BEA's WebLogic application servers, as well as applications built on Microsoft ..NET. EDGEXTEND provides a new distributed data services architecture, which complements J2EE compliant, and other, application servers. Through the J2EE Connector Architecture the data access layer is replaced by EDGEXTEND, allowing the application servers to have the benefits of DDC without changing their existing business and presentation logic. In addition, with this distributed data architecture, WebSphere and WebLogic application servers can operate outside of a data center in a "virtual data center" without the requirement of an expensive relational database infrastructure. EDGEXTEND FOR C++ (formerly POWERTIER for C++) Our EDGEXTEND for C++ product is a high-performance transactional application server, which is based on our patented technologies and the Common Object Request Broker Architecture, or CORBA, standard for communication between distributed applications. The CORBA standard is managed by an industry group called the Object Management Group. Our EDGEXTEND for C++ platform runs on the Windows and Unix operating systems. We have licensed the J2EE platform and are a contributor to the Java standard. 5 The following table describes the major features and benefits for EDGEXTEND for IBM WebSphere, BEA WebLogic, and Microsoft .NET and EDGEXTEND FOR C++: FEATURES BENEFITS -------- -------- Shared transactional object cache Enables real-time scalability by reducing database traffic Object-relational mapping that Speeds application development by managing provides abstraction to database database details for developer representation Optimized usage of native database Improves application capacity by libraries efficiently using database resources Application server cache Improves application capacity by caching synchronization unpredictably changing data Application server failover Delivers high availability by replicating information across clusters of application server cache DIRECT ALERT DIRECTALERT is an end-to-end solution for adding proactive notification services to business applications, allowing information to be delivered to decision makers and customers when and how they need it. DIRECTALERT is a J2EE application server add-in designed to provide sophisticated data and event monitoring as well as filtering. DIRECTALERT is designed to proactively notify clients ranging from desktop applications and ordinary web browsers to mobile phones and television set-top boxes. The following table describes the major features and benefits for the DIRECTALERT product: FEATURES BENEFITS -------- -------- Intelligent Server Engine Provides sophisticated and non-intrusive data monitoring, selection and filtering Flexible and powerful clients with Enables Java devices (mobile phones to "zero footprints" desktop PCs) to receive proactive notification resulting in business decisions being made on updated data Rapid development and Adds functionality to existing applications implementation without modifications as it is built with 100% Java and XML. Server side required only query definitions. No modification is required to existing application logic. POWERTIER Persistence continues to sell current and earlier versions of POWERTIER for J2EE application server to current customers. POWERTIER for J2EE incorporates our patented technologies into a J2EE-based transactional server. The J2EE standard, as defined by the Java Software division of Sun Microsystems, has gained rapid acceptance as a programming language for complex enterprise applications because it provides a consistent way to program and integrate services for companies building distributed business-to-business applications with the Java programming license. POWERTIER for J2EE delivers scalability, high availability, and rapid adaptability for high volume, high performance, and distributed enterprise applications. We believe that research and product development will be a key to our success as a leader in providing data services software. Our research and development expenditures totaled $4.1 million for 2002, $5.6 million for 2001 and $8.1 million for 2000. 6 CUSTOMERS Our software products are licensed to customers worldwide for use in a wide range of enterprise and electronic commerce applications, including real-time electronic trading, supply chain management, network management, application outsourcing and logistics management. Our services consist of professional consulting services, technical support and training. The following table lists a selection of customers who have purchased a significant amount of our products or services in 2002, 2001 or 2000 (defined as approximately 1% or more of our total revenues in any year.) E-COMMERCE/INTERNET FINANCIAL SERVICES/EXCHANGES Cisco Systems Chase/JP Morgan i2 CNP Assurances Intershop Citadel Investment Group Credit Suisse First Boston Fiducia AG Kinetech Services Reuters Financial Software Salomon Smith Barney Wells Fargo COMMUNICATIONS Zurich Arippina Gruppe 4T Solutions AT&T CSC Holdings (Cablevision) Lucent Technologies Motorola TRANSPORTATION & LOGISTICS Nokia Air France Spirent Communications Eurocontrol Sprint Federal Express NetJets Sabre Group Holdings (American Airlines) MANUFACTURING & DISTRIBUTION Hewlett Packard Nippon Steel Delco OTHER Applied Biosystems Bundesanstalt fur Arbeit Convergys Information Infron Technologies Refco Group In 2002, sales of products and services to Cablevision accounted for 26% of our total revenues and sales to Salomon Smith Barney accounted for 13% of our total revenues. In 2001, sales of products and services to Salomon Smith Barney accounted for 15% of our total revenues and sales to Cablevision accounted for 11% of our total revenues. In 2000, sales of products and services to Salomon Smith Barney accounted for 16% of our total revenues. SALES AND MARKETING We sell our products through both a direct sales force and third party distributors. As of December 31, 2002, we had 30 people in our sales and marketing organization, of which 21 were in the United States, and 9 were in European offices. We intend to increase the size of our direct sales force as well as focusing on indirect distribution channels. While our overall 2003 sales and marketing expense compared to 2002 is expected to decrease, reductions in non-personnel related programs are expected to offset expenses for new hirings. 7 Our sales cycle is relatively long, generally between three and nine months. A successful sales cycle typically includes presentations to both business and technical decision makers, as well as a limited pilot program, a proof of concept, to establish a technical fit. We have engaged in, and may continue to engage in, a variety of targeted marketing activities, including public relations, seminars, trade shows, lead generation programs and customer-oriented web site management. We have also made substantial marketing investments in education and training for the J2EE and C++ markets. We hold periodic seminars in order to train developers. We intend to continue to develop and expand relationships with OEMs, consultants, system integrators and independent software vendors (ISVs). We believe these third parties can effectively market our products, particularly EDGEXTEND, through their existing relationships with our target market customers. We believe that these relationships will provide additional marketing and sales channels for our products and facilitate the successful deployment of customer applications. We are currently working with multiple consultants, system integrators such as BearingPoint and ISV partners, including IBM and BEA, with whom we announced partner agreements in 2001. In international markets, we plan to expand our sales through indirect channels, such as distributors agents and OEMs. As of December 31, 2002, we were represented by one international distributor, who sells our products in Asia. COMPETITION The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors in our market are: o performance, including scalability, integrity and availability; o ability to provide a complete software platform; 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 o price. In the EDGEXTEND market, alternative technology is available from a variety of sources. Companies such as Versant, Gemstone and Excelon are middleware vendors that offer alternative data management solutions that directly target EdgeXtend's market. In addition, many prospective customers may build their own custom solutions. In the DIRECTALERT market, alternative approaches are provided by a variety of sources, including the potential for internal development. Companies such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software that 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. 8 We continue to sell current and earlier versions of POWERTIER for J2EE application server to current customers. Our competitors for POWERTIER include both publicly and privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE Application Server). Many customers may not be willing to purchase our POWERTIER products because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors have pre-existing customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. INTELLECTUAL PROPERTY RIGHTS Our performance may depend on our ability to protect our proprietary rights to the technologies used in our principal products. If we are not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and services, which would harm our business. We rely on a combination of patents, copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, but these legal means afford only limited protection. As of February 28, 2003, we had five issued United States patents and two pending United States patent applications with allowable subject matter. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our intellectual property rights as fully as do the laws of the United States. Thus, the measures we are taking to protect our intellectual property rights in the United States and abroad may not be adequate. Finally, our competitors may independently develop similar technologies. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows. For example, we may be inadvertently infringing a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware, which will cause us to be infringing when it issues in the future. To address these patent infringement claims, we may have to enter into royalty or licensing agreements on disadvantageous commercial terms. Alternatively, we may be unable to obtain a necessary license. A successful claim of product infringement against us, and our failure to license the infringed or similar technology, would harm our business. In addition, any infringement claims, with or without merit, would be time-consuming and expensive to litigate or settle and would divert management attention from administering our core business. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell competing products that would, in the absence of this license agreement, infringe our patents. Under this agreement, Sun Microsystems made a one-time payment to us. Neither Sun Microsystems nor we can transfer the license without the consent of the other party. In January 2001, we entered into a license agreement with both webGain and Secant to manufacture and sell products under three of our patents. Under this agreement, both webGain and Secant made a one-time payment to us. EMPLOYEES As of December 31, 2002, we had 68 full-time employees, including 30 in sales and marketing, 26 in research and development and technical services, and 12 in general and administrative functions. Our relationships with our employees are generally good. From time to time, we also employ independent contractors to support our sales and marketing, research and development, professional services and administrative organizations. 9 EXECUTIVE OFFICERS The following table sets forth specific information regarding our executive officers as of February 28, 2003: NAME AGE POSITION ---- --- -------- Christopher T. Keene..........42 Chief Executive Officer Christine Russell.............53 Chief Financial Officer and Secretary Derek Henninger...............40 Vice President of Worldwide Field Operations Ed Murrer.....................53 Vice President of Marketing Vivek Singhal.................34 Vice President of Engineering Each executive officer serves at the sole discretion of the Board of Directors. CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief Executive Officer and a director since June 1991 and as Chairman of the Board since April 1999. From June 1991 to April 1999, Mr. Keene also served as President. Before founding Persistence, Mr. Keene worked at McKinsey & Company, Ashton-Tate and Hewlett-Packard. Mr. Keene holds a B.S. degree in Mathematical Sciences with honors from Stanford University and an M.B.A. degree from The Wharton School at the University of Pennsylvania. CHRISTINE RUSSELL joined Persistence in October 1997 and has served as Chief Financial Officer and Secretary since December 1997. From October 1995 to October 1997, she served as Chief Financial Officer for Cygnus Solutions, an open source platform software company. Previously, Mrs. Russell was CFO of Valence Technology and served in various senior financial positions with Shugart Corporation, a subsidiary of Xerox. She holds a B.A. degree and an M.B.A. degree from Santa Clara University and serves on the Board of Directors of Peak Ltd. International. DEREK HENNINGER co-founded Persistence and served as Vice President of Engineering from June 1991 until January 2002 when he became Vice President of Customer Care and in January 2003 he became Vice President of Worldwide Field Operations which includes all field sales and technical resources. Previously, Mr. Henninger worked in the Data Interpretation Division of Metaphor Corporation, a software and hardware company, from September 1990 to June 1991. Mr. Henninger holds a B.A. degree in Economics and a B.S. degree in computer Science and Mathematics from the University of California at Davis. ED MURRER joined Persistence in July 2001 as Vice President of Marketing. Mr. Murrer was the Senior Vice President of Sales and Marketing at Xcert International, an enterprise security software company, from March 2000 to March 2001 when Xcert was sold to RSA Security. From July 1997 to March 2000, Mr. Murrer was Vice President, Business Development at Veridicom, a biometrics security software company. He holds a B.S. degree in Mechanical Engineering, with highest honors, and a M.S. degree in Mechanical Engineering from Purdue University. VIVEK SINGHAL joined Persistence in April 1995 as a Software Engineer. In January 2002, he was promoted to Vice President, Engineering. He holds a B.S. degree in Computer Science from the Massachusetts Institute of Technology and a Ph.D. in Computer Science from the University of Texas at Austin. ITEM 2. PROPERTIES. We are headquartered in San Mateo, California, where we lease approximately 17,000 square feet of office space under a lease expiring on December 31, 2004. We have an engineering staff facility in San Diego, where we lease approximately 6,000 square feet of office space under a lease expiring on August 31, 2004. We also maintain sales offices in other U.S. states, the United Kingdom and Germany. We believe that our existing facilities are adequate to meet our current and foreseeable requirements or that suitable additional or substitute space will be available as needed. 10 ITEM 3. LEGAL PROCEEDINGS. We are not currently subject to any material legal proceedings. We may, however, from time to time become a party to various legal proceedings that arise in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK. Our common stock was traded on the Nasdaq National Market under the symbol PRSW from the effective date of our initial public offering on June 24, 1999 until September 12, 2002 at which time we moved our stock listing to the Nasdaq SmallCap Market. Prior to the initial public offering, no public market existed for our common stock. The price per share reflected in the table below represents the range of low and high closing sale prices for our common stock as reported in the Nasdaq National Market (before September 12, 2002) or the Nasdaq SmallCap Market (both on and after September 12, 2002) for the periods indicated. HIGH LOW -------- -------- For The Year Ended December 31, 2001: First Quarter......................................... $ 4.50 $ 1.00 Second Quarter........................................ $ 1.25 $ 0.48 Third Quarter......................................... $ 0.99 $ 0.15 Fourth Quarter........................................ $ 1.35 $ 0.19 For The Year Ended December 31, 2002: First Quarter......................................... $ 1.85 $ 0.87 Second Quarter........................................ $ 1.00 $ 0.53 Third Quarter......................................... $ 0.82 $ 0.42 Fourth Quarter........................................ $ 0.72 $ 0.30 We had 159 stockholders of record as of February 28, 2003, including several holders who are nominees for an undetermined number of beneficial owners. DIVIDEND POLICY. We have never paid dividends on our common stock or preferred stock. We currently intend to retain any future earnings to fund the development of our business. Therefore, we do not currently anticipate declaring or paying dividends in the foreseeable future. In addition, our line of credit agreement prohibits us from paying dividends. RECENT SALES OF UNREGISTERED SECURITIES. On November 26, 2002 we issued 3,758,692 shares of our common stock at a price of $0.5321 per share, and warrants to purchase up to 1,205,130 shares of our common stock at an exercise price of $0.75 per share to certain purchasers affiliated with Needham Capital Partners. The warrants expire on the earlier of November 26, 2007 or the closing of a merger, acquisition or sale of substantially all of the assets of Persistence. In issuing these securities we relied upon Section 4(2) of the Securities Act on the basis that the transaction did not involve a public offering. 12 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this annual report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2002, 2001 and 2000 and the consolidated balance sheet data at December 31, 2002 and 2001, are derived from audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 1999 and 1998, and the consolidated balance sheet data as of December 31, 2000, 1999 and 1998 are derived from audited financial statements not included in this annual report on Form 10-K.
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: License ......................................... $ 9,061 $ 10,561 $ 17,684 $ 10,890 $ 7,478 Service ......................................... 5,525 8,810 7,593 3,553 2,682 --------- --------- --------- --------- --------- Total revenues .......................... 14,586 19,371 25,277 14,443 10,160 Loss from operations .............................. (5,451) (15,391) (17,857) (12,165) (4,090) --------- --------- --------- --------- --------- Net loss .......................................... $ (5,440) $(15,132) $(16,726) $(11,306) $ (4,089) ========= ========= ========= ========= ========= Basic and diluted net loss per share(1) ........... $ (0.26) $ (0.76) $ (0.87) $ (0.86) $ (0.59) ========= ========= ========= ========= ========= Shares used in basic and diluted net loss per share calculation ............................... 20,529 19,919 19,330 13,091 6,879 ========= ========= ========= ========= ========= AS OF DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.. $ 8,903 $ 7,411 $ 19,490 $ 29,652 $ 4,938 Working capital.................................... 4,942 6,783 17,289 29,582 3,384 Total assets....................................... 11,100 13,755 33,641 39,092 7,064 Long-term obligations.............................. 784 421 932 354 714 Total stockholders' equity......................... 4,711 7,944 22,556 32,018 3,422 __________
(1) Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase). Diluted net loss per common share was the same as basic net loss per common share for all periods presented, since the effect of any potentially dilutive securities is excluded as they are anti-dilutive because of the company's net losses. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements as of December 31, 2002 and 2001 and for each of the years ended December 31, 2002, 2001 and 2000, included elsewhere in this annual report on Form 10-K. In addition, this Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this annual report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," "targeting," and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such 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 annual report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. 13 OVERVIEW Persistence provides a suite of Data Services products that sit between existing databases - such as Oracle and DB2 - and application servers - such as BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure these products, creating a "Data Services" layer that positions business information for more efficient access for users, dramatically reduces network traffic and data latency, and results in better application performance at a much lower infrastructure cost. Persistence integrated Data Services include: object-relational mapping, transactional caching, guaranteed synchronization, "uninterruptible" application fail over and rule-based client notification. Persistence's Data Services are also cross-platform, providing a "data bridge" between J2EE, .Net, Java and C++ applications. Persistence caching solutions help systems "remember" answers from each processing step. When the system receives a request for which it has an answer, it can respond immediately, without traveling to back-end databases to generate an answer. Synchronization technology ensures that these cached answers are always accurate, even as the source data changes. Customer profile management, logistics, exchanges, trading desks, and supply chain management systems are just a few examples of query-intensive online systems that can realize significant increases in capacity and performance through online caching. Customers are able to more effectively manage enterprise data through re-architecting their IT infrastructure using Persistence Data Services products. Persistence Data Services solutions result in real-time, highly scalable, distributed applications without incurring the high costs of additional hardware and replicated databases. Decision makers and customers located at any location can now have an immediate "business visibility" into their data, that is, an up-to-date view into the data that they need, when and where they need it. Enterprises are creating competitive advantage by achieving the goal of the zero-latency enterprise through Data Services, the immediate distribution and management of business information. Delivering real-time data enhances employee productivity, improves operations, and enables improved relationships with customers. Data Services also ensures business continuity by providing immediate fail-over options preventing data center outages from interrupting business processing. Our EDGEXTEND data services software for Sun Microsystems' full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or EJB) application servers, C++ and .NET application servers offers a data architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft ..NET, plus C++ application servers to support highly distributed and transaction-oriented applications both within data centers and in remote locations. Our DIRECTALERT product is a proactive, personalized client caching and notification reporting product for zero latency applications which extends the reach of enterprise systems to small form-factor devices such as mobile phones, wireless PDAs, and digital set-top boxes. Major customers in 2002 consisted of Air France, Applied Biosystems, Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola, NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney. Our revenues, which consist of software license revenues and service revenues, totaled $14.6 million in 2002, $19.4 million in 2001, and $25.3 million in 2000. License revenues consist of licenses of our software products, which generally are priced based on the number of users or servers. Service revenues consist of professional services consulting, customer support and training. Because we only commenced selling EDGEXTEND and DIRECTALERT in 2002, we have a limited operating history in the data services markets. We currently expect that sales of our older POWERTIER products will continue to contribute to our revenues, but that sales of our newer EDGEXTEND and DIRECTALERT products will contribute a growing percentage of our revenues over the next several quarters. We market our software and services primarily through our direct sales organizations in the United States, the United Kingdom and Germany. Revenues from licenses and services to customers outside the United States were $4.8 million in 2002, $7.4 million in 2001, and $7.2 million in 2000 which represented approximately 33% of total revenues for 2002, 38% of total revenues for 2001, and 28% of total revenues for 2000. 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 55% of total revenues in 2002, 45% of total revenues in 2001, and 40% of total revenues in 2000. In the future, it is likely that a relatively few large customers could continue to account for a relatively large proportion of our revenues and these customers are likely to differ year to year. 14 To date, we have sold our products primarily through our direct sales force, and we will need to continue to hire sales people, including those with expertise in channel sales, in order to meet our sales goals. In addition, our ability to achieve significant revenue growth will depend in large part on our success in establishing and leveraging relationships with independent software vendors, systems integrators, OEM partners and other resellers. 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. 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. The total number of our full-time employees decreased from 81 as of December 31, 2001 to 68 as of December 31, 2002, representing a decrease of 16% as a result of periodic assessments during the year of efficient staffing requirements. We have incurred net losses in each quarter since 1996 and, as of December 31, 2002, had an accumulated deficit of $61.4 million. We are currently targeting that sales and marketing expenses, research and development expenses, and general and administrative expenses for 2003 will be below 2002 spending levels. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicative of future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. While we are targeting to begin achieving profitability on a quarterly basis in the second half of 2003, we may not achieve it. Our success depends significantly upon broad market acceptance of our recently introduced EDGEXTEND and, to a lesser degree, the DIRECTALERT products. Our performance will also depend on the level of capital spending in our target market of customers and on the growth and widespread adoption of the market for data services and data integration. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, intangible assets, income taxes, restructuring costs, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. - - REVENUE RECOGNITION. Our revenue recognition policy is significant because our revenue is a key component of our results of operations. In addition, our revenue recognition determines the timing of certain expenses, such as commissions. We follow specific and detailed guidelines in measuring and recognizing revenue. 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. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. Royalty revenues are recognized when the software or services has been delivered, collection is 15 reasonably assured and the fees are determinable. 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. While more infrequent, arrangements that require significant modification or customization of software are recognized under the completion of contract method. - - BAD DEBTS. Our bad debt policy requires that we maintain a specific allowance for certain doubtful accounts and a general allowance for the majority of the non-specifically reserved accounts. These allowances provide for estimated losses resulting from the inability or refusal of our customers to make required payments. We analyze such factors as historical bad debt experience, customer payment patterns and current economic trends. This analysis requires significant judgment. If the financial condition of the company's customers were to deteriorate further, additional allowances would generally be required resulting in future losses that are not included in our allowances for doubtful accounts at December 31, 2002. - - PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically resulted in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we will incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements and operating results. Accordingly in 2002, we took an impairment charge of $160,000. In 2001, we took an impairment charge of $2.0 million. - - STOCK COMPENSATION. We account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no accounting recognition is given to employee stock options granted with an exercise price equal to fair market value of the underlying stock on the grant date. Upon exercise, the net proceeds and any related tax benefit are credited to stockholders' equity. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results of using the alternative of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, is included in Note 1 of the "Notes to Consolidated Financial Statements," included elsewhere in this report. - - INCOME TAXES. Our income tax policy records the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We follow specific and detailed guidelines regarding the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2002 AND 2001 REVENUES Our revenues were $14.6 million for 2002 and $19.4 million for 2001 representing a decrease of 25%. International revenues were $4.8 million for 2002 and $7.4 million for 2001 representing a decrease of 35%. For 2002, sales to Cablevision accounted for 26% of total revenues, sales to Salomon Smith Barney accounted for 13% of total revenues, and sales to our top five customers accounted for 55% of total revenues. For 2001, sales 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. LICENSE REVENUES. License revenues consist of licenses of our software products, which generally are priced based on the number of users or central processing units deploying our software. License revenues were $9.1 million for 2002 and $10.6 million for 2001 representing a decrease of 14%. License revenues represented 62% of total revenues for 2002 and 55% of total revenues for 2001. The decrease in software license revenues was primarily due to decreased spending on IT infrastructure products by our target customers. Given the continuing dramatically reduced level of information technology spending, license revenues may fluctuate substantially over the next several quarters. In addition, for the same reason, our revenues may be flat to down for 2003 compared to 2002. 16 SERVICE REVENUES. Service revenues consist of professional services consulting, customer support and training. Our service revenues were $5.5 million for 2002 and $8.8 million for 2001, representing a decrease of 37%. The decrease in service revenues was primarily due to a decline in consulting service contracts in 2002. Service revenues represented 38% of total revenues for 2002 and 45% of total revenues for 2001. COST OF REVENUES COST OF LICENSE REVENUES. Cost of license revenues consists of royalties, packaging, documentation and associated shipping costs. Our cost of license revenues was $286,000 for 2002 and $14,000 for 2001. This increase was largely due to increased royalty charges by a third party software vendor because we sold more software that required payment of royalties. Cost of license revenues as a percentage of license revenues may vary between periods due to royalty charges from third party software vendors. 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 $2.7 million for 2002 and $4.0 million for 2001, representing a decrease of 31%. This decrease was primarily due to a reduction in our use of external consultants in 2002 as a result of the decline in both our technical support and consulting service contracts. As a percentage of service revenues, cost of service revenues were 50% for 2002 and 45% for 2001. Because a large portion of our cost of service revenues is fixed, the percentage increase was due in part to the decrease in our service revenues. Cost of service revenues as a percentage of service revenues may vary between periods due to our use of consultants. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries, benefits, commissions and bonuses earned by sales and marketing personnel, travel and entertainment, and promotional expenses. Our sales and marketing expenses were $8.7 million for 2002 and $14.4 million for 2001, representing a decrease of 40%. This decrease was primarily due to a reduction in staffing and personnel related costs, reduced office space and lower commissions based on lower sales revenues. Sales and marketing expenses represented 59% of total revenues for 2002 and 74% of total revenues for 2001. We are presently targeting that 2003 sales and marketing expense levels will be lower than comparable 2002 expense levels. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and benefits for software developers, technical managers and quality assurance personnel as well as payments to external software consultants. Our research and development expenses were $4.1 million for 2002 and $5.6 million for 2001, representing a decrease of 26%. This decrease was primarily related to a reduction in both employees and external contract staff. Research and development expenses represented 28% of total revenues for 2002 and 29% of total revenues for 2001. We are presently targeting that 2003 research and development expense levels will be lower than comparable 2002 expense levels. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance, administrative and executive management personnel, legal costs, accounting costs, bad debt write-offs and various costs associated with our status as a public company. Our general and administrative expenses were $3.5 million for 2002 and $5.5 million for 2001, representing a decrease of 37%. This decrease was primarily related to the termination of patent litigation and related legal fees and settlements, and a reduction in bad debt expense. General and administrative expenses represented 24% of total revenues for 2002 and 29% of total revenues for 2001. We are presently targeting that 2003 general and administrative expense levels will be lower than comparable 2002 expense levels. AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of purchased intangibles was $768,000 for 2002 and $3.6 million for 2001 representing a decrease of 79%. In December 2002, write-off of purchased intangibles amounted to $160,000. In June 2001, write-off of intangibles and goodwill amounted to $2.0 million. 17 RESTRUCTURING COSTS. Restructuring costs consist primarily of expenses associated in a reduction in employee headcount and the closure of excess field offices. In 2002, no restructuring costs were incurred. We restructured several functions during 2001. This resulted in a one-time charge of $1.7 million. The majority of this charge was related to severance and other employee related benefit costs. INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense) consists primarily of earnings on our cash, cash equivalents and short-term investment balances, offset by interest expense related to obligations under capital leases and other borrowings, and various miscellaneous state and foreign taxes, and other expenses. Net interest and other income was $11,000 for 2002 and $259,000 for 2001, representing a decrease of 96%. This decrease was primarily due to a reduction in our cash balances until November 2002 when we completed a $2 million common stock sale to purchasers affiliated with Needham Capital Partners, and a reduction in market interest rates. STOCK-BASED COMPENSATION. Some options granted and common stock issued in the past have been considered to be compensatory, as the estimated fair value of the stock price for accounting purposes was greater than the fair market value of the stock as determined by the Board of Directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of December 31, 2002 was $31,000, 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 $88,000 in 2002 and $245,000 in 2001. We expect to record amortization expense related to these securities of approximately $31,000 in 2003. PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of December 31, 2002, we had $55.9 million of federal and $8.6 million of state net operating loss carryforwards available to offset future taxable income. The federal net operating loss carryforwards expire through 2022, while the state net operating loss carryforwards expire through 2012. The net operating loss carryforwards for state tax purposes are substantially less than for federal tax purposes, primarily because only 50% of state net operating loss carryforwards can be utilized to offset future state taxable income and because state net operating loss carryforwards generated in earlier years have already expired. The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in situations where changes occur in the stock ownership of a company. If we should be acquired or otherwise have an ownership change, as defined in the Tax Reform Act of 1986, our utilization of these carryforwards could be restricted. As of December 31, 2002, the Company also had research and development tax credit carryforwards of $1.7 million and $1.6 million available to offset future federal and state income taxes, respectively. The federal credit carryforward expires in 2022, while the state credit carryforward has no expiration. We have placed a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the net deferred tax assets and the level of the valuation allowance. If and when we determine that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. YEARS ENDED DECEMBER 31, 2001 AND 2000 REVENUES Our revenues were $19.4 million for 2001 and $25.3 million for 2000 representing a decrease of 23%. International revenues were $7.4 million for 2001 and $7.2 million for 2000, representing an increase of 3%. For 2001, sales 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. For 2000, sales to Salomon Smith Barney accounted for 16% of total revenues and sales to our top five customers accounted for 40% of total revenues. 18 LICENSE REVENUES. License revenues were $10.6 million for 2001 and $17.7 million for 2000, representing a decrease of 40%. License revenues represented 55% of total revenues for 2001 and 70% of total revenues for 2000. The decrease in software license revenues was primarily due to a general reduction in information technology spending for 2001, as compared to the more buoyant levels experienced in 2000. This was particularly noticeable within our domestic markets. SERVICE REVENUES. Our service revenues were $8.8 million for 2001 and $7.6 million for 2000, representing an increase of 16%. The increase in service revenues was primarily due to our focus upon significant consulting engagements with Salomon Smith Barney and other key customers. Service revenues represented 45% of total revenues for 2001 and 30% of total revenues for 2000. COST OF REVENUES COST OF LICENSE REVENUES. Our cost of license revenues was $14,000 for 2001 and $304,000 for 2000. The cost of license revenues for 2000 included significant royalties that did not continue in 2001. COST OF SERVICE REVENUES. Our cost of service revenues was $4.0 million for 2001 and $3.6 million for 2000, representing an increase of 11%. This increase was primarily due to the higher technical support revenues experienced in 2001. As a percentage of service revenues, cost of service revenues were 45% for 2001 and 47% for 2000. Cost of service revenues as a percentage of service revenues may vary between periods due to our use of third party professional services. OPERATING EXPENSES SALES AND MARKETING. Our sales and marketing expenses were $14.4 million for 2001 and $22.8 million for 2000, representing a decrease of 37%. This decrease was primarily due to a general reduction in marketing programs, a reduction in staff and lower commissions based on lower sales revenues. Sales and marketing expenses represented 74% of total revenues for 2001 and 90% of total revenues for 2000. RESEARCH AND DEVELOPMENT. Our research and development expenses were $5.6 million for 2001 and $8.1 million for 2000, representing a decrease of 31%. This decrease was primarily related to a reduction in staff and a reduction in the use of external consultants. Research and development expenses represented 29% of total revenues for 2001 and 32% of total revenues for 2000. GENERAL AND ADMINISTRATIVE. general and administrative expenses were $5.5 million for 2001 and $5.4 million for 2000, representing an increase of 2%. This increase was primarily the result of patent litigation and settlement costs, offset by a reduction in personnel expenses. General and administrative expenses represented 29% of total revenues for 2001 and 21% of total revenues for 2000. AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of purchased intangibles was $3.6 million for 2001 and $2.9 million for 2000 representing an increase of 24%. The increase in amortization was primarily due to write-off of intangibles and goodwill of $2.0 million in June 2001. RESTRUCTURING COSTS. We restructured several operational functions during 2001. This resulted in a one-time charge of $1.7 million. The majority of this charge related to severance and other employee related benefit costs. INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense) consists primarily of earnings on our cash, cash equivalents and short-term investment balances, offset by interest expense related to obligations under capital leases and other borrowings, and various miscellaneous state and foreign taxes, and other expenses. Interest and other income (expense) was $259,000 for 2001 and $1.1 million for 2000, representing a decrease of 76%. This decrease was primarily due to a reduction in our short-term investment balances and a general reduction in market interest rates. 19 STOCK-BASED COMPENSATION. Some options granted and common stock issued in the past have been considered to be compensatory, as the estimated fair value of the stock price for accounting purposes was greater than the fair market value of the stock as determined by the Board of Directors on the date of grant or issuance. Total deferred stock compensation associated with equity transactions as of December 31, 2001 was $119,000, 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 $245,000 in 2001 and $416,000 in 2000. PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating losses for federal and state tax purposes and have not recognized any tax provision or benefit. QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited consolidated statement of operations data for each of the twelve quarters in the three-year period ended December 31, 2002. This financial data is also expressed as a percentage of our total revenues for the periods indicated. This data has been derived from our unaudited consolidated financial statements, which have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information when read in conjunction with the consolidated financial statements and notes thereto. Our quarterly results have been in the past, and may be in the future, subject to significant fluctuations. As a result, we believe that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future period. 20
QUARTER ENDED -------------------------------------------------------------------------------------- MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, 2000 2000 2000 2000 2001 2001 ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues: License ............................. $ 2,881 $ 4,402 $ 5,356 $ 5,045 $ 2,131 $ 2,538 Service ............................. 1,329 1,556 1,728 2,980 2,735 2,213 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues .................... 4,210 5,958 7,084 8,025 4,866 4,751 ----------- ----------- ----------- ----------- ----------- ----------- Cost of revenues: License ............................. 50 16 207 31 5 1 Service ............................. 715 902 857 1,118 1,173 1,189 ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenues ............ 765 918 1,064 1,149 1,178 1,190 ----------- ----------- ----------- ----------- ----------- ----------- Gross profit ......................... 3,445 5,040 6,020 6,876 3,688 3,561 ----------- ----------- ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing ................. 5,998 5,255 5,234 6,268 4,349 3,819 Research and development ............ 2,013 2,213 2,042 1,859 1,748 1,583 General and administrative .......... 867 1,492 1,649 1,423 1,374 1,394 Amortization of purchased intangibles ....................... 496 771 799 859 718 2,458 Restructuring costs ................. -- -- -- -- 785 688 ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses .......... 9,374 9,731 9,724 10,409 8,974 9,942 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations ........ (5,929) (4,691) (3,704) (3,533) (5,286) (6,381) Interest income (expense), net ....... 367 290 299 175 177 97 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) .................... $ (5,562) $ (4,401) $ (3,405) $ (3,358) $ (5,109) $ (6,284) =========== =========== =========== =========== =========== =========== Shares used in calculating basic net income (loss) per share ........................... 18,968 19,148 19,418 19,667 19,791 19,916 =========== =========== =========== =========== =========== =========== Shares used in calculating diluted net income (loss) per share ........................... 18,968 19,148 19,418 19,667 19,791 19,916 =========== =========== =========== =========== =========== =========== Basic net income (loss) per share .... $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32) =========== =========== =========== =========== =========== =========== Diluted net income (loss) per share .. $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32) =========== =========== =========== =========== =========== =========== AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License ............................. 68.4% 73.9% 75.6% 62.9% 43.8% 53.4% Service ............................. 31.6 26.1 24.4 37.1 56.2 46.6 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues .................... 100.0 100.0 100.0 100.0 100.0% 100.0% ----------- ----------- ----------- ----------- ----------- ----------- Cost of revenues: License ............................. 1.2 0.3 2.9 0.4 0.1 0.0 Service ............................. 17.0 15.1 12.1 13.9 24.1 25.0 ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenues ............ 18.2 15.4 15.0 14.3 24.2 25.0 ----------- ----------- ----------- ----------- ----------- ----------- Gross margin ......................... 81.8 84.6 85.0 85.7 75.8 75.0 ----------- ----------- ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing ................. 142.5 88.2 73.9 78.1 89.4 80.4 Research and development ............ 47.8 37.1 28.8 23.2 35.9 33.3 General and administrative .......... 20.6 25.0 23.3 17.7 28.2 29.3 Amortization of purchased intangibles ....................... 11.8 12.9 11.3 10.7 14.8 51.7 Restructuring costs ................. -- -- -- -- 16.1 14.5 ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses .......... 222.7 163.3 137.3 129.7 184.4 209.3 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations ........ (140.8) (78.7) (52.3) (44.0) (108.6) (134.3) Interest income (expense) net ........ 8.7 4.9 4.2 2.2 3.6 2.0 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) .................... (132.4)% (73.9)% (48.1)% (41.8)% (105.0)% (132.3)% =========== =========== =========== =========== =========== =========== Table continued on next page 21a table continued from above page QUARTER ENDED -------------------------------------------------------------------------------------- SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, 2001 2001 2002 2002 2002 2002 ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues: License ............................. $ 3,114 $ 2,778 $ 833 $ 4,104 $ 2,825 $ 1,299 Service ............................. 2,056 1,806 1,328 1,626 1,319 1,252 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues .................... 5,170 4,584 2,161 5,730 4,144 2,551 ----------- ----------- ----------- ----------- ----------- ----------- Cost of revenues: License ............................. 1 7 27 75 75 109 Service ............................. 975 636 768 759 691 522 ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenues ............ 976 643 795 834 766 631 ----------- ----------- ----------- ----------- ----------- ----------- Gross profit ......................... 4,194 3,941 1,366 4,896 3,378 1,920 ----------- ----------- ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing ................. 3,739 2,464 2,434 2,586 1,848 1,807 Research and development ............ 1,229 1,018 1,118 1,038 1,040 912 General and administrative .......... 1,464 1,287 927 919 798 815 Amortization of purchased intangibles ....................... 245 213 212 142 126 289 Restructuring costs ................. 200 -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses .......... 6,877 4,982 4,691 4,685 3,812 3,823 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations ........ (2,683) (1,041) (3,325) 211 (434) (1,903) Interest income (expense), net ....... 14 (29) 16 4 (15) 6 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) .................... $ (2,669) $ (1,070) $ (3,309) $ 215 $ (449) $ (1,897) =========== =========== =========== =========== =========== =========== Shares used in calculating basic net income (loss) per share ........................... 19,971 20,012 20,089 20,153 20,201 21,677 =========== =========== =========== =========== =========== =========== Shares used in calculating diluted net income (loss) per share ........................... 19,971 20,012 20,089 20,486 20,201 21,677 =========== =========== =========== =========== =========== =========== Basic net income (loss) per share .... $ (0.13) $ (0.05) $ (0.16) $ 0.01 $ (0.02) $ (0.09) =========== =========== =========== =========== =========== =========== Diluted net income (loss) per share .. $ (0.13) $ (0.05) $ (0.16) $ 0.01 $ (0.02) $ (0.09) =========== =========== =========== =========== =========== =========== AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License ............................. 60.2% 60.6% 38.5% 71.6% 68.2% 50.9% Service ............................. 39.8 39.4 61.5 28.4 31.8 49.1 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues .................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----------- ----------- ----------- ----------- ----------- ----------- Cost of revenues: License ............................. 0.0 0.1 1.2 1.3 1.8 4.3 Service ............................. 18.9 13.9 35.5 13.2 16.7 20.5 ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenues ............ 18.9 14.0 36.7 14.5 18.5 24.8 ----------- ----------- ----------- ----------- ----------- ----------- Gross margin ......................... 81.1 86.0 63.3 85.5 81.5 75.2 ----------- ----------- ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing ................. 72.3 53.8 112.6 45.1 44.6 70.8 Research and development ............ 23.8 22.2 51.7 18.1 25.1 35.8 General and administrative .......... 28.3 28.1 42.9 16.0 19.3 31.9 Amortization of purchased intangibles ....................... 4.7 4.6 9.8 2.5 3.0 11.3 Restructuring costs ................. 3.9 0.0 0.0 0.0 0.0 0.0 ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses .......... 133.0 108.7 217.0 81.7 92.0 149.8 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations ........ (51.9) (22.7) (153.7) 3.8 (10.5) (74.6) Interest income (expense) net ........ 0.2 (0.6) 0.7 0.1 (0.4) 0.2 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) .................... (51.7)% (23.3)% (153.0)% 3.9% (10.9)% (74.4)% =========== =========== =========== =========== =========== =========== 21b
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. These factors include: o our ability to close relatively large sales on schedule; o delays or deferrals of customer orders or deployments; o delays in shipment of scheduled software releases; o shifts in demand for and market acceptance among our various products, including our newer products, EDGEXTEND and DIRECTALERT, and our older POWERTIER product; o introduction of new products or services by us or our competitors; o annual or quarterly budget cycles of our customers or prospective customers; o the level of product and price competition in the application server and data management 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. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our business primarily through the sale of unregistered common stock in the amount of $2.0 million in November 2002, our initial public offering of common stock in June 1999, which totaled $34.1 million in aggregate net proceeds and private sales of convertible preferred stock, which totaled $19.9 million in aggregate net proceeds. We 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 a third equipment related loan in the amount of $149,000, and capitalized leases. As of December 31, 2002, we had $8.9 million of cash and cash equivalents and $4.9 million of working capital. Net cash provided by operating activities was $113,000 for 2002. In 2001 and 2000, cash used in operating activities was $11.6 million and $11.7 million respectively. For 2002, cash provided by operating activities was primarily attributable to a decrease in accounts receivable and increases in deferred revenues and other accrued liabilities. This provision of operating cash was offset primarily by net losses and a decrease in accounts payable. For each of 2001 and 2000, cash used for operating activities was attributable primarily to net operating losses. These losses were offset in part by depreciation and amortization expenses. 22 Net cash used in investing activities was $325,000 for 2002. Net cash provided by investing activities was $5.4 million for 2001, and net cash used in investing activities was $108,000 for 2000. For 2002, cash used in investing activities was primarily attributable to the purchase of property and equipment and the acquisition of purchased intangibles. For 2001, cash provided by investing activities consisted primarily of the sale of short-term investments. For 2000, cash used in investing activities consisted of purchases of property and equipment and purchased intangibles, offset by the sale of short-term investments. Net cash provided by financing activities was $1.7 million for 2002. Net cash used in financing activities was $500,000 for 2001. Net cash provided by financing activities was $3.6 million for 2000. Net cash provided by financing activities during 2002 consisted primarily of the sale of unregistered common stock and stock warrants to an investor offset by repayments under loan agreements. Net cash used in financing activities during 2001 consisted primarily of repayments of capital leases and loan agreements offset by the sale of common stock. Net cash provided by financing activities during 2000 was primarily attributable to the sale of common stock. For 2001 and 2000, net cash was also provided from borrowings under an equipment financing facility, offset by repayments of loan agreements. We have credit facilities with Comerica Bank. Under those credit facilities, we had a $5.0 million revolving line of credit facility at December 31, 2002 that was renegotiated in the amount of $2.5 million in March 2003 and is available until April 30, 2004 (refer to Note 11 of the "Notes to Consolidated Financial Statements" included elsewhere in this report). We also have a $655,000 equipment term loan, and a $149,000 equipment term loan. As of December 31, 2002 we had no borrowings outstanding under the revolving line of credit facility. As of December 31, 2002 we had $240,000 outstanding under the $655,000 equipment term loan. 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 December 31, 2002 we had $149,000 outstanding under an equipment facility. Under this facility, borrowings outstanding of $149,000 as of January 3, 2003 converted to an 18 month term loan with principal payments of $8,284 per month beginning on February 1, 2003 plus interest at the bank's base rate plus 1% per annum. The bank's credit facilities required that as of December 31, 2002 we, among other things, maintain a minimum tangible net worth of $5.5 million and a minimum quick ratio (current assets not including inventory less current liabilities) of 2 to 1. As of December 31, 2002, our tangible net worth fell below the minimum tangible net worth ratio then in effect, and the bank waived the event. In March 2003, we renegotiated our revolving credit facility and a new covenant structure is in place. The bank's renewed credit facilities require that Company, among other things, to maintain certain working capital, tangible net worth and profitability covenants. We expect to meet these covenants. Borrowings under the facilities are collateralized by substantially all of our assets. Currently we have no material commitments for capital expenditures nor do we anticipate a material increase in capital expenditures and lease commitments. We are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least December 31, 2003, provided that we meet our targets with respect to revenues and accounts receivable collections. 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 jeopardized. 23 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 did not carry any goodwill or intangible assets. 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 broadened the presentation of discontinued operations to include more disposal transactions. The Company adopted the provisions of SFAS No. 144 as of January 1, 2002. Adoption of 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 Emerging Issues Task Force Issue No. 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 our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 is expected to impact the timing of recognition and the amount of future restructuring activities. In December 2002, the FASB issued SFAS No. 148 ACCOUNTING FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation is effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Management does not intend to adopt the fair value accounting provisions of SFAS No. 123 and currently believes that the adoption of SFAS No. 148 will not have a material impact on our financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO. 5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34, DISCLOSURE OF INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation also incorporates without reconsideration the guidance in FASB Interpretation No. 34, which is being superseded. The adoption of FIN 45 will not have a material effect on our consolidated financial statements and will be applied prospectively. 24 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS You should carefully consider the following risks in addition to the other information contained in this annual report on Form 10-K. The risks and uncertainties described below are intended to be the ones that are specific to our company or industry and that we deem to be material, but are not the only ones that we face. WE HAVE A LIMITED OPERATING HISTORY IN THE DATA SERVICES MARKETS. Because we only commenced selling EDGEXTEND and DIRECTALERT in 2002, we have a limited operating history in the data services markets. We thus face the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in the rapidly changing software industry. These risks include: o the timing and magnitude of capital expenditures by our customers and prospective customers; o our need to achieve market acceptance for our new product introductions, including, DIRECTALERT and EDGEXTEND; o our dependence for revenue from our POWERTIER product, which was first introduced in 1997 and has achieved only limited market acceptance; o our need to expand our distribution capability through various sales channels, including a direct sales organization, original equipment manufacturers, third party distributors, independent software vendors and systems integrators; o our unproven ability to anticipate and respond to technological and competitive developments in the rapidly changing market for dynamic data management; o our unproven ability to compete in a highly competitive market; o the decline in spending levels in the software infrastructure market; o our dependence on the Java programming language, commonly known as J2EE, becoming a widely accepted standard in the transactional application server market; and o our dependence upon key personnel. BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NOT BECOME OR REMAIN PROFITABLE. We may not achieve our targeted revenues, and we may not be able to achieve or maintain profitability in the future. We have incurred net losses each year since 1996. In particular, we incurred losses of $5.4 million in 2002, $15.1 million in 2001 and $16.7 million in 2000. As of December 31, 2002, we had an accumulated deficit of $61.4 million. While we are currently targeting decreases in sales and marketing, research and development, and general and administrative expenses for 2003, as compared to the levels of those expenses in 2002, we will still need to achieve our revenue targets in order to preserve cash. Because our product markets are new and evolving, we cannot accurately predict either the future growth rate, if any, or the ultimate size of the markets for our products. 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 ending December 31, 2003. 25 WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. We are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least December 31, 2003 provided that we meet our targets with respect to revenues and accounts receivable collections. 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 jeopardized. THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future as a result of a number of factors, many of which are outside our control. In prior years, we have often experienced an absolute decline in revenues from the fourth quarter to the first quarter of the next year. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. The factors that may cause fluctuations of our operating results include the following: o our ability to close relatively large sales on schedule; o delays or deferrals of customer orders or deployments; o delays in shipment of scheduled software releases; o shifts in demand for and market acceptance among our various products, including our newer products, EDGEXTEND and DIRECTALERT, and our older POWERTIER product; o introduction of new products or services by us or our competitors; o annual or quarterly budget cycles of our customers or prospective customers; o the level of product and price competition in the application server and data 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. 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. 26 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 year ended December 31, 2002, sales to our top five customers accounted for 55% of total revenues. Sales to Cablevision accounted for 26% of total revenues and sales to Salomon Smith Barney accounted for 13% of total revenues. In the year ended December 31, 2001, sales to our top five customers accounted for 45% of total revenues. Sales to Salomon Smith Barney accounted for 15% of total revenues and sales to Cablevision accounted for 11% of total revenues. In year ended December 31, 2000, sales to Salomon Smith Barney accounted for 16% of total revenues and sales to our top five customers accounted for 40% of total revenues. If we lose a significant customer, or fail to increase product sales to an existing customer as planned, we may not be able to replace the lost revenues with sales to other customers. In addition, because our marketing strategy is to concentrate on selling products to industry leaders, any loss of a customer could harm our reputation within the industry and make it harder for us to sell our products to other companies in that industry. The loss of, or a reduction in sales to, one or more significant customers would likely result in a decrease in our revenues. WE ARE CURRENTLY TARGETING THAT A MATERIAL PORTION OF OUR REVENUES WILL BE DERIVED FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND, HOWEVER THERE ARE TECHNICAL AND MARKET RISKS ASSOCIATED WITH NEW PRODUCTS. Sales of our EDGEXTEND products currently represent a material percentage of our revenues. New products, like EdgeXtend, 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. BECAUSE OUR PRODUCTS PROVIDE ADDITIONAL FEATURES TO SUCCESSFUL APPLICATION SERVER PRODUCTS FROM IBM AND BEA, THEY MAY ADD THESE FEATURES TO A FUTURE VERSION OF THEIR PRODUCT, REDUCING THE NEED FOR OUR PRODUCTS. Because IBM and BEA control the development schedule and feature set of their products, we need to maintain a good working relationship with IBM and BEA if we decide to develop future versions of EDGEXTEND for those new versions of WebSphere and WebLogic. Failure to develop future versions compatible with the 27 latest versions from IBM and BEA could greatly reduce market acceptance for our products. IBM or BEA could add features to their products, which would reduce or eliminate the need for our products, which could harm our business. They could develop their products in a more proprietary way to favor their own products, or as those offered by a third party, which could make it much harder for us to compete in the J2EE software market. WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD AND THE JAVA 2 ENTERPRISE EDITION (J2EE) STANDARD AND DISTRIBUTED OBJECT COMPUTING, AND IF THESE TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER. We are focusing our marketing efforts on our EDGEXTEND products, which are based on three technologies, which have not been widely adopted by a large number of companies. These three technologies are a distributed object computing architecture, Sun Microsystems' Java programming language and J2EE. Distributed object computing combines the use of software modules, or objects, communicating across a computer network to software applications, such as our EDGEXTEND products. Our products depend upon and conform to the EJB standard. Sun Microsystems released the EJB standard in 1998, and thus far EJB has had limited market acceptance. EJB is a part of the J2EE standard; J2EE is the Java programming standard for use in an application server. Since most of our products depend upon the specialized J2EE and EJB standards, we face a limited market compared to competitors who may offer application servers based on more widely accepted standards, including the Java programming language. We expect a material portion of our future revenues will come from sales of products based on the J2EE standard. Thus, our success depends significantly upon broad market acceptance of distributed object computing in general, and Java application servers in particular. If J2EE and EJB does not become a widespread programming standard for application servers, our revenues and business could suffer. IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS. The market for our products and services is characterized by rapid technological change, dynamic customer demands and frequent new product introductions and enhancements. Customer requirements for products can change rapidly as a result of innovation in software applications and hardware configurations and the emergence or adoption of new industry standards, including Internet technology standards. We may need to increase our research and development investment over our current targeted spending levels to maintain our technological leadership. Our future success depends on our ability to continue to enhance our current products and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments. For example, as Sun Microsystems introduces new J2EE specifications, we may need to introduce new versions of EDGEXTEND designed to support these new specifications to remain competitive. If IBM or BEA introduce new versions of WebSphere and WebLogic, we may need to introduce new versions of EDGEXTEND designed to support these new versions. If we do not bring enhancements and new versions of our products to market in a timely manner, our market share and revenues could decrease and our reputation could suffer. If we fail to anticipate or respond adequately to changes in technology and customer needs, or if there are any significant delays in product development or introduction, our revenues and business could suffer. Our EDGEXTEND for WebSphere product was released in March 2002, our EDGEXTEND for WebLogic product was released in August 2002 and our EDGEXTEND for ..NET product was released in October 2002. Any delays in releasing future enhancements to these products or new products on a generally available basis may materially effect our future revenues. BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES. We must maintain a strong direct sales team to generate revenues. In the last several years, we have experienced significant turnover in our sales team. In the past, newly hired employees have required training and approximately six to nine months experience to achieve full productivity. Like many companies in the software industry, we are likely to continue to experience turnover in our sales force and we may not be able to hire enough qualified individuals in the future. As a result of our employee turnover, a number of our sales people are relatively new and we may not meet our sales goals. In addition, our recently hired employees may not become productive. 28 BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES CHANNEL THROUGH INDEPENDENT SOFTWARE VENDORS, SYSTEMS INTEGRATORS, OEM PARTNERS AND OTHER RESELLERS, ANY FAILURE TO DEVELOP THIS CHANNEL MAY RESULT IN LOWER REVENUES. To date, we have sold our products primarily through our direct sales force, but our ability to achieve revenue growth will depend in large part on our success in establishing and leveraging relationships with independent software vendors, system integrators, OEM partners and third parties. It may be difficult for us to establish these relationships, and, even if we establish these relationships, we will then depend on the sales efforts of these third parties. In addition, because these relationships are nonexclusive, these third parties may choose to sell application servers, data management products or other alternative solutions offered by our competitors, and not our products. If we fail to successfully build our third-party distribution channels or if our third party partners do not perform as expected, our business could be harmed. BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES. Because our products are often incorporated into multi-million dollar enterprise projects, we depend on the successful and timely completion of these large projects to fully deploy our products and achieve our revenue goals. These enterprise projects often take many years to complete and can be delayed by a variety of factors, including general or industry-specific economic downturns, our customers' budget constraints, other customer-specific delays, problems with other system components or delays caused by the OEM, independent software vendors, system integrators or other third-party partners who may be managing the system deployment. If our customers cannot successfully implement large-scale deployments, or they determine for any reason that our products cannot accommodate large-scale deployments or that our products are not appropriate for widespread use, our business could suffer. In addition, if an OEM, independent software vendors, system integrator or other third-party partner fails to complete a project utilizing our product for a customer in a timely manner, our revenues or business reputation could suffer. BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR THEIR OWN PRODUCTS. Because Sun Microsystems controls the J2EE standard, we need to maintain a good working relationship with Sun Microsystems as we decide to develop future versions of EDGEXTEND, as well as additional products using J2EE, that will gain market acceptance. In March 1998, we entered into a license agreement with Sun Microsystems, pursuant to which we granted Sun Microsystems rights to manufacture and sell, by itself and not jointly with others, products under a number of our patents, and Sun Microsystems granted us rights to manufacture and sell, by ourselves and not jointly with others, products under a number of Sun Microsystems' patents. As a result, Sun Microsystems may develop and sell some competing products that would, in the absence of this license agreement, infringe our patents. Because Sun Microsystems controls the J2EE standard, it could develop the J2EE standard in a more proprietary way to favor a product offered by its own products, or a third party, which could make it much harder for us to compete in the J2EE software market. MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD ACCEPTANCE. Our primary success has come in the J2EE market. Microsoft has established a competing standard for distributed computing, .NET. Our .NET products are new and unproven in the marketplace. If this standard gains widespread market acceptance over the J2EE or CORBA standards, our business could suffer. Because of Microsoft's resources and commanding position with respect to other markets and technologies, Microsoft's entry into the application server market may cause our potential customers to delay or change purchasing decisions. We expect that Microsoft's presence in the application server market will increase competitive pressure in this market. 29 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; o flexibility; o use of standards-based technology (e.g. J2EE); o ease of integration with customers' existing enterprise systems; o ease and speed of implementation; o quality of support and service; o security; o company reputation and perception of viability; and o price. In the EDGEXTEND market, alternative technology is available from a variety of sources. Companies such as Versant, Gemstone and Excelon are middleware vendors that offer alternative data management solutions that directly target EdgeXtend's market. In addition, many prospective customers may build their own custom solutions. In the DIRECTALERT market, alternative approaches are provided by a variety of sources, including the potential for internal development. Company vendors such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software which may evolve into competitive products. Vendors such as webMethods and Business Objects provide alternative architectures for business intelligence information. DIRECTALERT is based on licensed technology, which the Company is licensed to distribute on a non-exclusive basis. We continue to sell current and earlier versions of POWERTIER for J2EE application server to current customers. Our competitors for POWERTIER include both publicly and privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE Application Server). Many customers may not be willing to purchase our POWERTIER products because they have already invested heavily in databases and other enterprise software components offered by these competing companies. Many of these competitors have pre-existing customer relationships, longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and larger installed bases of customers than we do. IF THE MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS AND SERVICES DO NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR REVENUES COULD DECLINE. Our performance and future success will depend on the growth and widespread adoption of the markets for infrastructure software for networks and web-based products and services. If these markets do not develop in the manner we currently envision, our business could be harmed. Moreover, critical issues concerning the commercial use of the Internet, including security, cost, accessibility and quality of network service, remain unresolved and may negatively affect the growth of the Internet as a platform for conducting various forms of electronic commerce. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased activity or due to increased government regulation. 30 OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS. Achieving our planned revenue targets and other financial objectives will place significant demands on our management and other resources, in particularly because we must achieve our revenue and product development goals using both fewer people and less money. Our ability to manage our resources effectively will require us to continue to improve our sales process and to train, motivate and manage our employees. If we are unable to manage our business effectively within our current budget, we may not be able to retain key personnel and the quality of our services and products may suffer. 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 44% of our total revenues came from sales of products and services outside of the United States for the three months ended December 31, 2002, and approximately 33% of our total revenues came from sales of products and services outside of the United States for the year ended December 31, 2002. We expect international revenues to continue to represent a significant portion of our total revenues. To date, almost all of our international revenues have resulted from our direct sales efforts. In international markets, however, we expect that we will depend more heavily on third party distributors to sell our products in the future. The success of our international strategy will depend on our ability to develop and maintain productive relationships with these third parties. The failure to develop key international markets for our products could cause a reduction in our revenues. Additional risks related to our international expansion and operation include: o difficulties of staffing, funding and managing foreign operations; 31 o future dependence on the sales efforts of our third party distributors to expand business; o longer payment cycles typically associated with international sales; o tariffs and other trade barriers; o failure to comply with a wide variety of complex foreign laws and changing regulations; o exposure to political instability, acts of war, terrorism and economic downturns; 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. 32 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 December 31, 2002, we had approximately 23,989,958 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. On November 2002, we sold 3,758,692 shares of common stock at a purchase price of $0.5321 per share, for an aggregate sale price of $2,000,000, and warrants to purchase up to 1,205,130 shares common stock at an exercise price of $0.75 per share to certain purchasers affiliated with Needham Capital Partners. In connection with this financing, we agreed to file a registration statement with the SEC covering the resale of these shares (including the shares issuable on exercise of the warrants) on the earlier of (i) 30 days after the date of this Annual Report on Form 10-K or (ii) April 30, 2003. We also agreed to file an additional registration statement on the request of the purchasers under certain circumstances. When the SEC declares this S-3 registration statement effective, the Needham affiliated purchasers will be able to freely trade these shares in the public market, subject to certain restrictions as a result of their status as an affiliate, which could result in a decrease in the price of our stock. OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, AND WE HAVE RECEIVED A NOTICE FROM NASDAQ REGARDING THE POSSIBLE DELISTING OF OUR STOCK FROM THE NASDAQ SMALLCAP MARKET. Our common stock price has been and may continue to be highly volatile, and we expect that the market price of our common stock will continue to be subject to significant fluctuations, as a result of variations in our quarterly operating results and the overall volatility of the Nasdaq SmallCap Market. These fluctuations have been, and may continue to be, exaggerated because an active trading market has not developed for our stock. Thus, investors may have difficulty selling shares of our common stock at a desirable price, or at all. Furthermore, we have received a notice from the Nasdaq SmallCap Market that if our stock does not meet the minimum $1.00 per share minimum requirement for a 10-day period by June 2, 2003, our stock may be delisted from the Nasdaq SmallCap Market. If we cannot achieve compliance we expect to receive a formal delisting notice from the Nasdaq SmallCap Market. We currently intend to seek a Nasdaq hearing for appeal if and when we receive such notice of delisting. The maintenance of our Nasdaq SmallCap Market listing is very important to us. We intend to take appropriate actions, as necessary, including possibly seeking shareholder approval for a reverse stock split in order to maintain our Nasdaq SmallCap Market listing. If our efforts in this regard are unsuccessful, our stock would trade on the OTC "bulletin board". Delisting from the Nasdaq SmallCap Market could negatively impact our reputation and consequently our business. In addition, the market price of our common stock may rise or fall in the future as a result of many factors, such as: o variations in our quarterly results; o announcements of technology innovations by us or our competitors; o introductions of new products by us or our competitors; o acquisitions or strategic alliances by us or our competitors; o hiring or departure of key personnel; o the gain or loss of a significant customer or order; o changes in estimates of our financial performance or changes in recommendations by securities analysts; o market conditions and expectations regarding capital spending in the software industry and in our customers' industries; and o adoption of new accounting standards affecting the software industry. 33 The market prices of the common stock of many companies in the software and Internet industries have experienced extreme price and volume fluctuations, which have often been unrelated to these companies' operating performance. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its stock. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could harm our business. THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A TAKEOVER. Provisions in our certificate of incorporation, bylaws and Delaware law may discourage, delay or prevent a merger or other change in control that a stockholder may consider favorable. These provisions may also discourage proxy contests or make it more difficult for stockholders to take corporate action. These provisions include the following: o establishing a classified board in which only a portion of the total board members will be elected at each annual meeting; o authorizing the board to issue preferred stock; o prohibiting cumulative voting in the election of directors; o limiting the persons who may call special meetings of stockholders; o prohibiting stockholder action by written consent; and o establishing advance notice requirements for nominations for election of the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE OUR STOCKHOLDERS. As part of our business strategy, we expect to review acquisition prospects that we believe would be advantageous to the development of our business. While we have no current agreements or negotiations underway with respect to any major acquisitions of third-party technology, we may make acquisitions of businesses, products or technologies in the future. If we make any acquisitions, we could take any or all of the following actions, any of which could materially and adversely affect our financial results and the price of our common stock: o issue equity securities that would dilute existing stockholders' percentage ownership; o incur substantial debt; o assume contingent liabilities; or o take substantial charges in connection with the impairment of goodwill and amortization of other intangible assets. Acquisitions also entail numerous risks, including: o difficulties in assimilating acquired operations, products and personnel with our pre-existing business; o unanticipated costs; o diversion of management's attention from other business concerns; o adverse effects on existing business relationships with suppliers and customers; o risks of entering markets in which we have limited or no prior experience; and 34 o potential loss of key employees from either our preexisting business or the acquired organization. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE SENSITIVITY. Our operating results are sensitive to changes in the general level of U.S. interest rates. If market interest rates had changed by ten percent in 2002, our operating results would not have changed materially. As of December 31, 2002, most of our cash equivalents were invested in money market accounts and, thus, the principal values are not susceptible to changes in short-term interest rates. FOREIGN CURRENCY FLUCTUATIONS. We have certain operating transactions in foreign currencies, and maintain balances that are due or payable in foreign currencies at December 31, 2002. We estimate that a hypothetical ten percent change in foreign currency rates in 2002 would not have impacted our financial results of operations materially. We do not hedge any of our foreign currency exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a) for an index to the consolidated financial statements and supplementary data that are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 35 PART III ITEMS 10, 11, 12 AND 13. The Company's Proxy Statement for its Annual Meeting of Stockholders for the year ended December 31, 2002, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference in this Form 10-K pursuant to General Instruction G(3) of Form 10-K and will provide the information required under Part III (Items 10-13), except for the information with respect to the Company's executive officers, which is included in "Item 1. Business -- Executive Officers." ITEM 14. 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 on 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 our evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this annual report: (1) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT (pages F-1 through F-18): Audited Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets at December 31, 2002 and 2001 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULE (pages S-1 through S-3) Audited Consolidated Financial Statement Schedule: Independent Auditors' Report Schedule II -- Consolidated Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000 36 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. (3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K) (b) Reports on Form 8-K. One report on Form 8-K was filed on November 27, 2002 during the quarter ended December 31, 2002 reporting matters under Item 5. Other Events, and Item 7, Financial Statements Pro Forma Financial Information and Exhibits. 37 CERTIFICATIONS I, Christopher T. Keene, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K of Persistence Software, Inc.; 2. Based on my knowledge, this annual 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 annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual 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: March 28, 2003 /s/ CHRISTOPHER T. KEENE ---------------------------- Christopher T. Keene Chief Executive Officer 38 CERTIFICATIONS I, Christine Russell, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K of Persistence Software, Inc.; 2. Based on my knowledge, this annual 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 annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual 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: March 28, 2003 /s/ CHRISTINE RUSSELL ------------------------- Christine Russell Chief Financial Officer 39 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - -------- ----------- 3.2* Amended and Restated Certificate of Incorporation of Persistence. 3.4 Amended and Restated Bylaws of Persistence, as amended on February 12, 2003 4.1* Specimen Stock Certificate. 4.2*** Common stock warrant, warrant No. W-CS1, dated June 28, 2001, issued to RCG Capital Markets Group, Inc. 10.1* Form of Common Stock Purchase Agreement between Persistence and each of Christopher T. Keene and Derek P. Henninger. 10.2* Fifth Amended and Restated Investor Rights Agreement dated February 19, 1999 among Persistence and certain investors. 10.4* Form of Change of Control Agreement between Persistence and Christine Russell. 10.5* 1994 Stock Purchase Plan (as amended) and Form of Common Stock Purchase Agreement. 10.6 1997 Stock Plan (as amended) and Forms of Stock Option Agreement and Common Stock Purchase Agreement. 10.7 1999 Employee Stock Purchase Plan and Form of Subscription Agreement. 10.8 1999 Directors' Stock Option Plan and Form of Option Agreement. 10.9* Lease dated June 12, 1991 between Persistence and Great American Bank (as amended). 10.10*+ Settlement and License Agreement dated March 23, 1998 between Persistence and Sun Microsystems, Inc. 10.11* Form of Indemnification Agreement between Persistence and officers and directors. 10.12*** Registration Rights Agreement dated as of June 28, 2001 between Persistence and RCG Capital Markets Group, Inc. 10.13***** Amended and Restated Loan Agreement between Persistence and Comerica Bank dated March 6, 2002. 10.14***** Lease Amendment dated February 5, 2002 between Persistence and Cornerstone Properties I, LLC. 10.15***** Form of Change of Control Agreement between Persistence and each of Keith Zaky and Ed Murrer. 10.17**** Second Amendment to the Restated Loan and Security Agreement between Persistence and Comerica Bank dated July 3, 2002. 10.18**** Third Amendment to the Restated Loan and Security Agreement between Persistence and Comerica Bank dated July 17, 2002. 10.19** Common Stock Purchase Agreement dated as of November 26, 2002 by and between Persistence Software, Inc. and Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P. and Needham Capital Partners III (Bermuda), L.P. 10.20** Registration Rights Agreement dated as of November 26, 2002 by and between Persistence Software, Inc. and Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P. and Needham Capital Partners III (Bermuda), L.P. 10.21** Voting Agreement dated as of November 26, 2002 by and between Persistence Software, Inc., Christopher T. Keene and Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P. and Needham Capital Partners III (Bermuda), L.P. 10.22** Form of Common Stock Warrant dated as of November 26, 2002 issued to Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P. and Needham Capital Partners III (Bermuda), L.P. 10.23 Fourth Amendment to the Restated Loan and Security Agreement between Persistence and Comerica Bank dated November 15, 2002. 10.24 Amended and Restated Loan Agreement between Persistence and Comerica Bank dated March 20, 2003. 21.1* List of subsidiaries. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney (see page 42). 99.1 Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. __________ 40 * Incorporated herein by reference to our Registration Statement on Form S-1 (Commission File No. 333-76867). ** Incorporated herein by reference to our Current Report on Form 8-K filed on November 27, 2002. *** Incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. **** Incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. ***** Incorporated herein by reference to our Annual Report on Form 10K for the year ended December 31, 2001. + Certain information in this Exhibit has been omitted and filed separately with the Commission. Confidential treatment has been granted with respect to the omitted portions. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K for the fiscal year ended December 31, 2002 to be signed on its behalf by the undersigned, thereunto duly authorized. PERSISTENCE SOFTWARE, INC. By: /s/ CHRISTOPHER T. KEENE --------------------------------- Christopher T. Keene CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER (Principal Executive Officer) By: /s/ CHRISTINE RUSSELL --------------------------------- Christine Russell CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer) Date: March 28, 2003 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christine Russell his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CHRISTOPHER T. KEENE Chairman of the Board and Chief Executive March 25, 2003 - -------------------------------- Officer (Principal Executive Officer) Christopher T. Keene /s/ CHRISTINE RUSSELL Chief Financial Officer (Principal March 25, 2003 - -------------------------------- Financial and Accounting Officer) Christine Russell /s/ OWEN BROWN Director March 25, 2003 - -------------------------------- Owen Brown /s/ ALAN KING Director March 25, 2003 - -------------------------------- Alan King /s/ CHRISTOPHER PAISLEY Director March 25, 2003 - -------------------------------- Christopher Paisley /s/ THOMAS SHANAHAN Director March 25, 2003 - -------------------------------- Thomas Shanahan /s/ SANJAY VASWANI Director March 25, 2003 - -------------------------------- Sanjay Vaswani
42 PERSISTENCE SOFTWARE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Audited Consolidated Financial Statements: Independent Auditors' Report.............................................. F-2 Consolidated Balance Sheets at December 31, 2002 and 2001................. F-3 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000....................................... F-4 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the years ended December 31, 2002, 2001 and 2000.......................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000....................................... F-6 Notes to Consolidated Financial Statements................................ F-7 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Persistence Software, Inc.: We have audited the accompanying consolidated balance sheets of Persistence Software, Inc. and its subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP San Jose, California January 24, 2003 (March 20, 2003 as to Note 11) F-2 PERSISTENCE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS DECEMBER 31, --------------------- 2002 2001 --------- --------- Current assets: Cash and cash equivalents ........................................................... $ 8,903 $ 7,411 Accounts receivable, net of allowances of $220 and $152, respectively ............... 1,252 4,106 Prepaid expenses and other current assets ........................................... 392 656 --------- --------- Total current assets ........................................................... 10,547 12,173 Property and equipment, net ........................................................... 375 796 Purchased intangibles, net of amortization of $785 and $1,088, respectively ........... 123 722 Other assets .......................................................................... 55 64 --------- --------- Total assets ................................................................... $ 11,100 $ 13,755 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................................... $ 325 $ 1,070 Accrued compensation and related benefits ........................................... 722 892 Other accrued liabilities ........................................................... 1,188 457 Deferred revenues, net of long-term portion ......................................... 2,529 2,124 Current portion of long-term obligations ............................................ 841 847 --------- --------- Total current liabilities ...................................................... 5,605 5,390 Long-term liabilities Long-term portion of deferred revenues .............................................. 691 -- Long-term obligations ............................................................... 93 421 --------- --------- Total long-term liabilities .................................................... 784 421 --------- --------- Total liabilities .............................................................. 6,389 5,811 --------- --------- Commitments (Note 5) Stockholders' equity: Preferred stock, $0.001 par value; authorized-- 5,000,000 shares; designated and outstanding--none .................................................................. -- -- Common stock, $0.001 par value; authorized -- 75,000,000 shares; outstanding -- 2002, 23,989,958 shares; 2001, 20,036,588 shares ......................................... 66,103 64,036 Deferred stock compensation ......................................................... (31) (119) Notes receivable from stockholders .................................................. -- (54) Accumulated deficit ................................................................. (61,370) (55,930) Accumulated other comprehensive income .............................................. 9 11 --------- --------- Total stockholders' equity ..................................................... 4,711 7,944 --------- --------- Total liabilities and stockholders' equity ..................................... $ 11,100 $ 13,755 ========= ========= See notes to consolidated financial statements. F-3
PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- Revenues: License ......................................................... $ 9,061 $ 10,561 $ 17,684 Service ......................................................... 5,525 8,810 7,593 --------- --------- --------- Total revenues ............................................. 14,586 19,371 25,277 --------- --------- --------- Cost of revenues: License ......................................................... 286 14 304 Service ......................................................... 2,740 3,973 3,592 --------- --------- --------- Total cost of revenues ..................................... 3,026 3,987 3,896 --------- --------- --------- Gross profit ...................................................... 11,560 15,384 21,381 Operating expenses: Sales and marketing ............................................. 8,676 14,371 22,755 Research and development ........................................ 4,108 5,578 8,127 General and administrative ...................................... 3,459 5,519 5,431 Amortization and write-down of purchased intangibles ............ 768 3,634 2,925 Restructuring costs ............................................. -- 1,673 -- --------- --------- --------- Total operating expenses ................................... 17,011 30,775 39,238 --------- --------- --------- Loss from operations .............................................. (5,451) (15,391) (17,857) Interest and other income (expense): Interest income ................................................. 94 394 1,401 Interest expense ................................................ (44) (68) (60) Other, net ...................................................... (39) (67) (210) --------- --------- --------- Total interest and other income (expense) .................. 11 259 1,131 --------- --------- --------- Net loss .......................................................... $ (5,440) $(15,132) $(16,726) ========= ========= ========= Basic and diluted net loss per share .............................. $ (0.26) $ (0.76) $ (0.87) ========= ========= ========= Shares used in calculating basic and diluted net loss per share ... 20,529 19,919 19,330 ========= ========= ========= See notes to consolidated financial statements. F-4
PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK DEFERRED ----------------------------- ----------------------------- STOCK SHARES AMOUNT SHARES AMOUNT COMPENSATION ------------- ------------- ------------- ------------- ------------- Balances, January 1, 2000 ......... -- $ -- 19,269,704 $ 57,467 $ (1,206) Net loss .......................... Change in unrealized gain on investments ..................... Cumulative translation adjustment ...................... Comprehensive loss ................ Issuance of common stock, net of repurchases .............. 609,008 6,725 Collection of notes receivable from stockholders ............... Reversal of stock arrangements due to cancellations ............ (198) 198 Amortization of deferred stock compensation .............. 416 ------------- ------------- ------------- ------------- ------------- Balances, December 31, 2000 ....... -- -- 19,878,712 63,994 (592) Net loss .......................... Cumulative translation adjustment ...................... Comprehensive loss ................ Issuance of common stock, net of repurchases ..................... 157,876 270 Collection of notes receivable from stockholders ............... Issuance of stock warrants ........ 53 (53) Reversal of stock arrangements due to cancellations ............ (281) 281 Amortization of deferred stock compensation .............. 245 ------------- ------------- ------------- ------------- ------------- Balances, December 31, 2001 ....... -- -- 20,036,588 64,036 (119) Net loss .......................... Cumulative translation adjustment ...................... Comprehensive loss ................ Issuance of common stock and common stock warrants, net of repurchases .................. 3,953,370 2,025 Collection of notes receivable from stockholders ............... Issuance of stock options, non-employees ................... 42 Amortization of deferred stock compensation .............. 88 ------------- ------------- ------------- ------------- ------------- Balances, December 31, 2002 ....... -- $ -- 23,989,958 $ 66,103 $ (31) ============= ============= ============= ============= ============= table continued on next page F-5a NOTES ACCUMULATED RECEIVABLE OTHER TOTAL FROM ACCUMULATED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS DEFICIT (LOSS)INCOME TOTAL LOSS ------------- ------------- ------------- ------------- ------------- Balances, January 1, 2000 ......... $ (161) $ (24,072) $ (10) $ 32,018 Net loss .......................... (16,726) (16,726) $ (16,726) Change in unrealized gain on investments ..................... 10 10 10 Cumulative translation adjustment ...................... 46 46 46 ------------- Comprehensive loss ................ $ (16,670) ============= Issuance of common stock, net of repurchases .............. 6,725 Collection of notes receivable from stockholders ............... 67 67 Reversal of stock arrangements due to cancellations ............ Amortization of deferred stock compensation .............. 416 ------------- ------------- ------------- ------------- Balances, December 31, 2000 ....... (94) (40,798) 46 22,556 Net loss .......................... (15,132) (15,132) $ (15,132) Cumulative translation adjustment ...................... (35) (35) (35) ------------- Comprehensive loss ................ $ (15,167) ============= Issuance of common stock, net of repurchases ..................... 270 Collection of notes receivable from stockholders ............... 40 40 Issuance of stock warrants ........ Reversal of stock arrangements due to cancellations ............ Amortization of deferred stock compensation .............. 245 ------------- ------------- ------------- ------------- Balances, December 31, 2001 ....... (54) (55,930) 11 7,944 Net loss .......................... (5,440) (5,440) $ (5,440) Cumulative translation adjustment ...................... (2) (2) (2) ------------- Comprehensive loss ................ $ (5,442) ============= Issuance of common stock and common stock warrants, net of repurchases .................. 2,025 Collection of notes receivable from stockholders ............... 54 54 Issuance of stock options, non-employees ................... 42 Amortization of deferred stock compensation .............. 88 ------------- ------------- ------------- ------------- Balances, December 31, 2002 ....... $ -- $ (61,370) $ 9 $ 4,711 ============= ============= ============= ============= See notes to consolidated financial statements. F-5b
PERSISTENCE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................................. $ (5,440) $(15,132) $(16,726) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Allowance for doubtful accounts ................................... 353 951 896 Depreciation and amortization ..................................... 1,198 2,275 3,842 Write-down of purchased intangibles ............................... 160 1,988 -- Loss on sale of fixed assets ...................................... 14 164 -- Amortization of deferred stock compensation ....................... 88 245 416 Issuance of warrants and options to non-employees ................. 42 -- -- Reserve for loss on lease liability ............................... 22 -- -- Changes in operating assets and liabilities: Accounts receivable ............................................. 2,501 2,064 (2,332) Prepaid expenses and other current assets ....................... 264 175 (265) Accounts payable ................................................ (745) (587) 287 Accrued compensation and related benefits ....................... (171) (1,895) 983 Other accrued liabilities ....................................... 731 (1,274) 537 Deferred revenues ............................................... 1,096 (558) 667 --------- --------- --------- Net cash provided by (used in) operating activities .......... 113 (11,584) (11,695) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of short-term investments ......................... -- 5,387 1,965 Purchase of property and equipment ................................... (176) (101) (1,422) Proceeds from sale of property and equipment ......................... -- 93 -- Acquisition of purchased intangibles ................................. (158) -- (619) Deposits and other ................................................... 9 48 (32) --------- --------- --------- Net cash provided by (used) in investing activities .......... (325) 5,427 (108) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock, net of repurchases and issuance costs .......... 2,025 270 3,465 Repurchase of common stock ........................................... -- -- (1) Collection of notes receivable from stockholders ..................... 54 40 67 Repayment of capital lease obligations ............................... (33) (43) (77) Repayment of obligations incurred to acquire purchased intangibles ... (160) (470) (160) Borrowing under loan agreement ....................................... 149 122 533 Repayment under loan agreements ...................................... (329) (419) (267) --------- --------- --------- Net cash provided by (used) in financing activities .......... 1,706 (500) 3,560 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........... (2) (35) 46 --------- --------- --------- CASH AND CASH EQUIVALENTS: Net increase (decrease) .............................................. 1,492 (6,692) (8,197) Beginning of year .................................................... 7,411 14,103 22,300 --------- --------- --------- End of year .......................................................... $ 8,903 $ 7,411 $ 14,103 ========= ========= ========= NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of property and equipment under capital leases ........... $ 18 $ -- $ 73 ========= ========= ========= Long-term obligations incurred to acquire purchased intangibles ...... $ -- $ (150) $ 1,435 ========= ========= ========= Release of compensatory stock arrangements ........................... $ -- $ 281 $ -- ========= ========= ========= Compensatory stock arrangements ...................................... $ -- $ (53) $ -- ========= ========= ========= Common stock issued for purchased intangibles ........................ $ -- $ -- $ 3,063 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --CASH PAID DURING THE YEAR FOR: Interest ............................................................. $ 44 $ 68 $ 60 ========= ========= ========= Income taxes ......................................................... $ 34 $ 66 $ 132 ========= ========= ========= See notes to consolidated financial statements. F-6
PERSISTENCE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS -- Persistence Software solves data access problems for distributed and real-time systems. The Company's solutions help deliver better business visibility for applications which require current information about customers, products and suppliers. The Company 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 with optimal efficiency, improving application server performance and simplifying application distribution while reducing database costs. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments purchased with remaining maturities of less than three months to be cash equivalents. PROPERTY AND EQUIPMENT are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives of three years. Leasehold improvements are amortized over the shorter of the lease term or their useful life. PURCHASED INTANGIBLES are stated at cost. Amortization is computed using the straight-line method over the estimated useful lives of two to three years. Purchased intangibles at December 31, 2002 were $123,000 net of amortization. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -- The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In fiscal 2002, the Company determined that certain intangible assets were impaired and, thus, recorded a write-down of $160,000. In fiscal 2001, the Company determined that certain intangible assets were impaired and, thus, recorded a write-down of $2.0 million. Refer to Note 2. SOFTWARE DEVELOPMENT COSTS -- Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date. NOTES RECEIVABLE FROM STOCKHOLDERS -- The notes receivable from stockholders were issued at market rates in exchange for common stock, bear interest at 5.93% per annum, and were paid in full during fiscal 2002. The notes were full-recourse. REVENUE RECOGNITION -- Revenue consists primarily of fees for licenses of the Company's software products, maintenance and customer support. F-7 LICENSE REVENUE -- Revenue from software licenses is recognized upon shipment of the software if collection of the resulting receivable is probable, an executed agreement has been signed, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. Such undelivered elements in these arrangements typically consist of services. For sales made through distributors, revenue is recognized upon shipment. Distributors have no right of return. Royalty revenues are recognized when the software or services has been delivered, collection is reasonably assured and the fees are determinable. SERVICE REVENUE -- Revenue from customer training, support and consulting services is recognized as the services are performed. Support revenue is recognized ratably over the term of the support contract until support revenue is recognized it is included in "deferred revenue" on the accompanying consolidated balance sheet. If support or professional services are included in an arrangement that includes a license agreement, amounts related to support or professional services are allocated based on vendor-specific objective evidence. Vendor-specific objective evidence for support and professional services is based on the price when such elements are sold separately, or, when not sold separately, the price established by management having the relevant authority. Arrangements which require significant modification or customization of software are recognized under the percentage of completion method. INCOME TAXES -- Income taxes are provided using an asset and liability approach which requires recognition of deferred tax liabilities and assets, net of valuation allowances, for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities and net operating loss and tax credit carryforwards. FOREIGN CURRENCY TRANSACTIONS -- The functional currencies of the Company's foreign subsidiaries are the British Pound Sterling, Euro and the Hong Kong Dollar. Accordingly, all monetary assets and liabilities are translated at the current exchange rate at the end of the year, nonmonetary assets and liabilities are translated at historical rates and net sales and expenses are translated at average exchange rates in effect during the period. Translation gains and losses, which are included in the balance sheets and in other comprehensive income (loss) in the accompanying consolidated statements of changes in stockholders' equity, have not been significant. STOCK COMPENSATION -- The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no accounting recognition is given to employee stock options granted with an exercise price equal to fair market value of the underlying stock on the grant date. Upon exercise, the net proceeds and any related tax benefit are credited to stockholders' equity. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION as amended by SFAS 148 ACCOUNTING FOR STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE, requires the disclosure of pro forma net loss as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for options outstanding under the 1997 Stock Plan: expected life, 30 months following vesting in 2002, 24 months following vesting in 2001 and 2000; risk free interest rate of 4.0% in 2002, 5.0% in 2001, 5.1% in 2000; volatility of 147% for 2002, 183% for 2001, 124% for 2000; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards granted in 1997 and after had been amortized to expense over the vesting period of the awards, pro forma net loss (net of amortization of deferred compensation expense already recorded for the years ended December 31, 2002, 2001 and 2000, as discussed above) would have been approximately as follows: F-8
YEAR ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- Net loss applicable to common shareholders: ................. As reported ................................................. $ (5,440) $(15,132) $(16,726) Stock-based employee compensation expense included in reported loss ............................................. 88 245 416 Total stock-based employee compensation expense determined under fair value based method for all awards .. (1,301) 3,785 (10,677) --------- --------- --------- Pro forma net loss .......................................... $ (6,653) $(11,102) $(26,987) ========= ========= ========= Basic and diluted net loss applicable to common shareholders per share: As reported ................................................. $ (0.26) $ (0.76) $ (0.87) ========= ========= ========= Pro forma ................................................... $ (0.33) $ (0.56) $ (1.40) ========= ========= =========
The pro-forma reduction in net loss for 2001 from the amount reported was due to the cancellation of unvested options that had higher original exercise prices than the repriced options granted later in the year. This issue is further discussed in the "stock option repricing" section of Note 6. The Company accounts for stock-based awards to consultants using the multiple option method as described by FASB Interpretation No. 28. Stock-based compensation expense is recognized as earned. At each reporting date, the Company re-values the stock-based compensation using the Black-Scholes option-pricing model. As a result, the stock-based compensation expense will fluctuate as the fair market value of the Company's common stock fluctuates. NET LOSS PER COMMON SHARE -- Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase). Diluted net loss per common share was the same as basic net loss per common share for all periods presented. This result is due to the exclusion of all potentially dilutive securities, which are anti-dilutive because of the Company's net losses. CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and trade receivables. The risk associated with cash and cash equivalents is mitigated by using only high-quality financial institutions. The Company primarily sells its products to companies in the United States and Europe. The Company does not require collateral or other security to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial condition. The Company maintains allowances for potential credit losses. FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash and cash equivalents, notes receivable from stockholders and long-term debt. At December 31, 2002 and 2001, the fair value of these financial instruments approximated their financial statement carrying amounts, because the financial instruments are either short-term or reflect interest rates consistent with market rates. SIGNIFICANT ESTIMATES -- The preparation of financial statements in conformity with accounting principles as generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. This includes our bad debt policy which requires that we maintain a specific allowance for certain doubtful accounts and a general allowance for the majority of the non-specifically reserved accounts. Actual results could differ from these estimates. CERTAIN RISKS AND UNCERTAINTIES -- The Company operates in the software industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a significant negative effect on the Company in terms of its future financial position, results of operations and cash flows: ability to obtain additional financing; regulatory changes; fundamental changes in the technology underlying software products; market acceptance of the Company's products under development; development of sales channels; loss of significant customers; adverse changes in international market conditions; litigation or other claims against the Company; the hiring, training and retention of key employees; successful and timely completion of product development efforts; and new product introductions by competitors. F-9 The Company has incurred net losses each year since 1996 including losses of $5.4 million in 2002, $15.1 million in 2001, and $16.7 million in 2000. As of December 31, 2002, the Company had an accumulated deficit of $61.4 million. The Company believes its cash and cash equivalents of $8.9 million are sufficient to meet its anticipated cash needs for working capital and capital expenditures through at least December 31, 2003. If cash generated from operations is insufficient to satisfy the Company's liquidity requirements, we may seek to raise additional financing or reduce the scope of our planned product development and marketing efforts. COMPREHENSIVE (LOSS)/INCOME -- In 2002, the Company's comprehensive loss included a cumulative translation adjustment of $2,000. In 2001, the Company's comprehensive loss included a cumulative translation adjustment of $35,000 and in 2000 the comprehensive income included an unrealized gain on investments of $10,000 and a cumulative translation adjustment of $46,000. SEGMENTS OF AN ENTERPRISE -- The Company currently operates in one reportable segment and the chief operating decision maker is the Company's Chief Executive Officer. 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 the Company's financial statements as the Company did not carry any goodwill or intangible assets. 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 broadened the presentation of discontinued operations to include more disposal transactions. The Company adopted the provisions of SFAS No. 144 as of January 1, 2002. Adoption of 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 Emerging Issues Task Force Issue No. 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. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 is expected to impact the timing of recognition and the amount of future restructuring activities. In December 2002, the FASB issued SFAS No. 148 ACCOUNTING FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation is effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Management does not intend to adopt the fair value accounting provisions of SFAS No. 123 and currently believes that the adoption of SFAS No. 148 will not have a material impact on our financial statements. F-10 In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO. 5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34, DISCLOSURE OF INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation also incorporates without reconsideration the guidance in FASB Interpretation No. 34, which is being superseded. The adoption of FIN 45 will not have a material effect on our consolidated financial statements and will be applied prospectively. 2. ASSET WRITE-DOWNS AND EMPLOYEE TERMINATION COSTS During 2002, the Company recorded an impairment charge of $160,000 relating to the Company's evaluation of certain purchased intangible assets. During 2001, the Company recorded an impairment charge of $2.0 million relating to the Company's evaluation of certain purchased intangible assets. These intangible assets were written down to reflect 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. During 2002, no restructuring costs were incurred. During 2001, the Company adopted a plan to make organizational changes and reduce its work force. The Company recorded and paid $1.7 million in charges for employee severance and related operating expenses. This plan involved terminating 68 domestic employees, of which 35 were in sales and marketing, 25 were in research and development and 8 were in the general and administration functions. There were no accrued and unpaid severance costs at December 31, 2001. 3. PROPERTY AND EQUIPMENT Property and equipment consist of: DECEMBER 31, ---------------------- 2002 2001 ---------- ---------- (IN THOUSANDS) Equipment............................................... $ 3,306 $ 3,189 Software................................................ 1,119 1,093 Leasehold improvements.................................. 177 177 ---------- ---------- 4,602 4,459 Accumulated depreciation and amortization............... (4,227) (3,663) ---------- ---------- $ 375 $ 796 ========== ========== 4. LONG-TERM OBLIGATIONS Long-term obligations consist of: DECEMBER 31, ---------------------- 2002 2001 ---------- ---------- (IN THOUSANDS) Equipment term loan..................................... $ -- $ 67 Equipment term loan..................................... 240 502 Equipment term loan..................................... 149 -- Capital lease obligations (see Note 5).................. 28 44 Other long-term obligations............................. 517 655 ---------- ---------- 934 1,268 Less current portion.................................... (841) (847) ---------- ---------- $ 93 $ 421 ========== ========== F-11 Borrowings under the following facilities with a bank are collateralized by substantially all of the Company's assets. In November 2001, the Company renewed its credit facilities with the bank for a $5 million revolving line of credit facility available through April 30, 2003. As of December 31, 2002, the Company had no borrowings outstanding under the credit facility. Under this facility, any outstanding borrowings will bear interest at the bank's prime rate (4.25 % at December 31, 2002) plus 0.5%. On March 20, 2003, the Company renewed its credit facilities with the bank. Under the renewed facilities the Company's revolving credit line has been reduced to $2.5 million and is available through April 30, 2004. (Refer to Note 11 for amendment.) As of March 2002, the Company had paid in full $67,000 outstanding under its $800,000 equipment term loan, which bore interest at 7.75%. As of December 31, 2002, the Company had $240,000 outstanding under its $655,000 equipment term loan with the bank. The Company is required to make principal payments of $21,843 per month, plus interest, at the bank's base rate (4.25% at December 31, 2002) plus 0.5% per annum, payable in monthly installments through November 2003. As of December 31, 2002, the Company had $149,000 outstanding under an equipment term loan for the maximum principal amount of $250,000. Under this facility borrowings outstanding on January 3, 2003 converted to an 18-month term loan with principal payments of $8,284 per month beginning on February 1, 2003 with interest at the bank's base rate plus 1% per annum. The credit facilities require the Company, among other things, to maintain a minimum tangible net worth of $5.5 million and a minimum quick ratio (current assets, not including inventory, less current liabilities) of 2 to 1. As of December 31, 2002, the Company's tangible net worth fell below the minimum tangible net worth then in effect and the bank waived this covenant. On March 20, 2003, the Company renewed its credit facilities with the bank and a new covenant structure is in place. (Refer to Note 11 for amendment.) Other long-term obligations represent uncollateralized non-interest-bearing amounts payable for the acquisition of various purchased intangibles that are generally due within two years. As of December 31, 2002, annual maturities under the equipment financing facility, the existing equipment term loan, and the other long-term obligations are as follows (includes capital lease obligations): FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS) - ------------------------------- -------------- 2003.................................................... $ 841 2004.................................................... 85 2005.................................................... 6 2006.................................................... 2 --------- Total........................................... $ 934 ========= 5. LEASE COMMITMENTS Equipment with a net book value of $28,000 and $37,000 at December 31, 2002 and 2001, respectively, (net of accumulated amortization of $80,000 and $47,000) has been leased under capital leases. The Company leases its principal facility under a noncancelable operating lease expiring on December 31, 2004. Rent expense was approximately $463,000, $773,000 and $965,000 in 2002, 2001 and 2000, respectively. F-12 Future minimum payments under the Company's leases at December 31, 2002 are: CAPITAL OPERATING LEASES LEASES ---------- ---------- (IN THOUSANDS) 2003................................................ 20 540 2004................................................ 8 761 2005................................................ 8 67 2006................................................ 3 -- ---------- ---------- Total..................................... 39 $ 1,368 Amount representing interest........................ (11) ========== ---------- Present value....................................... 28 Current portion..................................... (15) ---------- Long-term portion................................... $ 13 ========== The Company has sublet a portion of its office space to sub-tenants. The future minimum lease payments due to the Company under these subleases is $210,000 at December 31, 2002 of which $102,000 is for the year ending December 31, 2003, $59,000 is for the year ending December 31, 2004 and $49,000 is for the year ending December 31, 2005. 6. STOCKHOLDERS' EQUITY 1994 STOCK PURCHASE PLAN Under the 1994 Stock Purchase Plan (the "Plan"), the Company could sell common stock to employees of the Company at the fair market value as determined by the Board of Directors. Sales are to be made pursuant to restricted stock purchase agreements containing provisions established by the Board of Directors. No shares were issued under the Plan in 2001, 2000 and 1999. The Company has the right to repurchase these shares at the original issuance price upon termination of employment; this right expires ratably over four years. During 2001 the Company repurchased no shares. During 2000 and 1999, the Company repurchased 5,782 and 10,084 shares, respectively, at prices ranging from $0.06 to $0.23 per share. At December 31, 2002 and at December 31, 2001, no shares were subject to repurchase and no shares were available for future grant. 1997 STOCK PLAN As of December 31, 2002, the Company has reserved 7,579,652 shares of common stock for issuance, at the discretion of the Board of Directors, to officers, directors, employees and consultants pursuant to its 1997 Stock Plan. This reserved amount was increased automatically on January 1, 2003 under the provisions of the Plan by 985,000 shares to 8,564,562 shares reserved. This excludes a maximum of 38,645 additional shares that may be transferred from the 1994 Stock Purchase Plan. The 1997 Stock Plan also provides for an automatic annual increase on the first day of 2003, 2004 and 2005 equal to the lesser of 985,000 shares, 4.94% of the outstanding common stock on the last day of the immediately preceding fiscal year, or such lesser number as determined by the Board of Directors. Options granted under the 1997 Stock Plan generally vest over four years and expire ten years from the date of grant. STOCK OPTION REPRICING On May 9, 2001, the Company offered to exchange all outstanding options granted under the Company's 1997 Stock Plan that had an exercise price in excess of $1.00 per share and were held by option holders who were employees of the Company on the date of tender and through the grant date, for new options to purchase shares of the Company's common stock. This offer expired on June 7, 2001 and resulted in the cancellation of 2,155,032 unexercised options. Subject to the terms and conditions of the offer, the Company has granted new options under the 1997 Stock Plan to purchase shares of common stock in exchange for such tendered options no earlier than six months and one day after June 7, 2001. The exercise price per share of the new options is $1.23 which is equal to the fair market value of the underlying common stock on the date of grant, December 10, 2001, which was determined to be the last reported sale price of the common stock on the Nasdaq National Market on the grant date. F-13 1999 DIRECTORS' STOCK OPTION PLAN The Company's 1999 Directors' Stock Option Plan (the "Directors' Plan") became effective upon the closing of the Company's initial public offering in June 1999. Under the Directors' Plan, a total of 500,000 shares of common stock have been reserved for the grant of nonstatutory stock options to nonemployee directors of the Company. Options granted under the Director's Plan shall be immediately vested and expire in five years from the date of grant. Additional information with respect to options under the 1997 Stock Plan and the 1999 Directors' Stock Option Plan is as follows:
WEIGHTED AVERAGE NUMBER OF OPTION PRICE OPTIONS PER SHARE ------------- ----------- Outstanding, January 1, 2000 (279,720 exercisable at a weighted average exercise price of $3.33)............. 3,243,475 $ 9.65 Granted (weighted average fair value of $10.95)................................. 2,675,450 $ 13.53 Exercised....................................................................... (365,734) $ 7.02 Canceled........................................................................ (1,664,439) $ 10.81 ------------- ----------- Outstanding, December 31, 2000 (1,028,433 exercisable at a weighted average exercise price of $9.85)........... 3,888,752 $ 12.06 Granted (weighted average fair value of $1.36).................................. 4,696,844 $ 1.47 Exercised....................................................................... (192,096) $ 0.56 Canceled........................................................................ (5,057,030) $ 9.43 ------------- ----------- Outstanding, December 31, 2001 (1,041,710 exercisable at a weighted average exercise price of $3.51)........... 3,336,470 $ 1.82 Granted (weighted average fair value of $0.62).................................. 1,009,000 $ 0.70 Exercised....................................................................... (79,697) $ 0.63 Canceled........................................................................ (610,685) $ 2.70 ------------- ----------- Outstanding, December 31, 2002 3,655,088 $ 1.38 ============= ===========
Additional information regarding options outstanding as of December 31, 2002 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED REMAINING WEIGHTED AVERAGE RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE --------------- ----------- ------------ -------------- ----------- ----- $ 0.01 to $ 0.50 576,938 8.54 $ 0.43 175,998 $ 0.41 $ 0.51 to $ 5.00 2,921,650 8.97 $ 1.01 1,269,746 $ 1.19 $ 5.01 to $10.00 95,000 6.97 $ 9.11 86,708 $ 9.23 $10.01 to $15.00 29,000 3.50 $13.85 28,312 $ 13.86 $15.01 to $20.00 23,500 4.60 $16.24 22,250 $ 16.29 $20.01 to $22.50 9,000 6.75 $21.63 8,270 $ 21.69 ----------- -------- --------- ---------- ------- 3,655,088 8.77 $ 1.38 1,591,284 $ 2.09 =========== ==========
1999 EMPLOYEE STOCK PURCHASE PLAN The Company's 1999 Employee Stock Purchase Plan (the "ESPP") became effective upon the closing of the Company's initial public offering in June 1999. Under the ESPP, eligible employees may purchase common stock through payroll deductions, which may not exceed 20% of any employee's compensation, nor more than 2,500 shares in any one purchase period. A total of 1,191,850 shares of common stock has been reserved for issuance under the ESPP as of December 31, 2002. The ESPP allows for an automatic annual increase on the first day of 2003 and 2004 equal to the lesser of 250,000 shares or 1% of outstanding common stock on the last day of the immediately preceding fiscal year. During 2002, 114,981 shares were issued under the ESPP at prices ranging from $0.37 to $0.60 per share resulting in aggregate proceeds of $45,000. During 2001, 90,364 shares were issued under the ESPP at prices ranging from $0.41 to $3.29 per share resulting in aggregate proceeds of $178,000. During 2000, 104,077 shares were issued under the ESPP at prices ranging from $9.35 to $14.56 per share and aggregate proceeds of $1,037,000. F-14 DEFERRED STOCK COMPENSATION In connection with grants of certain stock options and issuance of common stock in 2001 and 2000 the Company recorded nil (net of terminations of $281,000) and, $85,000 (net of terminations of $283,000), respectively, for the difference between the estimated fair value and the stock price as determined by the Board of Directors on the date of grant/issuance. This amount is being amortized to expense over the vesting period of the related stock/stock options (generally four years). Amortization of deferred stock compensation for the years ended December 31, 2002, 2001, and 2000 was $88,000, $245,000, and $416,000 respectively. ISSUANCE OF STOCK WARRANTS During 2002, the Company issued certain affiliated investors warrants for the purchase of 1,205,130 shares of common stock at an exercise price of $0.75 in connection with a common stock purchase agreement. Such warrants vested immediately. The Company recorded fair value of the warrants of $576,000 using the Black-Scholes pricing model using a risk free interest rate of 4.8%, contractual life of five years and volatility of 135%. This was recorded as part of the common stock offering costs. During 2002, the Company issued stock warrants to a non-employee for consulting services for the purchase of 50,000 shares of common stock at an exercise price of $0.38. Such warrants vested immediately. The Company recorded compensation expense equal to the fair value of the vested warrants using the Black-Scholes pricing model using a risk free interest rate of 4.8%, contractual life of five years and volatility of 130%. The compensation expense recorded in 2002 was $17,000 and was recognized in the accompanying statement of operations in accordance with the related service being performed. During 2001, the Company issued stock warrants to a nonemployee for consulting services for the purchase of 80,000 shares of common stock at an exercise price of $0.57. Such warrants vest over a period of four years. The Company recorded compensation expense equal to the fair value of the vested warrants using the Black-Scholes pricing model using a risk free interest rate of 5.0%, contractual life of five years and volatility of 162%. The compensation expense recorded in 2001 was $53,000. 7. NET LOSS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands):
YEAE ENDED DECEMBER 31, ------------------------------------ 2002 2001 2000 ---------- ---------- ---------- Net loss (numerator), basic and diluted........................ $ (5,440) $ (15,132) $ (16,726) Shares (denominator): Weighted average common shares outstanding................... 20,529 19,946 19,621 Weighted average common shares outstanding subject to repurchase............................................. -- (27) (291) ---------- ---------- ---------- Shares used in computation, basic and diluted................ 20,529 19,919 19,330 ========== ========== ========== Net loss per share, basic and diluted.......................... $ (0.26) $ (0.76) $ (0.87) ========== ========== ==========
For the above mentioned periods, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share in the periods presented, as their effect would have been anti-dilutive. Such outstanding securities consist of the following:
DECEMBER 31, ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Shares of common stock subject to repurchase............... -- -- 184,167 Outstanding options........................................ 3,655,088 3,336,470 3,888,752 Warrants................................................... 1,335,130 80,000 -- ------------ ------------ ------------ Total............................................ 4,990,218 3,416,470 4,072,919 ============ ============ ============ Weighted average exercise price of options................. $ 1.38 $ 1.82 $ 12.06 ============ ============ ============ Weighted average exercise price of warrants................ $ 0.73 $ 0.57 $ -- ============ ============ ============
F-15 8. INCOME TAXES The Company's deferred income tax assets are comprised of the following at December 31: 2002 2001 ---------- ---------- (IN THOUSANDS) Net deferred tax assets: Net operating loss carryforwards..................... $ 20,330 $ 17,491 Accruals deductible in different periods............. 595 179 General business credits............................. 3,593 2,469 Depreciation and amortization........................ 3,308 3,485 ---------- ---------- 27,826 23,624 Valuation allowance.................................. (27,826) (23,624) ---------- ---------- Total........................................ $ -- $ -- ========== =========== Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss and tax credit carryforwards. Due to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future tax returns, as of December 31, 2002 and 2001, the Company has fully reserved its net deferred tax assets of approximately $27.8 million and $23.6 million, respectively. The Company's effective rate differs from the expected benefit at the federal statutory tax rate at December 31 as follows: 2002 2001 2000 -------- -------- -------- Federal statutory tax rate.................... (35.0)% (35.0)% (35.0)% State taxes, net of federal benefit........... (6.0) (6.0) (6.0) Stock compensation expense.................... -- -- 1.0 Other......................................... 0.3 0.1 0.4 Valuation allowance........................... 40.7 40.9 39.6 -------- -------- -------- Effective tax rate............................. --% --% --% ======== ======== ========= Substantially all of the Company's loss from operations for all periods presented is generated from domestic operations. At December 31, 2002, the Company has net operating loss (NOL) carryforwards of approximately $55.9 million and $8.6 million for federal and state income tax purposes, respectively. The federal NOL carryforwards expire through 2022, while the state NOL carryforwards expire through 2012. The net operating loss carryforwards available for state tax purposes are substantially less than for federal tax purposes, primarily because only 50% of state net operating losses can be utilized to offset future state taxable income and because state net operating loss carry forwards generated in earlier years have already expired. At December 31, 2002, the Company also has research and development credit carryforwards of approximately $1.7 million and $1.6 million available to offset future federal and state income taxes, respectively. The federal credit carryforward expires in 2022, while the state credit carryforward has no expiration. The extent to which the loss and credit carryforwards can be used to offset future taxable income and tax liabilities, respectively, may be limited, depending on the extent of ownership changes within any three-year period. 9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS The Company is engaged in the development and marketing of transactional application server software products and operates in one reportable segment under SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. F-16 GEOGRAPHIC INFORMATION
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ------------------------ LONG-LIVED LONG-LIVED LONG-LIVED REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS ----------- ------ ----------- ------ ----------- ------ (IN THOUSANDS) United States............ $ 9,764 $ 538 $ 11,989 $ 1,526 $ 18,107 $ 6,054 Europe................... 4,550 14 5,505 54 4,755 73 Rest of the world........ 272 1 1,877 2 2,415 72 -------- ------- -------- ------- -------- ------- $ 14,586 $ 553 $ 19,371 $ 1,582 $ 25,277 $ 6,199 ======== ======= ======== ======= ======== ======= __________
(1) Revenues are broken out geographically by the ship-to location of the customer. SIGNIFICANT CUSTOMERS During 2002, one customer accounted for 26% of the Company's total revenues and another customer accounted for 13% of the Company's total revenues. During 2001, one customer accounted for 15% of the Company's total revenues and another customer accounted for 11% of the Company's total revenues. During 2000, one customer accounted for 16% of the Company's total revenues and one customer (a common stockholder) accounted for 5% of the Company's total revenues. At December 31, 2002, two customers accounted for 25% of accounts receivable. At December 31, 2001, two customers accounted for 11% of accounts receivable. 10. EMPLOYEE BENEFIT PLAN The Company has a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation (presently from 1% to 20% up to the maximum allowed under IRS rules). Company contributions are discretionary; no such Company contributions have been made since inception of this plan. 11. SUBSEQUENT EVENTS On March 20, 2003, the Company has renewed its credit facilities with a bank. Under the renewed facilities, the Company continues to have a revolving line of credit facility of up to $2.5 million available through April 30, 2004. The banks renewed credit facilities require the Company, among other things, to maintain certain working capital, tangible net worth and profitability covenants. We expect to meet these covenants. Borrowings under the facility are collateralized by substantially all of the Company's assets. F-17 PERSISTENCE SOFTWARE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE PAGE ---- Audited Consolidated Financial Statement Schedule: Independent Auditors' Report............................................ S-2 Schedule II-- Consolidated Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000........ S-3 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. S-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Persistence Software, Inc.: We have audited the consolidated financial statements of Persistence Software, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated January 24, 2003 (March 20, 2003 as to Note 11). Our audits also included the consolidated financial statement schedule of the Company listed in the Index at Item 15(a)(2). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP San Jose, California January 24, 2003 S-2 SCHEDULE II PERSISTENCE SOFTWARE, INC. CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT $000'S BEGINNING CHARGED TO COST DEDUCTIONS/ BALANCE AT OF YEAR AND EXPENSES WRITE-OFFS END OF YEAR ------- ------------ ---------- ----------- Year ended December 31, 2000 Allowance for doubtful accounts .............................. $ 332 $ 915 $ (19) $ 1,228 Year ended December 31, 2001 Allowance for doubtful accounts............................... $ 1,228 $ 951 $ (2,027) $ 152 Year ended December 31, 2002 Allowance for doubtful accounts............................... $ 152 $ 353 $ (285) $ 220
S-3 EX-3.4 3 persistence_10kex3-4.txt EXHIBIT 3.4 BYLAWS OF PERSISTENCE SOFTWARE, INC. TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES.............................................................3 1.1 Registered Office.............................................................3 1.2 Other Offices.................................................................3 ARTICLE II - MEETINGS OF STOCKHOLDERS.....................................................3 2.1 Place Of Meetings.............................................................3 2.2 Annual Meeting................................................................1 2.3 Special Meeting...............................................................3 2.4 Notice of Shareholder's Meeting; Affidavit Of Notice..........................3 2.5 Advance Notice of Stockholder Nominees........................................3 2.6 Quorum........................................................................4 2.7 Adjourned Meeting; Notice.....................................................4 2.8 Conduct Of Business...........................................................4 2.9 Voting........................................................................5 2.10 Waiver Of Notice.............................................................5 2.11 Record Date For Stockholder Notice; Voting...................................5 2.12 Proxies......................................................................6 ARTICLE III - DIRECTOR....................................................................6 3.1 Powers........................................................................6 3.2 Number Of Directors...........................................................6 3.3 Election, Qualification And Term Of Office Of Directors.......................6 3.4 Resignation And Vacancies.....................................................6 3.5 Place Of Meetings; Meetings By Telephone......................................7 3.6 Regular Meetings..............................................................8 3.7 Special Meetings; Notice......................................................8 3.8 Quorum........................................................................8 3.9 Waiver Of Notice..............................................................8 3.10 Board Action By Written Consent Without A Meeting............................9 3.11 Fees And Compensation Of Directors...........................................9 3.12 Approval Of Loans To Officers................................................9 3.13 Removal Of Directors.........................................................9 3.14 Chairman Of The Board Of Directors...........................................10 ARTICLE IV - COMMITTEES...................................................................10 4.1 Committees Of Directors.......................................................10 4.2 Committee Minutes.............................................................10 4.3 Meetings And Action Of Committees.............................................11 ARTICLE V - OFFICERS......................................................................14 5.1 Officers......................................................................14
i 5.2 Appointment Of Officers.......................................................14 5.3 Subordinate Officers..........................................................14 5.4 Removal And Resignation Of Officers...........................................14 5.5 Vacancies In Offices..........................................................12 5.6 Chief Executive Officer.......................................................15 5.7 President.....................................................................15 5.8 Vice Presidents...............................................................13 5.9 Secretary.....................................................................13 5.10 Chief Financial Officer......................................................16 5.11 Representation Of Shares Of Other Corporations...............................16 5.12 Authority And Duties Of Officers.............................................17 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS..........17 6.1 Indemnification Of Directors And Officers.....................................17 6.2 Indemnification Of Others.....................................................17 6.3 Payment Of Expenses In Advance................................................17 6.4 Indemnity Not Exclusive.......................................................18 6.5 Insurance.....................................................................18 6.6 Conflicts.....................................................................18 ARTICLE VII - RECORDS AND REPORTS.........................................................19 7.1 Maintenance And Inspection Of Records.........................................19 7.2 Inspection By Directors.......................................................19 7.3 Annual Statement To Stockholders..............................................19 ARTICLE VIII - GENERAL MATTERS............................................................20 8.1 Checks........................................................................20 8.2 Execution Of Corporate Contracts And Instruments..............................20 8.3 Stock Certificates; Partly Paid Shares........................................20 8.4 Special Designation On Certificates...........................................21 8.5 Lost Certificates.............................................................21 8.6 Construction; Definitions.....................................................21 8.7 Dividends.....................................................................21 8.8 Fiscal Year...................................................................22 8.9 Seal..........................................................................22 8.10 Transfer Of Stock............................................................22 8.11 Stock Transfer Agreements....................................................22 8.12 Registered Stockholders......................................................22 ARTICLE IX - AMENDMENTS...................................................................22
-ii- BYLAWS OF PERSISTENCE SOFTWARE, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware, County of New Castle, 19801. The name of its registered agent at such address is The Corporation Trust Company. 1.2 OTHER OFFICES. The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING. (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. (b) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the corporation's notice with respect to such meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2. (c) In addition to the requirements of Section 2.5, for nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such business must be a proper matter for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not less than twenty (20) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days prior to or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the twentieth (20th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (B) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (d) Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.2. The chairman of the meeting shall determine whether a nomination or any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed nomination or business has not been properly brought before the meeting, the chairman shall declare that such proposed business or nomination shall not be presented for stockholder action at the meeting. (e) For purposes of this Section 2.2, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service. (f) Nothing in this Section 2.2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2.3 SPECIAL MEETING. -4- (a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president. (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be selected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in Section 2.5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 2.5. 2.4 NOTICE OF STOCKHOLDER'S MEETINGS; AFFIDAVIT OF NOTICE. All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than sixty (60) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise -5- required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. -6- 2.9 VOTING. (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). (b) Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -7- 2.12 PROXIES. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. The number of directors constituting the entire Board of Directors shall be eight (8). 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold -8- office as provided in this section in the filling of other vacancies. A vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the quorum. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the certificate of incorporation or these Bylaws: (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in -9- a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall -10- constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 APPROVAL OF LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. -11- No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS. The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (e) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES. -12- Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. -13- 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS. In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the -14- president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. -15- The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the corporation, (b) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an -16- employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation 6.5 INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -17- ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, -18- notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full -19- or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. The directors of the corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. -20- 8.9 SEAL. The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -21- CERTIFICATE OF ASSISTANT SECRETARY OF ADOPTION OF BYLAWS The undersigned hereby certifies that the undersigned is the duly elected, qualified, and acting Assistant Secretary of Persistence Software, Inc. and that the foregoing Bylaws were adopted as the Bylaws of the corporation on April 21, 1999 by the Board of Directors of the corporation and are contingent on and effective as of the closing date of the corporation's initial public offering of common stock. Executed this 21st day of April 1999. /s/ MARK A. MEDEARIS ------------------------------------- Mark A. Medearis, Assistant Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF PERSISTENCE SOFTWARE, INC. The undersigned, being the duly acting and appointed Assistant Secretary of Persistence Software, Inc., a Delaware corporation, hereby certifies that the Bylaws of this corporation were amended at a meeting of the Board of Directors on March 2, 2001 to amend Section 3.2 of the Bylaws of the Company to read as follows: "The number of directors constituting the entire Board of Directors shall be five (5)." Dated: March 2, 2001 /s/ MARK A. MEDEARIS ------------------------------------- Mark A. Medearis Assistant Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF PERSISTENCE SOFTWARE, INC. The undersigned, being the duly acting and appointed Assistant Secretary of Persistence Software, Inc., a Delaware corporation, hereby certifies that the Bylaws of this corporation were amended at a meeting of the Board of Directors held on January 24, 2002 to amend Section 3.2 of the Bylaws of the Company to read as follows: "The number of directors constituting the entire Board of Directors shall be four (4)." Dated: January 24, 2002 /s/ Mark A. Medearis ------------------------------- Mark A. Medearis Assistant Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF PERSISTENCE SOFTWARE, INC. The undersigned, being the duly acting and appointed Assistant Secretary of Persistence Software, Inc., a Delaware corporation, hereby certifies that the Bylaws of this corporation were amended at a meeting of the Board of Directors held on April 18, 2002 to amend Section 3.2 of the Bylaws of the Company to read as follows: "The number of directors constituting the entire Board of Directors shall be five (5)." Dated: April 18, 2002 /s/ Mark A. Medearis ------------------------------ Mark A. Medearis Assistant Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF PERSISTENCE SOFTWARE, INC. The undersigned, being the duly acting and appointed Assistant Secretary of Persistence Software, Inc., a Delaware corporation, hereby certifies that the Bylaws of this corporation were amended at a meeting of the Board of Directors held on November 25, 2002 to amend Section 3.2 of the Bylaws of the Company to read as follows: "The number of directors constituting the entire Board of Directors shall be six (6)." Dated: November 25, 2002 /s/ Mark A. Medearis ----------------------------- Mark A. Medearis Assistant Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF PERSISTENCE SOFTWARE, INC. The undersigned, being the duly acting and appointed Assistant Secretary of Persistence Software, Inc., a Delaware corporation (the "Company"), hereby certifies that the Bylaws of the Company were amended at a meeting of the Board of Directors held on February 12, 2003 to amend Section 2.3(a) of the Bylaws of the Company to read as follows: "(a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president or by one or more stockholders holding shares in the aggregate entitled to cast not less than a majority of the votes at that meeting." Dated: February 12, 2003 /s/ Mark A. Medearis ---------------------------- Mark A. Medearis Assistant Secretary EX-10.6 4 persistence_1997stock.txt EXHIBIT 10.6 PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN (Amended December 11, 1997) (Amended April 30, 1998) (Amended January 3, 1999) (Amended April 21, 1999) (Amended January 6, 2000) (Amended April 13, 2000) (Amended June 7, 2001) (Amended February 12, 2003) 1. PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "AFFILIATE" means an entity other than a Subsidiary (as defined below) in which the Company owns a significant interest, directly or indirectly, as determined in the discretion of the Committee, or which, together with the Company, is under common control of a third person or entity. (c) "APPLICABLE LAWS" means the legal requirements relating to the administration of stock option and restricted stock purchase plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any Stock Exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time; provided, however, that to the extent permitted under such laws, rules, regulations and requirements, the rights of any participant under the Plan shall be determined in accordance with the law of the State of California, without giving effect to principles of conflict of law. (d) "BOARD" means the Board of Directors of the Company. (e) "CHANGE OF CONTROL" means a sale of all or substantially all of the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means one or more committees or subcommittees of the Board appointed by the Board to administer the Plan in accordance with Section 4 below. (h) "COMMON STOCK" means the Common Stock of the Company. (i) "COMPANY" means Persistence Software, Inc., a Delaware corporation. (j) "CONSULTANT" means any person, including an advisor, who renders services to the Company or any Parent, Subsidiary or Affiliate and is compensated for such services, and any Director of the Company whether compensated for such services or not. (k) "CONTINUOUS SERVICE" means the absence of any interruption or termination of service as an Employee or Consultant to the Company or a Parent, Subsidiary or Affiliate. Continuous Service shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Parent(s), Subsidiaries, Affiliates or their respective successors. Unless otherwise determined by the Administrator or the Company, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute a termination of Continuous Service. (l) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (m) "DIRECTOR" means a member of the Board. (n) "EMPLOYEE" means any person (including, if appropriate, any Named Executive, Officer or Director) employed by the Company or any Parent, Subsidiary or Affiliate of the Company. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (p) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: -2- (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange on the date of determination (or if no trading or bids occurred on the date of determination, on the last trading day prior to the date of determination), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the date of determination (or if no bids occurred on the date of determination, on the last trading day prior to the date of determination); or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (q) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable Option Agreement. (r) "LISTED SECURITY" means any security of the Company that is listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (s) "NAMED EXECUTIVE" means any individual who, on the last day of the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four most highly compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (t) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable Option Agreement. (u) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder. (v) "OPTION" means a stock option granted pursuant to the Plan. (w) "OPTION AGREEMENT" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of an Option granted under the Plan and includes any documents attached to or incorporated into such Option Agreement, including, but not limited to, a notice of stock option grant and a form of exercise notice. -3- (x) "OPTION EXCHANGE PROGRAM" means a program approved by the Administrator whereby outstanding Options are exchanged for Options with a lower exercise price. (y) "OPTIONED STOCK" means the Common Stock subject to an Option. (z) "OPTIONEE" means an Employee or Consultant who receives an Option. (aa) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (bb) "PARTICIPANT" means any holder of one or more Options or Stock Purchase Rights, or the Shares issuable or issued upon exercise of such awards, under the Plan. (cc) "PLAN" means this 1997 Stock Plan. (dd) "REPORTING PERSON" means an Officer, Director or greater than 10% shareholder of the Company within the meaning of Rule 16a-2 of the Exchange Act, who is required to file reports pursuant to Rule 16a-3 of the Exchange Act. (ee) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (ff) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of a Stock Purchase Right granted under the Plan and includes any documents attached to such agreement. (gg) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as amended from time to time, or any successor provision. (hh) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan. (ii) "STOCK EXCHANGE" means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any given time. (jj) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock pursuant to Section 11 below. (kk) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. (ll) "TEN PERCENT HOLDER" means a person who owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary. -4- 3. STOCK SUBJECT TO THE PLAN. The maximum aggregate number of shares that may be sold under the Plan (as amended effective April 13, 2000) is 6,594,652 Shares of Common Stock, plus a maximum of 38,645 additional Shares that may be transferred to the Plan from the Company's 1994 Stock Purchase Plan upon return to the 1994 Stock Purchase Plan pursuant to an amendment to the Plan dated December 10, 1997, plus an annual increase on the first day of each of the Company's fiscal years beginning in 2002, 2003, 2004 and 2005 equal to the lesser of (i) 985,000 Shares, (ii) 4.94% of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. The number of Shares subject to the Plan set forth in this Section 3 are subject to adjustment in accordance with the provisions of Section 15 of the Plan. If an Option expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares that were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise or purchase shall be treated as not issued and shall continue to be available under the Plan. Notwithstanding any other provision of the Plan, Shares issued under the Plan and later repurchased by the Company pursuant to any repurchase right that the Company may have shall not be available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) GENERAL. The Plan shall be administered by the Board or a Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Participants and, if permitted by the Applicable Laws, the Board may authorize one or more officers (who may (but need not) be Officers) to grant Options or Stock Purchase Rights to Employees and Consultants (other than Consultants who are Directors). (b) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS AND NAMED EXECUTIVES. With respect to Options granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit grants of Options to Reporting Persons to qualify for the exemption set forth in Rule 16b-3 and to permit grants of Options to Named Executives to qualify as performance-based compensation under Section 162(m) of the Code, and otherwise so as to satisfy the Applicable Laws. (c) COMMITTEE COMPOSITION. If a Committee has been appointed pursuant to this Section 4, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent -5- permitted by the Applicable Laws and, in the case of a Committee administering the Plan pursuant to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and Section 162(m) of the Code. (d) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(p) of the Plan; (ii) to select the Employees and Consultants to whom Options and Stock Purchase Rights or any combination thereof may from time to time be granted; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted; (iv) to determine the number of Shares of Common Stock to be covered by each such award granted; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder, which terms and conditions include but are not limited to the exercise or purchase price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to determine whether and under what circumstances an Option may be settled in cash under Section 10(f) instead of Common Stock; (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted and to make any other amendments or adjustments to any Option that the Administrator determines, in its discretion and under the authority granted to it under the Plan, to be necessary or advisable, provided however that no amendment or adjustment to an Option that would materially and adversely affect the rights of any Optionee shall be made without the prior written consent of the Optionee; (ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; (x) to initiate an Option Exchange Program; (xi) to construe and interpret the terms of the Plan and awards granted under the Plan; and -6- (xii) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to Participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs. (e) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants. 5. ELIGIBILITY. (a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees, provided however that Employees of Affiliates shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option or Stock Option Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) TYPE OF OPTION. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date of grant of such Option. In the event any Option designated as an Incentive Stock Option fails to meet the requirements set forth in this Plan for an Incentive Stock Option or as required to qualify as an incentive stock option within the meaning of Code Section 422, such Option shall not be void but instead shall be deemed a Nonstatutory Stock Option. (c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any Participant any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided however that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement and provided further that, in the case of an Incentive Stock Option granted to a person who at the time of such grant is a Ten Percent Holder, the term of such Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. -7- 8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided in Section 13 below, the maximum number of Shares which may be subject to Options and Stock Purchase Rights granted to any one Employee under this Plan for any fiscal year of the Company shall be 2,000,000. 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator and set forth in the Option Agreement, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; or (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a person who is at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator; (B) granted to a person who, at the time of the grant of such Option, is a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant if such Option is intended to qualify as performance-based compensation under Section 162(m) of the Code; or (C) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to any person other than a Named Executive or a Ten Percent Holder, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant if required by Applicable Law and, if not so required, shall be such price as is determined by the Administrator. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required in Sections 9(a)(i) and (ii) above pursuant to a Corporate Transaction; provided that, with respect to the grant of such Options on any date on which the Common Stock is not a Listed Security, such Options must be granted with a per Share exercise price as set forth in Sections 9(a)(i) and (ii) above UNLESS such Options are -8- granted to service providers of a party to the transaction other than the Company in exchange for options or other awards held by such persons that are assumed, substituted for, cancelled or converted into options or awards to purchase Common Stock in a manner that preserves the economic value of such options or awards notwithstanding the assumption, substitution, cancellation or conversion. (b) PERMISSIBLE CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash; (2) check; (3) delivery of Optionee's promissory note with such recourse, interest, security and redemption provisions as the Administrator determines to be appropriate; (4) cancellation of indebtedness; (5) surrender of other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender (or such other period as may be required to avoid a charge to the Company's earnings) or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option is exercised; (6) authorization by the Optionee for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; (7) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect exercise of the Option and prompt delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable withholding taxes; (8) any combination of the foregoing methods of payment; or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under the Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider whether acceptance of such consideration may be reasonably expected to benefit the Company and the Administrator may refuse to accept a particular form of consideration at the time of any Option exercise if, in its sole discretion, acceptance of such form of consideration is not in the best interests of the Company at such time. 10. EXERCISE OF OPTION. (a) VESTING. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, consistent with the terms of the Plan, and reflected in the Option Agreement, including vesting requirements and/or performance criteria with respect to the Company and/or the Optionee; provided however that, if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall become exercisable at a rate of at least 20% per year over five years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least 20% per year over five years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer (including but not limited to Officers), Director or Consultant, the Option may become exercisable, or a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the -9- Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided however that in the absence of such determination, vesting of Options shall be tolled during any such leave. (b) PROCEDURE FOR EXERCISE. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (c) RIGHTS AS A SHAREHOLDER. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 15 of the Plan. (d) TERMINATION OF CONTINUOUS SERVICE. In the event of termination of an Optionee's Continuous Service, such Optionee's right to exercise the Option shall cease and the Option shall forthwith become void and cease to have effect, except as set forth specifically in the Option Agreement. Notwithstanding the foregoing, if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall be exercisable by the Optionee for a period of time following the termination of the Optionee's Continuous Service as follows: (i) In the event of termination of Continuous Service for reasons other than the Optionee's disability or death, the Option shall be exercisable by the Optionee following such termination for a period of not less than thirty (30) days, as is determined by the Administrator (with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option), after the date of such termination of Continuous Service (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), to the extent that the Optionee was entitled to exercise it at the date of such termination. If an Option Agreement provides that an Incentive Stock Option may be exercised more than three (3) months after the termination of the Optionee's Continuous Service, to the extent that such Optionee fails to exercise such Option within three (3) months of the date of such termination, such Option thereafter shall be treated as a Nonstatutory Stock Option. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise the Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. -10- (ii) In the event of termination of Continuous Service as a result of Optionee's disability, such Optionee may, but only within six (6) months (or such longer period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent he or she was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise the Option to the extent so entitled within the time specified herein, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (iii) In the event of the death of an Optionee prior to termination of his or her Continuous Service, the Option may be exercised at any time within six (6) months (or such longer period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement) by such Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or, if earlier, the date of termination of the Optionee's Continuous Service. To the extent that the Optionee was not entitled to exercise the Option at the date of death or termination, as the case may be, or if the Optionee does not exercise such Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (e) EXTENSION OF EXERCISE PERIOD. The Administrator shall have full power and authority to extend the period of time for which an Option is to remain exercisable following termination of an Optionee's Continuous Service from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in the Option Agreement to such greater time as the Board shall deem appropriate, provided that in no event shall such Option be exercisable later than the date of expiration of the term of such Option as set forth in the Option Agreement. (f) BUY-OUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted under the Plan based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time such offer is made. 11. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the consideration to be paid, and the time within which such person must accept such offer, which shall in no event exceed 30 days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. In the case of a Stock Purchase Right granted prior to the date, if any, -11- on which the Common Stock becomes a Listed Security and if required by the Applicable Laws at such time, the purchase price of Shares subject to such Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. The offer to purchase Shares subject to Stock Purchase Rights shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company an irrevocable, exclusive option (the "Repurchase Option") exercisable upon the termination of the purchaser's Continuous Service for any reason. Subject to any requirements of the Applicable Laws (including without limitation Section 260.140.42(h) of the Rules of the California Corporations Commissioner), the Repurchase Option (including without limitation the price at which, and the consideration for which, it may be exercised, and the events upon which it shall lapse) shall be as determined by the Administrator in its sole discretion and reflected in the Restricted Stock Purchase Agreement. In no way limiting the foregoing, with respect to awards granted to a purchaser who is not an officer (including an Officer), Director or Consultant of the Company or of any Parent or Subsidiary of the Company on any date on which the Common Stock is not a Listed Security, such Repurchase Option shall lapse at a minimum rate of 20% of the Shares subject to the Stock Purchase Right if required by the Applicable Laws. (c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan. 12. TAXES. (a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising the Option or Stock Purchase Right) shall make such arrangements as the Administrator may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of Option or Stock Purchase Right and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. (b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option or Stock Purchase Right. -12- (c) This Section 12(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, applicable to the exercise. For purposes of this Section 12, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date"). (d) At the discretion of the Administrator, a Participant may satisfy his or her tax withholding obligations arising in connection with an Option by one or some combination of the following methods: (i) by cash payment; (ii) by payroll deduction out of the Optionee's current compensation; or (iii) if permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (A) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six (6) months on the date of surrender, and (B) have a Fair Market Value determined as of the applicable Tax Date equal to the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, applicable to the exercise. (e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 12(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 12(d) above must be made on or prior to the applicable Tax Date. (f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Except as set forth in this Section 13, Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder). The designation of a beneficiary by an Optionee will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 13. Notwithstanding the foregoing: -13- (a) with respect to any Options or Stock Purchase Rights granted on any date on which the Common Stock is a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer shall be subject to the Applicable Laws. (b) with respect to any Options or Stock Purchase Rights granted on any date on which the Common Stock is not a Listed Security, the Administrator may in its discretion grant Nonstatutory Stock Options that may be transferred pursuant to Option Agreements specifying such terms as permitted by Reg. 260.140.41 and Reg. 260.140.42 of Title 10 of the California Code of Regulations. 14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such later date as is determined by the Administrator; provided however that in the case of an Incentive Stock Option, the grant date shall be the later of the date on which the Administrator makes the determination granting such Incentive Stock Option or the date of commencement of the Optionee's employment relationship with the Company. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, CORPORATE TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, the number of Shares set forth in Sections 3 and 8 above, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per Share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock (including any change in the number of Shares of Common Stock effected in connection with a change of domicile of the Company), or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares of Common Stock subject to an Option or Stock Purchase Right. -14- (b) DISSOLUTION OR LIQUIDATION. In the event of the dissolution or liquidation of the Company, the Administrator shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not previously been exercised, each outstanding Option or Stock Purchase Right shall terminate immediately prior to the consummation of such action, unless otherwise provided by the Administrator. (c) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a Corporate Transaction, including a Change of Control, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation (such entity, the "Successor Corporation"), unless the Successor Corporation does not agree to such assumption or substitution, in which case such Options and Stock Purchase Rights shall terminate upon consummation of the transaction. For purposes of this Section 15(c), an Option or a Stock Purchase Right shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction or a Change of Control, as the case may be, each holder of an Option or Stock Purchase Right would be entitled to receive upon exercise of the Option or Stock Purchase Right the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option or the Stock Purchase Right at such time (after giving effect to any adjustments in the number of Shares covered by the Option or Stock Purchase Right as provided for in this Section 15); provided however that if the consideration received in the transaction is not solely common stock of the Successor Corporation, the Administrator may, with the consent of the Successor Corporation, provide for the consideration to be received upon exercise of the Option or Stock Purchase Right to be solely common stock of the Successor Corporation equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (d) CERTAIN DISTRIBUTIONS. In the event of any distribution to the Company's shareholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution. 16. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend, discontinue or terminate the Plan. To the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such as degree as required. -15- (b) EFFECT OF AMENDMENT OR TERMINATION. Except as provided in Section 15, no amendment, suspension or termination of the Plan shall materially and adversely affect Options already granted and such Options shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by such Optionee and the Company. Except as provided in Section 15, no amendment, suspension or termination of the Plan shall materially and adversely affect Stock Purchase Rights already granted, or the holder of Restricted Stock acquired pursuant to a Stock Purchase Right, unless mutually agreed otherwise between the holder of the Stock Purchase Right and the Company, which agreement must be in writing and signed by such holder and the Company. 17. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the Applicable Laws, with such compliance determined by the Company in consultation with its legal counsel. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by Applicable Laws. 18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by Option Agreements and Restricted Stock Purchase Agreements, respectively, in such form(s) as the Administrator shall from time to time approve. 20. SHAREHOLDER APPROVAL. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under the Applicable Laws. 21. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to the date, if any, upon which the Common Stock becomes a Listed Security and if required by the Applicable Laws, the Company shall provide financial statements at least annually to each Optionee and to each individual who acquired Shares pursuant to the Plan, during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares. The Company shall not be required to provide such information if the issuance of Options or Stock Purchase Rights under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. -16- PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN STOCK OPTION AGREEMENT 1. GRANT OF OPTION. Persistence Software, Inc., a Delaware corporation (the "Company"), hereby grants to Optionee an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Stock Option Grant (the "Notice"), at the exercise price per Share set forth in the Notice (the "Exercise Price") subject to the terms, definitions and provisions of the Persistence 1997 Stock Plan (the "Plan") adopted by the Company, which is incorporated in this Agreement by reference. Unless otherwise defined in this Agreement, the terms used in this Agreement shall have the meanings defined in the Plan. This Stock Option Agreement shall be deemed executed by the Company and Optionee upon execution by such parties of the Notice. 2. DESIGNATION OF OPTION. This Option is intended to be an Incentive Stock Option as defined in Section 422 of the Code only to the extent so designated in the Notice, and to the extent it is not so designated or to the extent the Option does not qualify as an Incentive Stock Option, it is intended to be a Nonstatutory Stock Option. Notwithstanding the above, if designated as an Incentive Stock Option, in the event that the Shares subject to this Option (and all other Incentive Stock Options granted to Optionee by the Company or any Parent or Subsidiary, including under other plans of the Company) that first become exercisable in any calendar year have an aggregate fair market value (determined for each Share as of the date of grant of the option covering such Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option, in accordance with Section 5(b) of the Plan. 3. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the Vesting/Exercise Schedule set out in the Notice and with the provisions of Section 10 of the Plan as follows: (a) RIGHT TO EXERCISE. (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Section 5 below, subject to the limitations contained in this Section 3. (iii) In no event may this Option be exercised after the Expiration Date of the Option as set forth in the Notice. (b) METHOD OF EXERCISE. (i) This Option shall be exercisable by delivering to the Company a written notice of exercise (in the form attached as Exhibit A or in any other form of notice approved by the Plan Administrator) which shall state Optionee's election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered to the Company by such means as are determined by the Plan Administrator in its discretion to constitute adequate delivery. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. (ii) As a condition to the exercise of this Option and as further set forth in Section 12 of the Plan, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the vesting or exercise of the Option, or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise. (iii) The Company is not obligated, and will have no liability for failure, to issue or deliver any Shares upon exercise of the Option unless such issuance or delivery would comply with the Applicable Laws, with such compliance determined by the Company in consultation with its legal counsel. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 221 of Title 12 of the Code of Federal Regulations as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by the Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination of the following, at the election of Optionee: (a) cash; (b) check; (c) surrender of other Shares that (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings, or were not acquired directly or indirectly from the Company and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, or -2- (d) if there is a public market for the Shares and they are registered under the Securities Act of 1933, as amended, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 5. TERMINATION OF RELATIONSHIP. Following the date of termination of Optionee's Continuous Service Status for any reason (the "Termination Date"), Optionee may exercise the Option only as set forth in the Notice and this Section 5. To the extent that Optionee is not entitled to exercise this Option as of the Termination Date, or if Optionee does not exercise this Option within the Termination Period set forth in the Notice or the termination periods set forth below, the Option shall terminate in its entirety. In no event, may any Option be exercised after the Expiration Date of the Option as set forth in the Notice. (a) TERMINATION. In the event of termination of Optionee's Continuous Service Status other than as a result of Optionee's disability or death, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set forth in the Notice. (b) OTHER TERMINATIONS. In connection with any termination other than a termination covered by Section 5(a), Optionee may exercise the Option only as described below: (i) TERMINATION UPON DISABILITY OF OPTIONEE. In the event of termination of Optionee's Continuous Service Status as a result of Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the Termination Date (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), exercise this Option to the extent Optionee was entitled to exercise it as of such Termination Date; provided, however, that in the event of termination of Optionee's Continuous Service as a result of disability not constituting a total and permanent disability, Optionee may, but only within six (6) months from the Termination Date (but in no event later than the Expiration Date set forth in the Notice of Stock Option Grant), exercise the Option to the extent Optionee was entitled to exercise it as of such Termination Date. (ii) DEATH OF OPTIONEE. In the event of the death of Optionee (a) during the term of this Option and while an Employee or Consultant of the Company and having been in Continuous Service Status since the date of grant of the Option, or (b) within thirty (30) days after Optionee's Termination Date, the Option may be exercised at any time within six (6) months following the date of death by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent Optionee was entitled to exercise the Option as of the Termination Date. 6. NON-TRANSFERABILITY OF OPTION. Except as otherwise set forth in the Notice, this Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him or her. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. -3- 7. TAX CONSEQUENCES. Below is a brief summary as of the date of this Option of certain of the federal tax consequences of exercise of this Option and disposition of the Shares under the laws in effect as of the Date of Grant. THIS SUMMARY IS INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) INCENTIVE STOCK OPTION. (i) TAX TREATMENT UPON EXERCISE AND SALE OF SHARES. If this Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject Optionee to the alternative minimum tax in the year of exercise. If Shares issued upon exercise of an Incentive Stock Option are held for at least one year after exercise and are disposed of at least two years after the Option grant date, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares issued upon exercise of an Incentive Stock Option are disposed of within such one-year period or within two years after the Option grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the fair market value of the Shares on the date of exercise, or (ii) the sale price of the Shares. (ii) NOTICE OF DISQUALIFYING DISPOSITIONS. With respect to any Shares issued upon exercise of an Incentive Stock Option, if Optionee sells or otherwise disposes of such Shares on or before the later of (i) the date two years after the Option grant date, or (ii) the date one year after the date of exercise, Optionee shall immediately notify the Company in writing of such disposition. Optionee acknowledges and agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from the early disposition by payment in cash or out of the current earnings paid to Optionee. (b) NONSTATUTORY STOCK OPTION. If this Option does not qualify as an Incentive Stock Option, there may be a regular federal (and state) income tax liability upon the exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. If Shares issued upon exercise of a Nonstatutory Stock Option are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. 8. EFFECT OF AGREEMENT. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof (and has had an opportunity to consult counsel regarding the Option terms), and hereby accepts this Option and agrees to be bound by its contractual terms as set forth herein and in the Plan. Optionee hereby agrees to accept as binding, conclusive and final all decisions and interpretations of the Plan Administrator regarding any questions relating to the Option. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of the Notice and this Agreement, the Plan terms and provisions shall prevail. The Option, including the Plan, constitutes the entire agreement between Optionee and the Company on the subject matter hereof and supersedes all proposals, written or oral, and all other communications between the parties relating to such subject matter. -4- EXHIBIT A --------- PERSISTENCE SOFTWARE, INC. 1997 STOCK PLAN NOTICE OF EXERCISE ------------------ To: PERSISTENCE SOFTWARE, INC. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase shares of PERSISTENCE SOFTWARE, INC. Common Stock, under and pursuant to the Persistence Software, Inc. 1997 Stock Plan and the Stock Option Agreement, as follows: Date of Grant: _____________________________________ Type of Option (ISO or NSO): _____________________________________ Date of Purchase: _____________________________________ Number of Shares: _____________________________________ Purchase Price: _____________________________________ Method of Payment of Purchase Price: _____________________________________ Social Security No.: _____________________________________ The shares should be issued as follows: Name: __________________________ Address: __________________________ __________________________ __________________________ Signed: __________________________ Date: __________________________ -5- EX-10.7 5 persistence_1999espp.txt EXHIBIT 10.7 PERSISTENCE SOFTWARE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- The following constitute the provisions of the Persistence Software, Inc. 1999 Employee Stock Purchase Plan. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" means the Common Stock of the Company. (d) "COMPANY" means Persistence Software, Inc., a Delaware corporation. (e) "COMPENSATION" means all regular straight time gross earnings and commissions, and shall not include payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Company, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to Company policy adopted from time to time. (g) "CONTRIBUTIONS" means all amounts credited to the account of a participant pursuant to the Plan. (h) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "DESIGNATED SUBSIDIARY" means any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan; provided, however, that the Board shall only have the discretion to designate a Subsidiary if the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. (j) "EMPLOYEE" means any person, including an Officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or a Designated Subsidiary. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding Trading Day), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding Trading Day), as reported in THE WALL STREET JOURNAL. For purposes of the Offering Date of the first Offering Period under the Plan, the Fair Market Value of a share of the Common Stock of the Company shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended, for the initial public offering of the Company's Common Stock (the "REGISTRATION STATEMENT"). (m) "OFFERING DATE" means the first Trading Day of each Offering Period of the Plan. (n) "OFFERING PERIOD" means a period of approximately twenty-four (24) months and not exceeding twenty-seven (27) months, except for the first Offering Period as set forth in Section 4(a). The duration and timing of the Offering Periods may be changed pursuant to Section 4 of the Plan. (o) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "PLAN" means this Persistence Software, Inc. 1999 Employee Stock Purchase Plan. (q) "PURCHASE DATE" means the last Trading Day of each Purchase Period. (r) "PURCHASE PERIOD" means a period of approximately six (6) months within an Offering Period, except for the first Purchase Period as set forth in Section 4(b). The duration and timing of the Purchase Periods may be changed pursuant to Section 4 of the Plan. (s) "PURCHASE PRICE" means with respect to a Purchase Period an amount equal to 85% of the Fair Market Value (as defined in Section 2(l) above) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the event (i) there is any increase in the number of Shares available for issuance under the Plan (including without limitation an automatic increase pursuant to Section 14(a) -2- below or as a result of a stockholder-approved amendment to the Plan), and (ii) all or a portion of such additional Shares are to be issued with respect to one or more Offering Periods that are underway at the time of such increase ("ADDITIONAL SHARES"), and (iii) the Fair Market Value of a Share of Common Stock on the date of such increase is higher than the Fair Market Value on the Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to such Additional Shares shall be 85% of the Fair Market Value of a Share of Common Stock on the date of such increase or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. (t) "SHARE" means a share of Common Stock, as adjusted in accordance with Section 20 of the Plan. (u) "SUBSIDIARY" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (v) "TRADING DAY" means a day on which national stock exchanges and the Nasdaq System are open for trading. 3. ELIGIBILITY. (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary, or (ii) to the extent such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of Fair Market Value (as defined in Section 2(l) above) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS AND PURCHASE PERIODS. (a) OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods generally of twenty-four (24) months duration and not exceeding twenty-seven (27) months duration, with new Offering Periods commencing on or about February 1 and August 1 of each year, or at such other time or times as may be determined by the Board of Directors. Offering Periods shall commence on a continuing and overlapping basis until terminated in accordance with Section 21 hereof. Notwithstanding the foregoing, the first Offering Period under the Plan shall commence on the beginning of the effective date of the Registration Statement on Form S-1 for the initial public offering -3- of the Company's Common (the "IPO DATE") and continue until the last Trading Day on or before July 31, 2001. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. (b) PURCHASE PERIODS. Each Offering Period shall generally consist of four (4) Purchase Periods of approximately six (6) months duration, the first commencing on the Offering Date and ending on the July 31 or January 31 next following, and each other Purchase Period in such Offering Period commencing on the day after the last day of the preceding Purchase Period and ending on the July 31 or January 31 next following; provided, however, that the first Purchase Period shall commence on the IPO Date and shall end on January 31, 2000. The Board of Directors of the Company shall have the power to change the duration and/or frequency of Purchase Periods with respect to future purchases without stockholder approval if such change is announced at least five (5) days prior to the otherwise scheduled beginning of the first Purchase Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. (b) The subscription agreement shall set forth the Employee's participation election, either in the form of a designation of the percentage of the Employee's Compensation the Employee elects to have deducted from his or her pay on each pay day during the Offering Period and credited to his or her account under the Plan to be used to purchase shares on the Purchase Date for each of the relevant Purchase Periods, which percentage shall be not less than one percent (1%) and not more than twenty percent (20%), or, if permitted by the Board, in the form of a designation of the number of whole shares the Employee elects to purchase at the end of each Purchase Period with respect to the Offering Period, up to such maximum number of shares as the Board may establish from time to time before an Offering Date; provided that to the extent a participant is participating in more than one Offering Period and the maximum contribution amount is designated as a percentage of Compensation, the maximum aggregate percentage of Compensation that the participant may contribute under the Plan shall be twenty percent (20%) (or such greater percentage as the Board may establish from time to time before an Offering Date). (c) A participant's subscription shall be effective for each successive Offering Period in which he or she is eligible to participate, unless the participant withdraws in accordance with Section 11(a). (d) In addition to the limits on an Employee's participation in the Plan set forth herein, the Board may establish limits on the number of shares an Employee may elect to purchase with respect to any Offering Period if such limit is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. -4- 6. GRANT OF OPTION. On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price, provided, however, that the maximum number of Shares an Employee may purchase on any Purchase Date under the Plan (without regard to how many Offering Periods in which the participant is participating) shall be 2,500 Shares (subject to adjustment pursuant to Section 20 below and subject to allocation among Offering Periods so that Shares are first allocated to that Offering Period having the lowest applicable Purchase Price, and then thereafter to that Offering Period with the next-lowest applicable Purchase Price, and so forth), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 9(b). 7. METHOD OF PAYMENT OF CONTRIBUTIONS. (a) PAYROLL DEDUCTIONS. (i) If an Employee's participation election is in the form of an election to contribute a percentage of his or her Compensation through payroll deductions, or if an Employee otherwise elects to make contributions to the Plan through payroll deductions of a specified percentage of his or her Compensation as permitted by the Board with respect to an Employee's participation election in the form of an election to purchase a designated number of shares at the end of each Purchase Period, such payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid in the Offering Period to which such subscription agreement and payroll deduction authorization is applicable, unless sooner terminated by the participant as provided in Section 11. All payroll deductions made by a participant shall be credited to his or her account under the Plan. (ii) A participant may discontinue his or her participation in the Plan as provided in Section 11, or on one occasion only during an Offering Period may increase and on one occasion only during an Offering Period decrease the rate of his or her payroll deductions with respect to the Offering Period by completing and filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The change in rate shall be effective as of the beginning of the next calendar month commencing ten (10) or more business days after the date the new subscription is filed. (iii) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased by the Company to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 11. -5- (b) CASH OR STOCK CONTRIBUTIONS. To the extent permitted by the Board, a participant may make contributions to the Plan for purchase of shares in cash or by tendering Company stock or by election to receive shares representing the difference between the Purchase Price and the Fair Market Value of the shares, less applicable withholding. Any such cash or stock contribution, or any election to receive net shares, must be received by the Company in accordance with procedures and at such times as established by the Board, and a participant's failure to make such contributions or such an election within the time required, to the extent the aggregate Purchase Price of the number of shares the participant has an option to purchase on the Purchase Date exceeds payroll deduction contributions made by the participant as of the Purchase Date, shall be deemed a withdrawal from the Offering Period with respect to shares subject to the option not purchased on the applicable Purchase Date and with respect to all other Purchase Periods in such Offering Period. 8. WITHHOLDING TAX OBLIGATIONS. At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for payment to the Company of the Company's federal, state or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by the participant. 9. EXERCISE OF OPTION. (a) Unless a participant withdraws from the Plan as provided in Section 11, his or her option for the purchase of Shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of full Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. (b) If the Board determines that, on a given Purchase Date, the number of Shares with respect to which options are to be exercised may exceed (i) the number of Shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period (after deduction of all Shares for which options have been exercised or are then outstanding), or (ii) the number of shares available for sale under the Plan on such Purchase Date (after deduction of all Shares for which options have been exercised or are then outstanding), the Board may, in its sole discretion, provide that the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, shall be allocated pro rata, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date and (x) continue all Offering Periods then in effect or (y) pursuant to Section 21 below, terminate any or all Offering Periods then in effect. The Board may direct that the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence be allocated pro rata, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's stockholders subsequent to such Offering Date. -6- (c) Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of Shares at the termination of each Purchase Period which is insufficient to purchase a full Share shall be carried over to the next Purchase Period if the Employee continues to participate in the Plan, or if the Employee does not continue to participate, shall be returned to the participant. Any other amounts left over in a participant's account after a Purchase Date shall be returned to the participant. 10. RIGHTS AS STOCKHOLDER; DELIVERY OF CERTIFICATE. (a) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (b) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. (c) As promptly as practicable after each Purchase Date of each Offering Period, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the Shares purchased upon exercise of his or her option. 11. VOLUNTARY WITHDRAWAL. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to each Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current Offering Period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during and with respect to such Offering Period. (b) A participant's voluntary withdrawal from the Plan with respect to an Offering Period will not have any effect upon his or her eligibility to participate in a succeeding Offering Period or in any similar plan which may hereafter be adopted by the Company. 12. AUTOMATIC WITHDRAWAL. (a) REDUCTION OF HOURS. In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (b) TERMINATION OF EMPLOYMENT. Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period (other than on account of death), he or she will be automatically withdrawn from the Plan effective as of the date of such -7- termination of his or her Continuous Status as an Employee, the Contributions credited to his or her account will be returned to him or her, and his or her option will be automatically terminated. (c) DEATH OF PARTICIPANT. Upon the death of a participant prior to the Purchase Date of an Offering Period, he or she will be automatically withdrawn from the Plan, the Contributions credited to his or her account will be returned to the person or persons entitled thereto under Section 16, and his or her option will be automatically terminated. (d) REDUCTION IN FAIR MARKET VALUE. To the extent permitted by any applicable laws, regulations or stock exchange rules, if the Fair Market Value of the Shares on a Purchase Date of an Offering Period (other than the final Purchase Date of such Offering Period) is less than the Fair Market Value of the Shares on the Offering Date for such Offering Period, then every participant shall automatically (i) be withdrawn from such Offering Period at the close of such Purchase Date and after the acquisition of Shares for such Purchase Period, and (ii) be enrolled in the first Offering Period commencing subsequent to such Purchase Date. Participants shall automatically be withdrawn as of July 31, 1999 from the Offering Period beginning on the IPO Date and re-enrolled in the Offering Period beginning on August 1, 1999 if the Fair Market Value of the Shares on the IPO Date is greater than the Fair Market Value of the Shares on July 31, 1999, unless a participant notifies the Administrator prior to July 31, 1999 that he or she does not wish to be withdrawn and re-enrolled. All payroll deductions accumulated in a participant's account as of a withdrawal date pursuant to this Section 12(d) shall be returned to the participant. 13. INTEREST. No interest shall accrue on the Contributions of a participant in the Plan. 14. STOCK. The maximum number of Shares which shall be made available for sale under the Plan shall be 600,000 Shares, plus an annual increase on the first day of each of the Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004, equal to the lesser of (A) 250,000 Shares, (B) 1% of the Shares outstanding on the last day of the immediately preceding fiscal year, or (C) such lesser number of Shares as is determined by the Board, subject to adjustment upon changes in capitalization of the Company as provided in Section 20. 15. ADMINISTRATION. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 16. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any Shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of a Purchase Period but prior to delivery to him or her of such Shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the -8- Purchase Date of an Offering Period. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. Such designation of beneficiary may be changed by the participant (with the consent of his or her spouse, if any) at any time by written notice effective upon receipt by the Company of such notice. (b) In the absence of a beneficiary validly designated in accordance with Section 16(a) who is living at the time of such participant's death, upon the death of the participant the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 17. TRANSFERABILITY. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the participant (other than by will, the laws of descent and distribution, or as provided in Section 16). Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 11. 18. USE OF FUNDS. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 19. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 20. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of Shares covered by each option under the Plan which has not yet been exercised and the number of Shares which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "RESERVES"), as well as the maximum number of shares of Common Stock which may be purchased by a participant in a Purchase Period, the number of shares of Common Stock set forth in Section 14 above, and the price per Share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company, which such increase or decrease occurs after the effective date of -9- this Plan; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) CORPORATE TRANSACTIONS. In the event of a dissolution or liquidation of the Company, any Purchase Period and Offering Period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, each Purchase Period and Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "NEW PURCHASE DATE"), as of which date any Purchase Period and Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 11. For purposes of this Section 20(b), an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the Corporate Transaction if the holder had been, immediately prior to the Corporate Transaction , the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided in Section 20(a)); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the Corporate Transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. -10- 21. AMENDMENT AND TERMINATION. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 20, no such amendment or termination of the Plan may materially and adversely affect either options previously granted or the rights of any then-current participant. In addition, to the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation) or Rule 16b-3 under the Exchange Act, the Company shall obtain stockholder approval in such a manner and to such a degree as so required. (b) Without stockholder consent and provided that outstanding options and participant rights are not materially and adversely affected by such action, the Board (or its committee) shall be entitled to change the Offering Periods and Purchase Periods, limit the frequency and/or number of changes in the amount withheld from a participant's Compensation during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 22. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the IPO Date. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 21. -11- 25. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -12- PERSISTENCE SOFTWARE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT ---------------------- New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the Persistence Software, Inc. 1999 Employee Stock Purchase Plan (the "PLAN") commencing with the Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that the total aggregate amount of my Compensation contributed to the Plan under all Offering Periods in which I am participating must not be less than 1% and not more than 20% of my Compensation at any point in time. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on each Purchase Date of an Offering Period unless I otherwise withdraw from the Offering Period prior to a Purchase Date by giving written notice to the Company for such purpose. 4. I understand that I may decrease the rate of my Contributions on one occasion only during any Offering Period, and that I may increase the rate of my Contributions on one occasion only during any Offering Period, by completing and filing a new Subscription Agreement with such decrease or increase, as the case may be, taking effect as of the beginning of the calendar month following the date of filing of the new Subscription Agreement, if filed at least ten (10) business days prior to the beginning of such month. I also understand that I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period in which I am eligible to participate commencing after the new Subscription Agreement is filed. 5. I understand that I may discontinue my participation in an Offering Period at any time prior to a Purchase Date as provided in Section 11 of the Plan, and that if I do so I will not be permitted to renew participation in such Offering Period. I UNDERSTAND THAT UNLESS I DISCONTINUE MY PARTICIPATION IN AN OFFERING PERIOD AS PROVIDED IN SECTION 11 OF THE PLAN OR CHANGE THE RATE OF DEDUCTIONS BY FILING A NEW SUBSCRIPTION AGREEMENT, MY ELECTION MADE UNDER THIS SUBSCRIPTION AGREEMENT WILL CONTINUE TO BE EFFECTIVE FOR EACH SUCCESSIVE OFFERING PERIOD COMMENCING AFTER THE TERMINATION OF AN OFFERING PERIOD IN WHICH I HAVE PARTICIPATED. 6. I have received a copy of the Company's most recent description of the Plan and a copy of the complete "Persistence Software, Inc. 1999 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 7. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): ____________________________________ ____________________________________ 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan: NAME: (Please print) _____________________________________ (First) (Middle) (Last) ____________________ _____________________________________ (Relationship) (Address) _____________________________________ Summary of Tax Treatment On Sale of Shares ------------------------------------------ THE FOLLOWING INFORMATION REGARDING THE FEDERAL TAX TREATMENT ON SALE OF SHARES ACQUIRED UNDER THE PLAN IS ONLY A SUMMARY AND IS SUBJECT TO CHANGE, AND IS NOT INTENDED TO REPRESENT OR PROVIDE TAX ADVICE TO THE PARTICIPANT, HIS OR HER SPOUSE OR BENEFICIARIES. YOU SHOULD CONSULT A TAX ADVISOR CONCERNING THE TAX IMPLICATIONS OF THE PURCHASE AND SALE OF STOCK UNDER THE PLAN. If any shares received pursuant to the Plan are sold or otherwise disposed of within two (2) years after the first day of the Offering Period during which I purchased such shares or within one (1) year after the Purchase Date, the excess of the fair market value of the shares on the Purchase Date over the price paid for the shares on such Purchase Date will be treated for federal income tax purposes as ordinary compensation income at the time of such disposition, regardless of the amount received on sale or other disposition of the shares, even if such amount is less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. -2- If any shares received pursuant to the Plan are sold or otherwise disposed of at any time after expiration of the 2-year and 1-year holding periods, the lesser of 15% of the fair market value of the shares on the Offering Date or the excess of the fair market value of the shares at the time of such sale or disposition over the price paid for the shares on the Purchase Date will be treated for federal income tax purposes as ordinary compensation income. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. 9. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of shares within two (2) years after the first day of the Offering Period during which I purchased such shares or within one (1) year after the Purchase Date, and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 10. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE: ____________________________________________ SOCIAL SECURITY #: ____________________________________ DATE:__________________________________________________ SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse): _______________________________________________________ (Signature) _______________________________________________________ (Print name) -3- PERSISTENCE SOFTWARE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL -------------------- I, __________________________, hereby elect to withdraw my participation in the Persistence Software, Inc. 1999 Employee Stock Purchase Plan (the "PLAN") for the Offering Period commencing ____________. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me with respect to the Offering Period from which I have hereby withdrawn. I further understand and agree that I will be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement prior to the commencement of such Offering Period in accordance with procedures established by the Company. Dated:___________________ ________________________________ Signature of Employee ________________________________ Social Security Number EX-10.8 6 persistence_1999directors.txt EXHIBIT 10.8 PERSISTENCE SOFTWARE, INC. 1999 DIRECTORS' STOCK OPTION PLAN --------------------------------- (Amended April 11, 2001) (Amended February 12, 2003) 1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "BOARD" means the Board of Directors of the Company. (b) "CHANGE OF CONTROL" means a sale of all or substantially all of the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMON STOCK" means the Common Stock of the Company. (e) "COMPANY" means Persistence Software, Inc., a Delaware corporation. (f) "CONTINUOUS STATUS AS A DIRECTOR" means the absence of any interruption or termination of service as a Director. (g) "CORPORATE TRANSACTION" means a dissolution or liquidation of the Company, a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (h) "DIRECTOR" means a member of the Board. (i) "EMPLOYEE" means any person, including any officer or Director, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (k) "OPTION" means a stock option granted pursuant to the Plan. All options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code). (l) "OPTIONED STOCK" means the Common Stock subject to an Option. (m) "OPTIONEE" means an Outside Director who receives an Option. (n) "OUTSIDE DIRECTOR" means a Director who is not an Employee. (o) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "PLAN" means this 1999 Directors' Stock Option Plan. (q) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (r) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 500,000 Shares of Common Stock (the "POOL"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option, or any withholding taxes due with respect to such exercise, shall be treated as not issued and shall continue to be available under the Plan. If Shares that were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN. (a) ADMINISTRATOR. Except as otherwise required herein, the Plan shall be administered by the Board. (b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each person who becomes an Outside Director after the effective date of this Plan (a "NEW OUTSIDE DIRECTOR") shall automatically be granted an Option to purchase 20,000 Shares (the "FIRST OPTION") on the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy. (iii) Each New Outside Director shall automatically be granted an Option to purchase 20,000 Shares (the "SECOND OPTION") on the first anniversary of the date such New Outside Director first became an Outside Director, provided his or her Continuous Status as a Director has not terminated on such date. (iv) Each New Outside Director shall thereafter automatically be granted an Option to purchase 10,000 Shares on the first day of each fiscal year after the date of the Second Option grant, provided his or her Continuous Status as a Director has not terminated on such date. (v) Each Outside Director who was an Outside Director prior to the effective date of this Plan shall automatically be granted an Option to purchase 10,000 Shares on the first day of each fiscal year beginning on and after January 1, 2002, provided his or her Continuous Status as a Director has not terminated on such date. (vi) Notwithstanding the preceding provisions hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (vii) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof. (c) TERMS OF THE OPTIONS. The terms of each Option granted hereunder shall be as follows: (i) each Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 below; -3- (ii) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of each Option, determined in accordance with Section 8 hereof; (iii) each Option shall have a term of ten (10) years from the date of grant thereof unless an Option terminates sooner pursuant to Section 8 below; and (iv) each Option shall be exercisable in its entirety immediately upon grant. (d) POWERS OF THE BOARD. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 7(b) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 7 of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (e) EFFECT OF BOARD'S DECISION. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (f) SUSPENSION OR TERMINATION OF OPTION. If the Chief Executive Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee's right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. ELIGIBILITY. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) above. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. -4- 6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the effectiveness of the registration statement under the Securities Act of 1933, as amended, relating to the Company's initial public offering of securities. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 12 of the Plan. 7. EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option. (b) FAIR MARKET VALUE. The fair market value shall be determined by the Board; provided however that in the event the Common Stock is traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the closing sales price on such system or exchange on the date of grant of the Option (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in THE WALL STREET JOURNAL, or if there is a public market for the Common Stock but the Common Stock is not traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System). (c) FORM OF CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 8. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) above; provided however that no Options shall be exercisable unless stockholder approval of the Plan in accordance with Section 16 below has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and -5- method of payment allowable under Section 7(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. If an Outside Director ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 4(c) has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. Notwithstanding Section 8(b) above, in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), or, with respect to awards granted on any date on which the Common Stock is not a "Listed Security" (as defined below), as a result of such other disability that does not qualify as "total and permanent" pursuant to the Code, he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 4(c) has expired. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. For the purposes of this Plan, a "Listed Security" means any security of the Company that is listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee: (A) during the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, or (B) three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that -6- had accrued at the date of death or the date of termination, as applicable. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 4(c) has expired. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. 9. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section. 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of Shares of Common Stock set forth in Sections 4(b) above, and the number of Shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company) or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a Corporate Transaction, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation, unless the successor corporation does not agree to assume the outstanding Options or to substitute equivalent options, in which case the Options shall terminate upon the consummation of the transaction. For purposes of this Section 10(b), an Option shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon such Corporate Transaction or Change of Control, each Optionee would be entitled to receive upon exercise of an Option the same -7- number and kind of shares of stock or the same amount of property, cash or securities as the Optionee would have been entitled to receive upon the occurrence of such transaction if the Optionee had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option at such time (after giving effect to any adjustments in the number of Shares covered by the Option as provided for in this Section 10); provided however that if such consideration received in the transaction was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option to be solely common stock of the successor corporation or its Parent equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (c) CERTAIN DISTRIBUTIONS. In the event of any distribution to the Company's stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option to reflect the effect of such distribution. 11. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 12. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the stockholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 13. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange or Nasdaq rules or regulations to which the Company may be subject and the applicable laws of any other country or jurisdiction where Options are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time (the "APPLICABLE LAWS"). Such compliance shall be determined by the Company in consultation with its legal counsel. -8- As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law. 14. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. STOCKHOLDER APPROVAL. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the stockholders of the Company. Such stockholder approval shall be obtained in the manner and to the degree required under the Applicable Laws. -9- PERSISTENCE SOFTWARE, INC. 1999 DIRECTORS' STOCK OPTION PLAN NOTICE OF STOCK OPTION GRANT ---------------------------- <> <> <> You have been granted an option to purchase Common Stock of Persistence Software, Inc. (the "COMPANY") as follows:
Date of Grant <> Exercise Price per Share <> Total Number of Shares Granted <> Total Exercise Price <> Expiration Date <> Vesting Schedule This Option may be exercised, in whole or in part, at any time after the Date of Grant and prior to the earlier of the Expiration Date or the end of the Termination Period. Termination Period This Option may be exercised for 90 days after termination of Optionee's Continuous Status as a Director, or such longer period as may be applicable upon death or disability of Optionee as provided in the Plan, but in no event later than the Expiration Date as provided above.
-1- By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1999 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement, all of which are attached and made a part of this document. OPTIONEE: PERSISTENCE SOFTWARE, INC. _______________________________ By: _____________________________ Signature _______________________________ Title:___________________________ Print Name -2- PERSISTENCE SOFTWARE, INC. NONSTATUTORY STOCK OPTION AGREEMENT ----------------------------------- 1. GRANT OF OPTION. The Board of Directors of the Company hereby grants to the Optionee named in the Notice of Stock Option Grant attached as Part I of this Agreement (the "OPTIONEE"), an option (the "OPTION") to purchase a number of Shares, as set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "EXERCISE PRICE"'), subject to the terms and conditions of the 1999 Directors' Stock Option Plan (the "PLAN"), which is incorporated herein by reference. (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Nonstatutory Stock Option Agreement, the terms and conditions of the Plan shall prevail. 2. EXERCISE OF OPTION. (a) RIGHT TO EXERCISE. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. In the event of Optionee's death, disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. (b) METHOD OF EXERCISE. This Option is exercisable by delivery of an exercise notice, in the form attached as EXHIBIT A (the "EXERCISE NOTICE"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "EXERCISED SHARES"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. SUSPENSION OR TERMINATION OF OPTION. (a) MISCONDUCT. If the Chief Executive Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee's right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. (b) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. If an Outside Director ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its Expiration Date set forth in the Notice of Stock Option Grant. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. Notwithstanding Section 4(b) above, in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), or, if this Option was granted on a date on which the Common Stock was not a Listed Security, as a result of such other disability that does not qualify as "total and permanent" pursuant to the Code, he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its Expiration Date set -2- forth in the Notice of Stock Option Grant. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee: (i) During the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as Director for six (6) months after the date of death. Notwithstanding the foregoing, in no event may the Option be exercised after its Expiration Date set forth in the Notice of Stock Option Grant. (ii) Within three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, in no event may the option be exercised after its Expiration Date set forth in the Notice of Stock Option Grant. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination, as provided in Section 4(d)(i) or (ii) above, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. 5. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder) and may be exercised during the lifetime of Optionee only by the Optionee or a transferee permitted by Section 9 of the Plan. The terms of the Plan and this Nonstatutory Stock Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 6. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Nonstatutory Stock Option Agreement. 6. TAX CONSEQUENCES. Set forth below is a brief summary of certain federal tax consequences relating to this Option under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. -3- (a) EXERCISING THE OPTION. Since this Option does not qualify as an incentive stock option under Section 422 of the Code, the Optionee may incur regular federal (and state) income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. (b) DISPOSITION OF SHARES. If the Optionee holds the Option Shares for more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. The long-term capital gain will be taxed for federal income tax and purposes at a maximum rate of 20% if the Shares are held more than one year after exercise. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Nonstatutory Stock Option Agreement and fully understands all provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Nonstatutory Stock Option Agreement. PERSISTENCE SOFTWARE, INC. By: _________________________ <> Title: ______________________ -4- CONSENT OF SPOUSE ----------------- The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Nonstatutory Stock Option Agreement. _____________________________________ Spouse of Optionee EXHIBIT A --------- NOTICE OF EXERCISE ------------------ To: Persistence Software, Inc. Attn: Stock Option Administrator Subject: NOTICE OF INTENTION TO EXERCISE STOCK OPTION -------------------------------------------- This is official notice that the undersigned ("OPTIONEE") intends to exercise Optionee's option to purchase __________ shares of Persistence Software, Inc. Common Stock, under and pursuant to the Company's 1999 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated _______________, as follows: Grant Number: ________________________________________ Date of Purchase: ________________________________________ Number of Shares: ________________________________________ Purchase Price: ________________________________________ Method of Payment of Purchase Price: ________________________________________ Social Security No.: ________________________________________ The shares should be issued as follows: Name: ________________________________________ Address: ________________________________________ ________________________________________ ________________________________________ Signed: ________________________________________ Date: ________________________________________ EX-10.23 7 persistence_fourthamend.txt EXHIBIT 10.23 FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- This Fourth Amendment to Loan and Security Agreement is entered into as of November 15, 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, that certain Second Amendment to Loan and Security Agreement dated as of July 3, 2002 and that certain Third Amendment to Loan and Security Agreement dated as of July 17, 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. Section 6.9 of the Agreement is hereby amended in its entirety to read as follows: 6.9 TANGIBLE NET WORTH. On a consolidated basis, Borrower shall maintain a Tangible Net Worth of at least $4,000,000, provided that such required amount shall increase by 50% of Borrower's net income after taxes in each quarter after November 15, 2002 and by 75% of any proceeds received by Borrower from the sale or issuance of its equity or debt securities after November 15, 2002. This covenant 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. 2. EXHIBIT D to the Agreement is hereby amended and replaced in its entirety by EXHIBIT D attached hereto. 3. Bank waives failure to comply with Section 6.9 of the Agreement for the quarter ended on September 30, 2002, as such section was in effect prior to this Amendment. Bank does not waive any other failure by Borrower to perform its Obligations under the Loan Documents and Bank does not waive any Obligations Borrower may have under the Agreement after the date hereof. This waiver is not a continuing waiver with respect to any failure to perform any Obligation after the date of this Amendment. 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. 1 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 restructure fee equal to Five Hundred Dollars ($500), 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. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. PERSISTENCE SOFTWARE, INC. By: /s/ Christing Russell ----------------------------------- Title: Chief Financial Officer COMERICA BANK - CALIFORNIA By: /s/ Guy Simpson ----------------------------------- Title: Assistant Vice President 2 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 Certificate 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 LOAN DOCUMENTS. To execute and deliver to Bank that certain Fourth Amendment dated as of November 15, 2002 (the "Loan Agreement") and any other agreement entered into between Corporation and Bank in connection with the Loan Agreement, including any amendments, all as amended or extended from time to time (collectively, with the Loan Agreement, 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. 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 3 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 November 15, 2002 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED AND ATTESTED BY: X ________________________________________ ________________________________________________________________________________ 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 increased $________ Yes No by 50% of Borrower's quarterly net income after taxes and by 75% of any equity proceeds**
* 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 $4,000,000, provided that such required amount shall increase by 50% of Borrower's net income after taxes in each quarter after the date hereof and by 75% of any proceeds received by Borrower from the sale or issuance of its equity or debt securities after [the Closing Date/June 30, 2002]. This covenant 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.
------------------------------------------------------------------ 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-10.24 8 persistence_10kex10-24.txt EXHIBIT 10.24 - -------------------------------------------------------------------------------- PERSISTENCE SOFTWARE, INC. AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of March 20, 2003, by and between COMERICA BANK - CALIFORNIA ("Bank") and PERSISTENCE SOFTWARE, INC. ("Borrower"). RECITALS A. Bank and Borrower 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, that certain Second Amendment to Loan and Security Agreement dated as of July 3, 2002, that certain Third Amendment to Loan and Security Agreement dated as of July 17, 2002, and that certain Fourth Amendment to Loan and Security Agreement dated as of November 15, 2002 (collectively, the "Original Agreement"). B. Borrower and Bank wish to amend and restate the terms of the Original Agreement. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance or cash advances under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to seventy percent (70%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. 1 "Change in Control" shall mean a transaction in which any "person" or "group" (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such "person" or "group" to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards, or merchant services issued or provided for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect such Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "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. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; 2 (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower (including without limitation account debtors which have made deposits with Borrower), but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty percent (20%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (ii) are supported by credit insurance acceptable to Bank, or (iii) are Accounts on which the account debtor is Nokia, the German Labor Unit (BA) or another account debtor acceptable to Bank. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "Equipment Advance" has the meaning set forth in Section 2.1(d). "Equipment Maturity Date" means June 3, 2004. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Event of Default" has the meaning assigned in Article 8. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. 3 "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property Collateral" means all of Borrower's right, title, and interest in and to the following: (a) Copyrights, Trademarks and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents or (iii) the value or priority of Bank's security interests in the Collateral. 4 "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subject to the cap set forth in Section 7.13, Indebtedness secured by a lien described in clause (c) of the defined term "Permitted Liens," provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness; (d) Indebtedness to trade creditors incurred in the ordinary course of Borrower's business; and (e) Subordinated Debt. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank and (iv) Bank's money market accounts. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; 5 (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Responsible Officer" means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Facility" means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1(a) hereof. "Revolving Line" means a credit extension of up to Two Million Five Hundred Thousand Dollars ($2,500,000). "Revolving Maturity Date" means April 30, 2004. "Schedule" means the schedule of exceptions attached hereto and approved by Bank, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation, company or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock or other units of ownership which by the terms thereof has the ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of Borrower and its Subsidiaries minus intangible assets, plus Subordinated Debt, on a consolidated basis determined in accordance with GAAP. "Term Advance" has the meaning set forth in Section 2.1(b). "Term Maturity Date" means November 1, 2003. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks. 6 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT. 2.1 CREDIT EXTENSIONS. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. (a) REVOLVING ADVANCES. (i) Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed the Revolving Line minus the aggregate undrawn face amount of all outstanding Letters of Credit, provided that, at any time during which 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 face amount of all outstanding Letters of Credit shall not exceed the Borrowing Base. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(a) shall be immediately due and payable. Borrower may prepay any Advances without penalty or premium. (ii) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(a) to Borrower's deposit account. (b) TERM ADVANCES. As of the Closing Date, there are outstanding term advances (the "Term Advances") in an aggregate principal amount equal to $174,745 under the Original Agreement. Borrower shall not request nor receive any further Term Advances. Interest shall continue to accrue on the Term Advances at the rate specified in Section 2.3. Borrower shall continue to make monthly payments on the Term Advances in the principal amount of $21,843.15, plus all accrued interest, on the first day of each month through the Term Maturity Date, at which time all Term Advances shall be immediately due and payable. Term Advances, once repaid, may not be reborrowed. Borrower may prepay any Term Advances without penalty or premium. (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. 7 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. (ii) The obligation of Borrower to reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, the Application, and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit, except for expenses caused by Bank's gross negligence or willful misconduct. (d) Equipment Advances. As of the Closing Date, there are outstanding equipment advances (the "Equipment Advances") in an aggregate principal amount equal to $132,658 under the Original Agreement. Borrower shall not request nor receive any further Equipment Advances. Interest shall continue to accrue on the Equipment Advances at the rate specified in Section 2.3. Borrower shall continue to make monthly payments on the Equipment Advances in the principal amount of $8,229, plus all accrued interest, on the first day of each month through the Equipment Maturity Date, at which time all Equipment Advances shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Equipment Advances without penalty or premium. 2.2 OVERADVANCES. If the aggregate amount of the outstanding Advances plus the aggregate undrawn face amount of all outstanding Letters of Credit is greater than $400,000 and exceeds the lesser of the Revolving Line or the Borrowing Base at any time, Borrower shall immediately pay to Bank, in cash, the amount of such excess or cash secure such excess in a manner satisfactory to Bank. 2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS. (a) INTEREST RATES. (i) ADVANCES. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding Daily Balance thereof, at a rate equal to one and one half percent (1.5%) above the Prime Rate. (ii) TERM ADVANCES. Except as set forth in Section 2.3(b), the Term Advances shall bear interest, on the outstanding Daily Balance thereof, at a rate equal to one half percent (0.50%) above the Prime Rate. (iii) EQUIPMENT ADVANCES. 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. (b) LATE FEE; DEFAULT RATE. If any payment is not made within ten (10) days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) PAYMENTS. Interest hereunder shall be due and payable on the first (1st) calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue 8 interest at the rate then applicable hereunder. All payments shall be free and clear of any taxes, withholdings, duties, impositions or other charges, to the end that Bank will receive the entire amount of any Obligations payable hereunder, regardless of source of payment. (d) COMPUTATION. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 FEES. Borrower shall pay to Bank the following: (a) FACILITY FEE. On the Closing Date and on each anniversary of the Closing Date, a Facility Fee equal to Twelve Thousand Five Hundred Thousand Dollars ($12,500), which shall be nonrefundable and which Bank shall charge against any of Borrower's deposit accounts; and (b) BANK EXPENSES. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 9 2.7 TERM. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS. 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; and (d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; (b) receipt by Bank of (i) a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable and accounts payable, (ii) a company prepared consolidated balance sheet, income, and cash flow statement covering Borrower's operations for the month ended immediately prior to the date on which the applicable Credit Extension is requested, prepared in accordance with GAAP on a consolidated and consolidating basis, consistently applied, in a form acceptable to Bank and certified by a Responsible Officer, and (iii) a current Compliance Certificate signed by a Responsible Officer in substantially the form of EXHIBIT D hereto; and (c) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2. 4. CREATION OF SECURITY INTEREST. 4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 10 4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue the perfection of Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours but no more than twice a year (unless an Event of Default has occurred and is continuing), to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any material agreement to which it is a party or by which it is bound. 5.3 NO PRIOR ENCUMBRANCES. Borrower has good and marketable title to its property, free and clear of Liens, except for Permitted Liens. 5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing obligations. The property and services giving rise to such Eligible Accounts has been delivered or rendered to the account debtor or to the account debtor's agent for immediate and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 5.5 MERCHANTABLE INVENTORY. All Inventory is in all material respects of good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made. 5.6 INTELLECTUAL PROPERTY COLLATERAL. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. Except as set forth in the Schedule, Borrower's rights as a licensee of intellectual property do not give rise to more than five percent (5%) of its gross revenue in any given month, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service. Except as set forth in the Schedule, Borrower is not a party to, or bound by, any agreement that restricts the grant by Borrower of a security interest in Borrower's rights under such agreement. 5.7 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. All Borrower's Inventory and Equipment is located only at the location set forth in Section 10 hereof and Borrower has paid for and owns all Equipment financed by Bank hereunder. 11 5.8 LITIGATION. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect, or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.9 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated and consolidating financial statements related to Borrower and any Subsidiary that Bank has received from Borrower fairly present in all material respects Borrower's financial condition as of the date thereof and Borrower's consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or the consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.10 SOLVENCY, PAYMENT OF DEBTS. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.11 REGULATORY COMPLIANCE. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA, and no event has occurred resulting from Borrower's failure to comply with ERISA that could result in Borrower's incurring any material liability. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.12 ENVIRONMENTAL CONDITION. Except as disclosed in the Schedule, none of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.13 TAXES. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein. 5.14 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15 GOVERNMENT CONSENTS. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, the failure to obtain which could have a Material Adverse Effect. 5.16 ACCOUNTS. None of Borrower's nor any Subsidiary's property is maintained or invested with a Person other than Bank. 5.17 FULL DISCLOSURE. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 12 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 GOOD STANDING. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which it is required under applicable law. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver the following to Bank: (a) as soon as available, but in any event within forty five (45) days after the end of each quarter, a company prepared consolidated balance sheet, income, and cash flow statement covering Borrower's operations during such period, prepared in accordance with GAAP on a consolidated and consolidating basis, consistently applied, in a form acceptable to Bank and certified by a Responsible Officer (in the alternative, Borrower shall deliver such financial information on a monthly basis within twenty (20) days after the end of each month for any month in which the aggregate amount of the outstanding Advances plus the aggregate undrawn face amount of all outstanding Letters of Credit exceeded $400,000 at any time); (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated and consolidating financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission (to the extent their delivery is not already required pursuant to subsections (a) and (b) above); (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Fifty Thousand Dollars ($50,000) or more; (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time generally prepared by Borrower in the ordinary course of business; and (f) within forty five (45) days of the last day of each fiscal quarter, a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower's intellectual property, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in EXHIBITS A, B, and C of the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement. Within fifteen (15) days after the last day of each month in which the aggregate amount of the outstanding Advances plus the aggregate undrawn face amount of all outstanding Letters of Credit exceeds $400,000 at any time, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable and accounts payable. Borrower shall deliver to Bank with the quarterly and (if required) monthly financial statements, a Compliance Certificate signed by a Responsible Officer in substantially the form of EXHIBIT D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts and appraise Collateral at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 13 6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and marketable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 INSURANCE. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's business, ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof, and all liability insurance policies shall show the Bank as an additional insured and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 ACCOUNTS. Borrower shall maintain and shall cause each of its Subsidiaries to maintain its primary depository, operating, and investment accounts with Bank and/or Comerica Securities, Inc. 6.8 MAXIMUM LOSSES. Borrower shall not show a loss (measured on a consolidated basis in accordance with GAAP) in excess of the following amounts for any of the corresponding quarters: ---------------------------------- ------------------------- QUARTER ENDING MAXIMUM LOSS ---------------------------------- ------------------------- March 31, 2003 ($1,250,000) June 30, 2003 ($750,000) September 30, 2003 ($250,000) ---------------------------------- ------------------------- Borrower shall show a profit of at least One Dollar ($1.00) for the quarter ending December 31, 2003 and for each quarter thereafter. 6.9 TANGIBLE NET WORTH. On a consolidated basis, Borrower shall maintain a Tangible Net Worth of at least $2,250,000, provided that such required amount shall increase by 50% of Borrower's net income after taxes in each quarter after the Closing Date and by 75% of any proceeds received by 14 Borrower from the sale or issuance of its equity or debt securities after the Closing Date. This covenant 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. 6.10 MINIMUM CASH BALANCE. Borrower shall maintain at all times a balance of unrestricted cash held in the United States of at least (i) $4,500,000 PLUS (ii) the aggregate amount of all outstanding Advances. 6.11 INTELLECTUAL PROPERTY RIGHTS. (a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registerable intellectual property rights now owned or hereafter developed or acquired by Borrower, to the extent that Borrower, in its reasonable business judgment, deems it appropriate to so protect such intellectual property rights. (b) Borrower shall promptly give Bank written notice of any applications or registrations of intellectual property rights filed with the United States Patent and Trademark Office, including the date of such filing and the registration or application numbers, if any. Borrower shall (i) give Bank not less than 30 days prior written notice of the filing of any applications or registrations with the United States Copyright Office, including the title of such intellectual property rights to be registered, as such title will appear on such applications or registrations, and the date such applications or registrations will be filed, and (ii) prior to the filing of any such applications or registrations, shall execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower, and upon the request of Bank, shall file such documents simultaneously with the filing of any such applications or registrations. Upon filing any such applications or registrations with the United States Copyright Office, Borrower shall promptly provide Bank with (i) a copy of such applications or registrations, without the exhibits, if any, thereto, (ii) evidence of the filing of any documents requested by Bank to be filed for Bank to maintain the perfection and priority of its security interest in such intellectual property rights, and (iii) the date of such filing. (c) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect and maintain the priority of Bank's security interest in the Intellectual Property Collateral. Borrower shall (i) protect, defend and maintain the validity and enforceability of the trade secrets, Trademarks, Patents and Copyrights, (ii) use commercially reasonable efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld. (d) Bank may audit Borrower's Intellectual Property Collateral to confirm compliance with this Section, provided such audit may not occur more often than twice per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section to take but which Borrower fails to take, after 15 days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section. 6.12 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, 15 all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) Transfers of worn-out or obsolete Equipment which was not financed by Bank. 7.2 CHANGE IN BUSINESS; CHANGE IN CONTROL OR EXECUTIVE OFFICE. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto); or cease to conduct business in the manner conducted by Borrower as of the Closing Date; or suffer or permit a Change in Control; or without thirty (30) days prior written notification to Bank, relocate its chief executive office or state of incorporation; or without Bank's prior written consent, change the date on which its fiscal year ends. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. Notwithstanding the foregoing, this Section 7.3 shall not apply to acquisitions in which the sole consideration is Borrower's stock or cash (provided that the aggregate amount of all cash used by Borrower for acquisitions shall not exceed $1,000,000 in the aggregate during the terms of the Original Agreement and this Agreement), Borrower is the surviving entity, and, after giving effect to such transaction, there is no Change in Control, provided that (i) the acquired entity is in a line of business directly related to Borrower's line of business and (ii) at the time of any such transaction an Event of Default has not occurred which is continuing and no Event of Default would exist after giving effect to any such transaction. 7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. Agree with any Person other than Bank not to grant a security interest in, or otherwise encumber, any of its property, or permit any Subsidiary to do so. 7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock (other than distributions payable solely in Borrower's equity securities), or permit any of its Subsidiaries to do so, except that Borrower may repurchase the stock of former employees pursuant to stock repurchase agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase. 7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments; or maintain or invest any of its property with a Person other than Bank or permit any of its Subsidiaries to do so unless such Person has entered into an account control agreement in form and substance satisfactory to Bank; or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower. Allow any money or other assets with an aggregate value of more than $1,000,000 to be conveyed or transferred to another entity or other entities (including a Subsidiary) by any means, including without limitation in the form of an Investment, an Account, a loan, a guaranty of the Indebtedness of another, a pledge of assets in supports of the obligations of another, an advance for operational purposes and/or otherwise, during the term of this Agreement. 7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 16 7.10 INVENTORY AND EQUIPMENT. Store the Inventory or the Equipment with a bailee, warehouseman, or other third party unless the third party has been notified of Bank's security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Bank's benefit or (b) is in pledge possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Store or maintain any Equipment or Inventory at a location other than the location set forth in Section 10 of this Agreement. 7.11 COMPLIANCE. Become an "investment company" or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 7.12 NEGATIVE PLEDGE AGREEMENTS. Permit the inclusion in any contract to which it or a Subsidiary becomes a party of any provisions that could restrict or invalidate the creation of a security interest in any of Borrower's or such Subsidiary's property. 7.13 CAPITAL EXPENDITURES. On a consolidated basis, Borrower's capital expenditures and payments on equipment leases (including all purchase money transactions) shall not exceed $2,000,000 in any given year. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the Obligations; 8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 MATERIAL ADVERSE EFFECT. If there occurs any circumstance or circumstances that could have a Material Adverse Effect; 8.4 ATTACHMENT. If any portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of 17 record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6 OTHER AGREEMENTS. If there is a default or other failure to perform in any agreement to which Borrower is a party or by which it is bound resulting in a right by a third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Fifty Thousand Dollars ($50,000); or which could have a Material Adverse Effect; 8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 JUDGMENTS. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9 MISREPRESENTATIONS. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES. 9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5, all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; 18 (e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Dispose of the Collateral by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (h) to transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the California Uniform Commercial Code; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred, including without limitation to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions hereunder is terminated. 9.3 ACCOUNTS COLLECTION. At any time during the term of this Agreement, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under a loan facility in Section 2.1 as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 19 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: PERSISTENCE SOFTWARE, INC. 1720 South Amphlett Boulevard 3rd Floor San Mateo, CA 94402 Attn: Christine Russell If to Bank: Comerica Bank-California 9920 S. La Cienega Blvd., Suite 1401 Inglewood, CA 90301 Attn: Manager FAX: (310) 338-6110 with a copy to: Comerica Bank-California 226 Airport Blvd., Suite 100 San Jose, CA 95110 Attn: Guy Simpson FAX: (408) 451-8568 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 20 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS. 12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys' fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. Neither this Agreement nor the Loan Documents can be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the Loan Documents, if any, are merged into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 EFFECT OF AMENDMENT AND RESTATEMENT. This Agreement is intended to and does completely amend and restate, without novation, the Original Agreement. All security interests granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement. 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. PERSISTENCE SOFTWARE, INC. By: /s/ Christine Russell Title: Chief Financial Officer COMERICA BANK - CALIFORNIA By: /s/ Guy Simpson Title: Assistant Vice President 22 DEBTOR PERSISTENCE SOFTWARE, INC. SECURED PARTY: COMERICA BANK - CALIFORNIA EXHIBIT A --------- COLLATERAL DESCRIPTION ATTACHMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT All personal property of Borrower (herein referred to as "Borrower" or "Debtor") whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to: (a) all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor's books and records with respect to any of the foregoing, and the computers and equipment containing said books and records; (b) all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the forgoing, or any parts thereof or any underlying or component elements of any of the forgoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright; (c) all trademarks, service marks, trade names and service names and the goodwill associated therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark; (d) all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and (e) any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001. 23 EXHIBIT B --------- TECHNOLOGY & LIFE SCIENCES DIVISION LOAN ANALYSIS LOAN ADVANCE/PAYDOWN REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00* P.M., P.S.T. DEADLINE FOR EQUIPMENT ADVANCES IS 3:00 P.M., P.S.T. ** DEADLINE FOR WIRE TRANSFERS IS 1:30 P.M., P.S.T. *AT MONTH END AND THE DAY BEFORE A HOLIDAY, THE CUT OFF TIME IS 1:30 P.M., P.S.T. **SUBJECT TO 3 DAY ADVANCE NOTICE.
TO: Loan Analysis DATE:____________ TIME:_____________ FAX #: (650) 846-6840 ==================================================================================================================== FROM: PERSISTENCE SOFTWARE, INC. TELEPHONE REQUEST (For Bank Use Only): Borrower's Name The following person is authorized to request the loan payment transfer/loan advance on the designated account and is known to me. FROM: _______________________________ Authorized Signer's Name FROM: _______________________________ ________________________________________ Authorized Signature (Borrower) Authorized Request & Phone # PHONE #: ____________________________ ________________________________________ Received by (Bank) & Phone # FROM ACCOUNT#: ______________________ (please include Note number, if applicable) ________________________________________ TO ACCOUNT #: _______________________ Authorized Signature (Bank) (please include Note number, if applicable) ==================================================================================================================== ==================================================================================================================== REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT For Bank Use Only - -------------------------- ----------------------- PRINCIPAL INCREASE* (ADVANCE) $_______________________ Date Rec'd: PRINCIPAL PAYMENT (ONLY) $_______________________ Time: Comp. Status: YES NO Status Date: OTHER INSTRUCTIONS: Time: ___________________________________________________________________ Approval: ___________________________________________________________________ ==================================================================================================================== All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and advance confirmed by this Borrowing Certificate, including without limitation the representation that Borrower has paid for and owns the equipment financed by the Bank; provided, however, that those representations and warranties the date expressly referring to another date shall be true, correct and complete in all material respects as of such date. *IS THERE A WIRE REQUEST TIED TO THIS LOAN ADVANCE? (PLEASE CIRCLE ONE) YES NO If YES, the Outgoing Wire Transfer Instructions must be completed below. ==================================================================================================================== OUTGOING WIRE TRANSFER INSTRUCTIONS Fed Reference Number Bank Transfer Number --------------------------------------------------------- THE ITEMS MARKED WITH AN ASTERISK (*) ARE REQUIRED TO BE COMPLETED. - -------------------------------------------------------------------------------------------------------------------- *Beneficiary Name - -------------------------------------------------------------------------------------------------------------------- *Beneficiary Account Number - -------------------------------------------------------------------------------------------------------------------- *Beneficiary Address - -------------------------------------------------------------------------------------------------------------------- Currency Type US DOLLARS ONLY - -------------------------------------------------------------------------------------------------------------------- *ABA Routing Number (9 Digits) - -------------------------------------------------------------------------------------------------------------------- *Receiving Institution Name - -------------------------------------------------------------------------------------------------------------------- *Receiving Institution Address - -------------------------------------------------------------------------------------------------------------------- *Wire Account $ ==================================================================================================================== 24 EXHIBIT C --------- BORROWING BASE CERTIFICATE - -------------------------------------------------------------------------------------------------------------------- Borrower: PERSISTENCE SOFTWARE, INC. Lender: Comerica Bank-California Commitment Amount: $2,500,000 - -------------------------------------------------------------------------------------------------------------------- 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 25 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: Maximum Loss ** _____:1.00 Yes No Minimum Tangible Net Worth $2,250,000 increased by $________ Yes No 50% of Borrower's quarterly net income after taxes and by 75% of any equity proceeds Minimum Unrestricted Cash Balance $4,500,000 plus amount $_________ Yes No of outstanding Advances * 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. ** Borrower shall not show a loss (measured in accordance with GAAP) in excess of the following amounts for any of the corresponding quarters: March 31, 2003 ($1,250,000); June 30, 2003 ($750,000); September 30, 2003 ($250,000). Borrower shall show a profit of at least One Dollar ($1.00) for the quarter ending December 31, 2003 and for each quarter thereafter. 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 26
SCHEDULE OF EXCEPTIONS ---------------------- PERMITTED INDEBTEDNESS (Section 1.1) - ---------------------- None. PERMITTED INVESTMENTS (Section 1.1) - --------------------- None. PERMITTED LIENS (Section 1.1) - --------------- None. PRIOR NAMES (Section 5.7) - ----------- None. LITIGATION (Section 5.8) - ---------- None. 27 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 Certificate 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 LOAN DOCUMENTS. To execute and deliver to Bank that certain Amended and Restated Loan and Security Agreement dated as of March 20, 2003 (the "Loan Agreement") and any other agreement entered into between Corporation and Bank in connection with the Loan Agreement, including any amendments, all as amended or extended from time to time (collectively, with the Loan Agreement, 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. 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 March 20, 2003 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED AND ATTESTED BY: X ____________________________________ EX-23.1 9 persistence_10kex23-1.txt EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-53176, 333-82543 and 333-68798 of Persistence Software, Inc. on Form S-8 of our reports dated January 24, 2003 (March 20, 2003 as to Note 11) appearing in this Annual Report on Form 10-K of Persistence Software, Inc. for the year ended December 31, 2002. /s/ DELOITTE & TOUCHE LLP San Jose, California March 28, 2003 EX-99.1 10 persistence_10kex99-1.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 Annual Report of Persistence Software, Inc. (the "Company") on Form 10-K for the year ended December 31, 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 result of operations of the Company. /s/ CHRISTOPHER T. KEENE - -------------------------------- Christopher T. Keene Chief Executive Officer March 28, 2003 EX-99.2 11 persistence_10kex99-2.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 Annual Report of Persistence Software, Inc. (the "Company") on Form 10-K for the year ended December 31, 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 result of operations of the Company. /s/ CHRISTINE RUSSELL - ---------------------------- Christine Russell Chief Financial Officer March 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----