-----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, Urj4hWvroQJkAdOmJUhD1iqVCv+aTv39GhyMGC4hkPgpviq4uZYVLLlrVW09SThE yu/7qdpDILVBLuuUNoH9pg== 0001019687-04-001763.txt : 20040813 0001019687-04-001763.hdr.sgml : 20040813 20040813140526 ACCESSION NUMBER: 0001019687-04-001763 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25857 FILM NUMBER: 04973357 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 10QSB 1 persistence_10q-063004.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2004 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-25857 ================================================================================ PERSISTENCE SOFTWARE, INC. (Exact name of small business issuer 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) (650) 372-3600 (Issuer's telephone number) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) ================================================================================ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 2004, there were 2,718,664 shares of the registrant's common stock outstanding. Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X] INDEX PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 3. CONTROLS AND PROCEDURES. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. SIGNATURES 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) JUNE 30, DECEMBER 31, 2004 2003 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 4,987 $ 5,680 Accounts receivable, net 1,044 1,498 Prepaid expenses and other current assets 390 258 ----------- ----------- Total current assets 6,421 7,436 Property and equipment, net 105 95 Purchased intangibles, net 41 59 Other assets 37 37 ----------- ----------- Total assets $ 6,604 $ 7,627 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 353 $ 329 Accrued compensation and related benefits 418 338 Other accrued liabilities 586 924 Deferred revenues net of long-term portion 2,002 2,565 Current portion of long-term obligations 5 334 ----------- ----------- Total current liabilities 3,364 4,490 Long-term liabilities: Long-term portion of deferred revenues -- 84 Long-term obligations 10 18 ----------- ----------- Total long-term liabilities 10 102 ----------- ----------- Total liabilities 3,374 4,592 ----------- ----------- Stockholders' equity: Common stock 67,129 67,112 Accumulated deficit (63,891) (64,076) Accumulated other comprehensive loss (8) (1) ----------- ----------- Total stockholders' equity 3,230 3,035 ----------- ----------- Total liabilities and stockholders' equity $ 6,604 $ 7,627 =========== ===========
See notes to condensed consolidated financial statements. 3 PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ---------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2004 2003 2004 2003 -------------------------------------------------- Revenues: Licenses $ 1,139 $ 1,656 $ 1,982 $ 2,950 Service 1,182 1,220 2,396 2,449 -------- -------- -------- -------- Total revenues 2,321 2,876 4,378 5,399 -------- -------- -------- -------- Cost of revenues: Licenses 23 22 42 61 Service 317 459 583 936 -------- -------- -------- -------- Total cost of revenues 340 481 625 997 -------- -------- -------- -------- Gross profit 1,981 2,395 3,753 4,402 -------- -------- -------- -------- Operating expenses: Sales and marketing 755 1,545 1,537 3,076 Research and development 622 803 1,193 1,652 General and administrative 470 657 944 1,300 Purchased intangibles -- -- (110) -- -------- -------- -------- -------- Total operating expenses 1,847 3,005 3,564 6,028 -------- -------- -------- -------- Income/(loss) from operations 134 (610) 189 (1,626) Interest income 8 16 17 35 Interest and other expense (4) (11) (11) (22) -------- -------- -------- -------- Income/(loss) before income taxes 138 (605) 195 (1,613) Income taxes (9) (19) (9) (19) -------- -------- -------- -------- Net income/(loss) $ 129 $ (624) $ 186 $(1,632) ======== ======== ======== ======== Basic net income/(loss) per share $ 0.05 $ (0.26) $ 0.07 $ (0.68) ======== ======== ======== ======== Diluted net income/(loss) per share $ 0.05 $ (0.26) $ 0.07 $ (0.68) ======== ======== ======== ======== Shares used in calculating basic net income/(loss) per share 2,716 2,406 2,715 2,404 ======== ======== ======== ======== Shares used in calculating diluted net income/(loss) per share 2,743 2,406 2,741 2,404 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 4 PERSISTENCE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30, ---------------------- 2004 2003 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) $ 186 $(1,632) Adjustments to reconcile net income/(loss) to net cash used in operating activities: Depreciation and amortization 49 237 Amortization of deferred stock compensation -- 8 Release of obligation incurred to acquire purchased intangibles (110) -- Loss on sale of fixed assets 5 -- Other non-cash items (5) (4) Changes in operating assets and liabilities: Accounts receivable, net 454 (696) Prepaid expenses and other current assets (132) 170 Accounts payable 24 87 Accrued compensation and related benefits 80 26 Other accrued liabilities (338) (100) Deferred revenues (647) (590) -------- -------- Net cash used in operating activities (434) (2,494) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (47) (24) Proceeds from sale of property and equipment -- 2 -------- -------- Net cash used in investing activities (47) (22) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of offering costs 17 (20) Repayment of obligations incurred to acquire purchased intangibles (160) -- Repayment of long term obligations (62) (180) -------- -------- Net cash used in financing activities (205) (200) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (7) (13) -------- -------- CASH AND CASH EQUIVALENTS: Net decrease (693) (2,729) Beginning of period 5,680 8,903 -------- -------- End of period $ 4,987 $ 6,174 ======== ======== See notes to condensed consolidated financial statements.
5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS Persistence provides data access and caching infrastructure software specifically designed to eliminate data access bottlenecks such as redundant or inefficient database queries that cause poor application performance. Persistence's technology may simplify and optimize access to complex enterprise data for custom applications. Persistence's products provide a "data services" layer that sits between relational databases such as Oracle and DB2 and application servers. This data services layer provides integrated object-to-relational mapping, caching, and cache synchronization with automated cache management. Persistence products may support cross-platform deployment of high-performance, custom applications written in Java, C++ or C#, including those built for BEA WebLogic, IBM WebSphere or Microsoft .NET. 2. BASIS OF PRESENTATION The condensed consolidated financial statements included in this filing on Form 10-QSB as of June 30, 2004 and for the three and six month periods ended June 30, 2004 and 2003 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2003 balance sheet was extracted from audited financial statements as of that date, but does not include all disclosures required by generally accepted accounting principles for complete financial statements. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K as of and for year ended December 31, 2003 filed with the Securities and Exchange Commission. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's condensed consolidated financial position as of June 30, 2004, its condensed consolidated results of operations for the three and six month periods ended June 30, 2004 and 2003, and its condensed consolidated cash flows for the six month periods ended June 30, 2004 and 2003, have been made. The results of operations and cash flows for any interim period are not necessarily indicative of the operating results and cash flows for any future interim or annual periods. 3. NET INCOME/(LOSS) PER SHARE Basic net income/(loss) per common share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding for the period. Diluted net income per common share for the three and six months ended June 30, 2004 was the same as basic net income per common share. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the exercise of outstanding options and warrants to purchase common stock using the treasury stock method. A reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share amounts follows (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ----------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ----------- Numerator for basic and diluted net income (loss) per share - net income/(loss)......................................... $ 129 $ (624) $ 186 $ (1,632) ------------ ------------ ------------ ----------- Denominator for basic net income (loss) per share - weighted-average shares outstanding....................... 2,716 2,406 2,715 2,404 Dilutive effect of: Common stock options........................................... 27 -- 26 -- Warrants....................................................... -- -- -- -- ------------ ------------ ------------ ----------- Denominator for diluted net income (loss) per share............ 2,743 2,406 2,741 2,404 ============ ============ ============ ===========
6 As of June 30, 2004, the Company had securities outstanding which could potentially dilute basic earnings per share in the future. Such outstanding securities consist of the following (in thousands): JUNE 30, JUNE 30, 2004 2003 ------ ------ Outstanding options 366 426 Warrants 224 134 ------ ------ Total 590 560 ====== ====== 4. ACCOUNTING FOR STOCK BASED COMPENSATION The Company accounts for stock based compensation granted to employees and directors under the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS No. 148 ACCOUNTING FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, requires the disclosure of pro forma net income/(loss) as if the Company had adopted the fair value method. 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: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- --------------------------------- 2004 2003 2004 2003 ---------------- ---------------- ---------------- --------------- Risk Free Interest Rate.................................. 2.71% 1.81% 2.33% 1.81% Expected Life after vesting (years) ..................... 2.50 2.50 2.50 2.50 Expected Volatility...................................... 118% 144% 125% 145% Expected Dividend........................................ $0 $0 $0 $0
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 had been amortized to expense over the vesting period of the awards, pro forma net income/(loss) (net of amortization of deferred compensation expense already recorded for the six months ended June 30, 2003) would have been approximately as follows (in thousands, except for per share data): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- --------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income/(loss) as reported............................ $ 129 $ (624) $ 186 $ (1,632) Add: Stock-based employee compensation expense included in reported net income/(loss)............... -- 2 -- 8 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (120) (139) (259) (256) ---------- ---------- ---------- ---------- Pro forma net income/(loss).............................. $ 9 $ (761) $ (73) $ (1,880) ========== ========== ========== ========== Basic net income/(loss) per share: As reported.............................................. $ 0.05 $ (0.26) $ 0.07 $ (0.68) Pro forma................................................ $ 0.00 $ (0.32) $ (0.03) $ (0.78) Diluted net income/(loss) per share: As reported.............................................. $ 0.05 $ (0.26) $ 0.07 $ (0.68) Pro forma................................................ $ 0.00 $ (0.32) $ (0.03) $ (0.78)
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 for consultants is recognized as earned. At each reporting date, the Company re-values the stock-based compensation using the Black-Scholes option-pricing model for stock based awards that have not fully vested. As a result, the stock-based compensation expense will fluctuate as the fair market value of the Company's common stock fluctuates. 7 5. COMPREHENSIVE INCOME /(LOSS) The components of comprehensive income/(loss), consisting of the Company's reported net income/(loss) and unrealized gains or losses in the translation of foreign currencies, are as follows (in thousands): SIX MONTHS ENDED JUNE 30, 2004 2003 ----------- ----------- Net income/(loss)............................... $ 186 $ (1,632) Other comprehensive income/(loss) .............. (7) (13) ----------- ----------- Total comprehensive income/(loss)............... $ 179 $ (1,645) =========== =========== 6. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation Number ("FIN") 46, "Consolidation of Variable Interest Entities", and a revised interpretation of FIN 46 ("FIN 46R") in December 2003 (collectively "FIN 46"). FIN 46 addresses consolidation of variable interest entities. FIN 46 provides guidance for determining when a primary beneficiary should consolidate a variable interest entity or equivalent structure that functions to support the activities of the primary beneficiary. The provisions of FIN 46 are effective immediately for all variable interest entities created after January 31, 2003. It applies in the first year or interim period ending after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company did not have interest in any variable interest entities as of June 30, 2004, and the adoption of FIN 46 did not have a material effect on the Company's financial statements. 7. INDEMNIFICATION In its agreements with customers, the Company generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer. The Company also typically warrants that its maintenance services will be performed consistently with its maintenance policy in effect at the time those services are delivered. The Company believes its maintenance policy is consistent with generally accepted industry standards. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, the Company has not incurred significant expense under its product or services warranties. As a result, the Company believes the estimated fair value of these warranty provisions is minimal. The Company's customer agreements customarily provide for indemnification of customers for intellectual property infringement claims. Such agreements generally limit the scope of the available remedies to a variety of industry-standard methods, including but not limited to product usage, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claim for such indemnifications is outstanding as of June 30, 2004. As a result, the Company believes the estimated fair value of these indemnification provisions is minimal. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements as of December 31, 2003 and 2002 and for each of the years ended December 31, 2003 and 2002, included in our Annual Report on Form 10-K as of and for the year ended December 31, 2003 filed with the Securities and Exchange Commission. In addition, this Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-QSB contain forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," "targeting," and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Additional Factors That May Affect Future Results" and those appearing elsewhere in this Form 10-QSB and our Annual Report on Form 10-K as of and for the year ended December 31, 2003 filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. OVERVIEW Persistence provides data access and caching infrastructure software specifically designed to eliminate data access bottlenecks such as redundant or inefficient database queries that cause poor application performance. Persistence's technology may simplify and optimize access to complex enterprise data for custom applications. Persistence's products provide a "data services" layer that sits between relational databases such as Oracle and DB2 and application servers. This data services layer provides integrated object-to-relational mapping, caching, and cache synchronization with automated cache management. Persistence products may support cross-platform deployment of high-performance, custom applications written in Java, C++ or C#, including those built for BEA WebLogic, IBM WebSphere or Microsoft .NET. THE CURRENT ECONOMIC ENVIRONMENT The economic climate in which we operate has been difficult over the last several years, and capital spending has decreased dramatically. This has had a pronounced effect on our ability to generate new license fees, as IT budgets have been frozen and large capital expenditures like those required to purchase some of our products have been quite limited. Additionally, competition for these more limited sales opportunities has increased, and we have seen intense price competition both for new licenses and for support services. We cannot provide any assurance that these pressures on IT spending will ease. Continued competitive pressure and a weak economy could have a continuing pronounced effect on our operating results. We undertook a variety of cost reduction measures during the third and fourth quarters of 2003 designed to bring our operating expenses in line with our perceptions of the business climate. Some of the measures taken include workforce reductions. REVENUES Our revenues, which consist of software license revenues and service revenues, totaled $4.4 million for the six months ended June 30, 2004 and $5.4 million for the six months ended June 30, 2003. License revenues consist of licenses of our software products, which generally are priced based on the number of users or central processing units deploying our software. Service revenues consist of professional services consulting, customer support and training. Our two major products, POWERTIER and EDGEXTEND, are based on a common technology platform for application data management. They differ mainly in that POWERTIER contains a proprietary, bundled application server, whereas EDGEXTEND is optimized to integrate with third party application servers, such as IBM's WebSphere and BEA's WebLogic application servers. We currently expect that sales of our older POWERTIER application server 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. Because a substantial portion of our revenues result from software license revenue from a limited number of customers, the identity of which change from quarter to quarter, in any given quarter the percentage contribution of POWERTIER, EDGEXTEND and DIRECTALERT to total license revenues varies, sometimes dramatically. Our deferred revenue balance, which is comprised mainly of our support and maintenance contracts, was $2.0 million at June 30, 2004. This represents a 24% decrease from our deferred revenue balance of $2.6 million at December 31, 2003. This decrease was primarily due to three customers who chose not to renew their support and maintenance contracts. Our deferred revenue balance may fluctuate if existing customers choose not to renew their support and maintenance contracts or new or existing customers purchase such contracts. 9 REVENUES FROM SALES OF PRODUCTS OUTSIDE THE UNITED STATES We market our software and services primarily through our direct sales organizations in the United States and the United Kingdom. Revenues from licenses and services to customers outside the United States were: THREE MONTHS ENDED JUNE 30, REVENUES % OF TOTAL REVENUES --------------------------- -------- ------------------- 2004 $ 1.4 million 59% 2003 614,000 21 SIX MONTHS ENDED JUNE 30, REVENUES % OF TOTAL REVENUES ------------------------- -------- ------------------- 2004 $ 2.2 million 50% 2003 2.2 million 41 Sales of our products to customers in Europe increased by 121% in the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. This increase was primarily attributable to two customers. Sales of our products to customers in Europe were flat in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. LIMITED NUMBER OF CUSTOMERS Historically, we have received a substantial portion of our revenues from a limited number of customers. Sales of products to our top five customers accounted for: THREE MONTHS ENDED JUNE 30, % OF TOTAL REVENUES --------------------------- ------------------- 2004 64% 2003 69 SIX MONTHS ENDED JUNE 30, % OF TOTAL REVENUES ------------------------- ------------------- 2004 50% 2003 58 In addition, the identity of our top five customers has changed from year to year. In the future, it is likely that a relatively few large customers could continue to account for a relatively large proportion of our revenues and these customers are likely to differ year to year. We had 39 total employees as of June 30, 2004. In 2003, we made staff reductions across all functional areas of our business in order to manage operating expenses and conserve cash in response to continued uncertainty in IT spending, which has affected our license revenue. We had 68 total employees as of December 31, 2002 and 39 as of December 31, 2003, representing a decrease of 43%. This decrease was due primarily to a workforce reduction during the third and fourth quarters of 2003 to cut costs. We have incurred net losses in each year since 1996 and as of June 30, 2004, had an accumulated deficit of $63.9 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed 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 liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing 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 and the reported amount of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 10 REVENUE RECOGNITION. We recognize revenues in accordance with the American Institute of Certified Public Accounts' Statement of Position 97-2, "Software Revenue Recognition," as amended. 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. Our revenue recognition policy is significant because our revenue is the 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 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS. A significant portion of our receivables are concentrated with a small number of customers. 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 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 our 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 June 30, 2004 and December 31, 2003. PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically resulted in goodwill and other intangible assets. The determination of the recoverability of such intangible assets requires management to make estimates and assumptions about fair value that affect our consolidated financial statements and operating results. STOCK BASED COMPENSATION. We account for stock-based awards to employees using the intrinsic value method in accordance with APB 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. Current proposed regulations indicate that stock options granted to both employees and non-employees will need to be valued at their fair value and included in operating expenses. When these proposed regulations become final, material differences in our expenses relating to equity compensation may result if different estimates and assumptions are required or if a different valuation model is used. Information about the impact on our operating results of using the fair value method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, is included in Note 4 of the "Notes to Condensed 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 condensed 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. 11 RESULTS OF OPERATIONS THREE MONTHS (SECOND QUARTERS) ENDED JUNE 30, 2004 AND 2003 The following table sets forth statements of operations data for the three months ended June 30, expressed as a percentage of total revenues: THREE MONTHS ENDED JUNE 30, --------------------------- 2004 2003 ----------- ----------- Revenues: License.......................................... 49% 58% Service.......................................... 51 42 ----------- ----------- Total revenues............................... 100% 100% ----------- ----------- Cost of revenues: License.......................................... 1% 1% Service.......................................... 14 16 ----------- ----------- Total cost of revenues....................... 15% 17% ----------- ----------- Gross profit....................................... 85% 83% Operating expenses: Sales and marketing.............................. 33% 54% Research and development......................... 27 28 General and administrative....................... 20 23 ----------- ----------- Total operating expenses..................... 80% 105% ----------- ----------- Income/(loss) from operations...................... 5 (22) Interest income.................................... 0 1 Interest and other expense......................... (0) (0) ----------- ----------- Income/(loss) before income taxes.................. 5 (21) Income taxes....................................... (0) (1) ----------- ----------- Net income/(loss).................................. 5% (22)% THREE MONTHS ENDED JUNE 30, 2004 AND 2003 REVENUES (TABLE $ IN THOUSANDS) % CHANGE 2004 2003 - 2004 2003 --------- ----------- --------- Revenues: License....................... $ 1,139 (31)% $ 1,656 Service....................... 1,182 (3) 1,220 --------- ------ --------- Total Revenues.............. $ 2,321 (19)% $ 2,876 ========= ========= Our total revenues declined by 19% in the three months ended June 30, 2004 as compared to the same period in 2003. For the three months ended June 30, 2004, sales to Nokia accounted for 23% of total revenues, sales to Reuters Financial accounted for 17% of total revenues, sales to Motorola accounted for 13% of total revenues, and sales to our top five customers accounted for 64% of total revenues. For the three months ended June 30, 2003, sales to Citigroup Global Markets accounted for 52% of total revenues, and sales to our top five customers accounted for 69% of total revenues. LICENSE REVENUES. License revenues generally are priced based on the number of users or central processing units deploying our software. License revenues declined by 31% to $1.1 million in the three months ended June 30, 2004 as compared to $1.7 million in the three months ended June 30, 2003. The decrease in software license revenues was primarily due to the fact that our target customers are those data- and transaction-intensive companies that are either building a new project or contemplating a rearchitecture of their current system in order to improve their data management performance. We believe that continued industry-wide downturn in spending on IT infrastructure products has caused many of these target customers to delay these large IT projects, which affected our license revenues. 12 SERVICE REVENUES. Service revenues consist of professional services consulting, customer support and training. Our service revenues were flat at $1.2 million in each of the three months ended June 30, 2004 and the three months ended June 30, 2003. INTERNATIONAL REVENUES. International revenues were $1.4 million for the three months ended June 30, 2004 and $614,000 for the three months ended June 30, 2003, representing an increase of 121%. The increase in international revenues from the second quarter of 2003 to the second quarter of 2004 was primarily attributable to increased sales of our software to two customers. COST OF REVENUES (TABLE $ IN THOUSANDS) % CHANGE 2004 2003 - 2004 2003 ------- ----------- ------- License ................... $ 23 5% $ 22 Service ................... 317 (31) 459 ------- ------- ------- Total cost of revenues... $ 340 (29)% $ 481 ------- ------- Gross profit .............. $1,981 (17)% $2,395 ======= ======= COST OF LICENSE REVENUES. Cost of license revenues consists of royalties, packaging, documentation and associated shipping costs, commissions paid to distributors of our software, and the amortization of third party software embedded in our software. Cost of license revenues as a percentage of license revenues may vary between periods due to royalty charges from third party software vendors and commission payments to distributors. 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 and commissions paid to distributors. The 31% decrease in cost of services revenues from the three months ended June 30, 2003 to the three months ended June 30, 2004 was primarily due to a $159,000 reduction in staffing and personnel related costs. As a percentage of service revenues, cost of service revenues was 27% for the three months ended June 30, 2004 and 38% for the three months ended June 30, 2003. OPERATING EXPENSES (TABLE $ IN THOUSANDS) % CHANGE 2004 2003 - 2004 2003 -------- ----------- -------- Sales and marketing ........... $ 755 (51)% $ 1,545 Research and development ...... 622 (23) 803 General and administrative..... 470 (28) 657 -------- -------- -------- Total operating expenses .... $ 1,847 (39)% $ 3,005 ======== ======== SALES AND MARKETING. Sales and marketing expenses consist of salaries, benefits, commissions and bonuses earned by sales and marketing personnel, travel and entertainment, and promotional expenses. The 51% decrease in sales and marketing expenses from the three months ended June 30, 2003 to the three months ended June 30, 2004 was primarily due to a $477,000 reduction in staffing and personnel related costs, a $150,000 reduction in marketing and promotional expenses, as well as a decrease of $119,000 in commissions expensed due to lower revenues. Sales and marketing expenses represented 33% of total revenues for the three months ended June 30, 2004 and 54% of total revenues for the three months ended June 30, 2003. We are presently targeting that fiscal 2004 sales and marketing expense levels will be lower than comparable fiscal 2003 expense levels because as of July 2004 we had 14 sales and marketing employees as compared to an average of 22 such employees during 2003. 13 RESEARCH AND DEVELOPMENT. Research and development expenses consist of salaries and benefits for software developers, technical managers and quality assurance personnel as well as payments to external software consultants. The 23% decrease in research and development expenses from the three months ended June 30, 2003 to the three months ended June 30, 2004 was primarily due to a $158,000 reduction in staffing and personnel related costs. Research and development expenses represented 27% of total revenues for the three months ended June 30, 2004 and 28% of total revenues for the three months ended June 30, 2003. We are presently targeting that fiscal 2004 research and development expense levels will be lower than comparable fiscal 2003 expense levels because as of July 2004 we had 17 research and development employees as compared to an average of 22 such employees during 2003. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist 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. The 28% decrease in general and administrative expenses from the three months ended June 30, 2003 to the three months ended June 30, 2004 was primarily due to a $99,000 reduction in staffing and personnel related costs. General and administrative expenses represented 20% of total revenues for the three months ended June 30, 2004 and 23% of total revenues for the three months ended June 30, 2003. INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense) consists of earnings on our cash and cash equivalents, offset by interest expense related to obligations under capital leases and other equipment-related borrowings and other expenses. Interest and other income was $4,000 for the three months ended June 30, 2004 and $5,000 for the three months ended June 30, 2003. 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. We had no deferred stock compensation associated with equity transactions as of June 30, 2004 and $23,000 as of June 30, 2003, net of amortization. Deferred stock compensation was amortized ratably over the vesting periods of these securities. Amortization expense, which is included in operating expenses, was $2,000 for the three months ended June 30, 2003. PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating losses for federal and state tax purposes and have only recognized minimal tax provisions within our international subsidiaries. We have placed a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the net deferred tax assets and the level of the valuation allowance. If and when we determine that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. 14 SIX MONTHS ENDED JUNE 30, 2004 AND 2003 The following table sets forth statements of operations data for the six months ended June 30, expressed as a percentage of total revenues: SIX MONTHS ENDED JUNE 30, 2004 2003 ----------- ----------- Revenues: License......................................... 45% 55% Service......................................... 55 45 ----------- ----------- Total revenues.............................. 100% 100% ----------- ----------- Cost of revenues: License......................................... 1% 1% Service......................................... 13 17 ----------- ----------- Total cost of revenues...................... 14% 18% ----------- ----------- Gross profit...................................... 86% 82% Operating expenses: Sales and marketing............................. 35% 57% Research and development........................ 27 31 General and administrative...................... 22 24 Purchased intangibles........................... (3) -- ----------- ----------- Total operating expenses.................... 81% 112% ----------- ----------- Income/(loss) from operations..................... 5 (30) Interest income................................... 0 0 Interest and other expense........................ (0) (0) ----------- ----------- Income/(loss) before income taxes................. 5 (30) Income taxes...................................... (0) (0) ----------- ----------- Net income/(loss)................................. 5% (30)% SIX MONTHS ENDED JUNE 30, 2004 AND 2003 REVENUES (TABLE $ IN THOUSANDS) % CHANGE 2004 2003 - 2004 2003 ---------- ----------- ---------- Revenues: License........................ $ 1,982 (33)% $ 2,950 Service........................ 2,396 (2) 2,449 ---------- ---- ---------- Total Revenues.............. $ 4,378 (19)% $ 5,399 ========== ========== Our total revenues declined by 19% in the six months ended June 30, 2004 as compared to the same period in 2003. For the six months ended June 30, 2004, sales to Nokia accounted for 14% of total revenues, sales to Motorola accounted for 11% of total revenues, and sales to our top five customers accounted for 50% of total revenues. For the six months ended June 30, 2003, sales to Citigroup Global Markets accounted for 30% of total revenues, sales to Adobe Systems accounted for 14% of total revenues, and sales to our top five customers accounted for 58% of total revenues. LICENSE REVENUES. License revenues declined by 33% to $2.0 million in the six months ended June 30, 2004 as compared to $3.0 million in the six months ended June 30, 2003. The decrease in software license revenues was primarily due to the fact that our target customers are those data- and transaction-intensive companies that are either building a new project or contemplating a rearchitecture of their current system in order to improve their data management performance. We believe that continued industry-wide downturn in spending on IT infrastructure products has caused many of these target customers to delay these large IT projects, which affected our license revenues. 15 SERVICE REVENUES. Our service revenues were flat at $2.4 million in each of the six months ended June 30, 2004 and the six months ended June 30, 2003. INTERNATIONAL REVENUES. International revenues were flat at $2.2 million in each of the six months ended June 30, 2004 and the six months ended June 30, 2003. COST OF REVENUES (TABLE $ IN THOUSANDS) % CHANGE 2004 2003 - 2004 2003 ------ ----------- ------ License ................ $ 42 (31)% $ 61 Service ................ 583 (38) 936 ------ ------ ------ Total cost of revenues $ 625 (37)% $ 997 ------ ------ Gross profit ........... $3,753 (15)% $4,402 ====== ====== COST OF LICENSE REVENUES. Cost of license revenues as a percentage of license revenues is expected to vary between periods due to royalty charges from third party software vendors and commission payments to distributors. COST OF SERVICE REVENUES. The 38% decrease in cost of services revenues from the six months of fiscal 2003 to the six months of fiscal 2004 was primarily due to a $372,000 reduction in staffing and personnel related costs. As a percentage of service revenues, cost of service revenues was 24% for the six months ended June 30, 2004 and 38% for the six months ended June 30, 2003. OPERATING EXPENSES (TABLE $ IN THOUSANDS) % CHANGE 2004 2003 - 2004 2003 -------- ----------- -------- Sales and marketing ............... $ 1,537 (50)% $ 3,076 Research and development .......... 1,193 (28) 1,652 General and administrative......... 944 (27) 1,300 Purchased intangibles ............. (110) (100) -- -------- -------- -------- Total operating expenses ........ $ 3,564 (41)% $ 6,028 ======== ======== SALES AND MARKETING. The 50% decrease in sales and marketing expenses from the first six months of 2003 to the first six months of 2004 was primarily due to a $1.1 million reduction in staffing and personnel related costs, a $297,000 reduction in marketing and promotional expenses, as well as a decrease of $128,000 in commissions expensed due to lower revenues. Sales and marketing expenses represented 35% of total revenues for the six months ended June 30, 2004 and 57% of total revenues for the six months ended June 30, 2003. We are presently targeting that fiscal 2004 sales and marketing expense levels will be lower than comparable fiscal 2003 expense levels because as of July 2004 we had 14 sales and marketing employees as compared to an average of 22 such employees during 2003. RESEARCH AND DEVELOPMENT. The 28% decrease in research and development expenses from the first six months of 2003 to the first six months of 2004 was primarily due to a $398,000 reduction in staffing and personnel related costs. Research and development expenses represented 27% of total revenues for the six months ended June 30, 2004 and 31% of total revenues for the six months ended June 30, 2003. We are presently targeting that fiscal 2004 research and development expense levels will be lower than comparable fiscal 2003 expense levels because as of July 2004 we had 17 research and development employees as compared to an average of 22 such employees during 2003. GENERAL AND ADMINISTRATIVE. The 27% decrease in general and administrative expenses from the first six months of 2003 to the first six months of 2004 was primarily due to a $193,000 reduction in staffing and personnel related costs as well as a $218,000 reduction in costs associated with our status as a public company. General and administrative expenses represented 22% of total revenues for the six months ended June 30, 2004 and 24% of total revenues for the six months ended June 30, 2003. 16 PURCHASED INTANGIBLES. Purchased intangibles expense (reversal) was $(110,000) for the six months ended June 30, 2004. In March 2004, we renegotiated a long-term obligation for third party software that was fully expensed in prior periods. This negotiation resulted in a reversal of $110,000 of the total amounts previously expensed. INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense) consists of earnings on our cash and cash equivalents, offset by interest expense related to obligations under capital leases and other equipment-related borrowings and other expenses. Interest and other income was $6,000 for the six months ended June 30, 2004 and $13,000 for the six months ended June 30, 2003. STOCK-BASED COMPENSATION. Certain 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. We had no deferred stock compensation associated with equity transactions as of June 30, 2004 and $23,000 as of June 30, 2003, net of amortization. Deferred stock compensation was amortized ratably over the vesting periods of these securities. Amortization expense, which is included in operating expenses, was $8,000 for the six months ended June 30, 2003. PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating losses for federal and state tax purposes and have only recognized minimal tax provisions within our international subsidiaries. We have placed a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of these assets. We evaluate on a quarterly basis the recoverability of the net deferred tax assets and the level of the valuation allowance. If and when we determine that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2004, we had $5.0 million of cash and cash equivalents as compared to $5.7 million as of December 31, 2003. Net cash used in operating activities was $434,000 for the six months ended June 30, 2004, as compared to $2.5 million for the six months ended June 30, 2003. The main reason for the decrease in net cash used in operating activities in the first six months of 2004 was an improvement in our net loss position. Net cash used in investing activities was not significant for the six months ended June 30, 2004 or for the six months ended June 30, 2003. Net cash used in financing activities was $205,000 for the six months ended June 30, 2004, because we renegotiated and paid off a long-term obligation for third party software. Net cash used in financing activities was $200,000 for the six months ended June 2003 which consisted mainly of $180,000 in repayments of long-term obligations. We have a revolving credit facility with Comerica Bank of up to $1.5 million which is available through May 31, 2005 under which no borrowings were outstanding as of June 30, 2004. We also had a $149,000 equipment term loan, which was repaid as of June 30, 2004. As of June 30, 2004 we were in compliance with our debt covenants, which require us, among other things, to maintain certain working capital and profitability covenants. We expect to meet these covenants if we are able to achieve our revenues and accounts receivable collection targets. Borrowings under the facility are collateralized by substantially all of our assets. We are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least June 30, 2005, provided that we meet our targets with respect to revenues and accounts receivable collections. If we experience difficulties in achieving our targets with respect to revenues and accounts receivable collections, our cash and cash equivalents may not be sufficient to meet our anticipated cash needs. Accordingly, our operating plans could be restricted and our business could be harmed. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain an additional credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we may not be able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain this additional financing, our business could be jeopardized. 17 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to the other information in this quarterly report on Form 10-QSB and in our annual report on Form 10-K for the year ended December 31, 2003, the following factors should be considered carefully in evaluating our business and prospects. WE MAY NOT ACHIEVE OUR SALES TARGETS. Our target customers are those data- and transaction-intensive companies that are either building a new project or re-architecting their current system in order improve their data management performance. Thus, anything that would cause these target customers to defer these projects, such as constrained budgets, will negatively affect our product sales. In addition, our ability to achieve our sales targets are affected by: 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 EDGEXTEND and DIRECTALERT; o our dependence for revenue from our POWERTIER product, which 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 upon key personnel; and o our existing customers may choose not to renew their support and maintenance contracts. IF WE ARE NOT ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO FUND OUR BUSINESS AND FAIL TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, OUR BUSINESS COULD FAIL. 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 are currently targeting that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through at least June 30, 2005 provided that we meet our targets with respect to revenues and accounts receivable collections. If we experience difficulties in achieving our revenue and accounts receivable 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. 18 THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY DEPRESS 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. The timing of our sales is governed in part by our customers' capital spending budgets. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. In addition to the other risk factors described in this Form 10-QSB, additional 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. OUR SALES CYCLE IS LONG AND UNPREDICTABLE, SO IT IS DIFFICULT TO FORECAST OUR REVENUES. 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. 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 a long consultative sales process regarding the use and benefits of our products and the integration of our products into the customer's current system. 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 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, which may require substantial integration of our software with the customer's existing 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. 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. 19 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 several of our top five customers has changed from period to period, including year to year. PERIOD % OF TOTAL REVENUES IDENTITY AND % OF TOTAL REVENUES ------ OF TOP 5 CUSTOMERS OF TOP 2 CUSTOMERS ------------------ ------------------ Six months ended June 30, 2004 50% Nokia.................................14% Motorola...............................11 Six months ended June 30, 2003 58 Citigroup Global Markets...............30 Adobe Systems..........................14 Year ended December 31, 2003 46 Citigroup Global Markets...............21 Adobe Systems...........................9
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. In addition, because a substantial portion of our revenues result from product sales to a limited number of customers, the identity of which change from quarter to quarter, in any given quarter the percentage contribution of POWERTIER, EDGEXTEND and DIRECTALERT to total license revenues varies, sometimes dramatically. DECLINES IN SALES REVENUE MAY RESTRICT OUR GROWTH AND HARM OUR BUSINESS AND OUR ABILITY TO ACHIEVE OUR FINANCIAL OBJECTIVES. We have experienced substantial sales declines beginning in 2001. In 2001 our revenues declined from the previous year by 23%, in 2002 our revenues declined by 25% and in 2003 our revenues declined by 36%. In the six months ended June 30, 2004, our sales revenues declined by 19% from the six months ended June 30, 2003. We believe a portion of the decline in sales of our products is due to the general downturn in information technology spending by our prospective customers. Our target customers are those data- and transaction-intensive companies that are either building a new project or re-architecting their current system in order to improve their data management performance. Thus, anything that would cause these target customers to defer these projects, such as constrained budgets, will negatively affect our product sales. Our declining sales may also negatively affect our reputation with the investment community or potential customers, which may lead to a decline in our stock price and may also discourage investors from purchasing our stock or potential customers from purchasing our products. 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 services product, any failure in market adoption of this product could result in our failure to meet our revenue goals. BECAUSE OUR PRODUCTS PROVIDE ADDITIONAL FEATURES TO SUCCESSFUL APPLICATION SERVER PRODUCTS FROM IBM AND BEA, THEY MAY ADD THESE FEATURES TO A FUTURE VERSION OF THEIR PRODUCT, REDUCING THE NEED FOR OUR PRODUCTS. Because IBM and BEA control the development schedule and feature set of their products, we need to maintain a good working relationship with IBM and BEA if we decide to develop future versions of EDGEXTEND for those new versions of WebSphere and WebLogic. Failure to develop future versions compatible with the latest versions from IBM and BEA could greatly reduce market acceptance for our products. IBM or BEA could add features to their products, which would reduce or eliminate the need for our products, which could harm our business. They could develop their products in a more proprietary way to favor their own products, or those offered by a third party, which could make it much harder for us to compete in the J2EE software market. 20 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, our EDGEXTEND for ..NET product was released in October 2002 and our EDGEXTEND for Linux was released in March 2003. 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. Typically, 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. In addition, in connection with our workforce reductions in the third and fourth quarters of 2003, we reduced our sales and marketing staff from 22 employees at the beginning of 2003 to 13 employees as of December 31, 2003 and we had 14 sales and marketing employees as of June 30, 2004. As a result of our employee turnover and headcount reductions, we may not meet our sales goals. 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. 21 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 Progress Software are middleware vendors that offer alternative data management solutions that directly target EDGEXTEND'S market. In addition, many prospective customers may build their own custom solutions. In the DIRECTALERT market, alternative approaches are provided by a variety of sources, including the potential for internal development. Company vendors such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software, which may evolve into competitive products. Vendors such as webMethods and Business Objects provide alternative architectures for business intelligence information. DIRECTALERT is based on licensed technology, which the Company is licensed to distribute on a non-exclusive basis. In the POWERTIER market, our competitors include both publicly and privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere), Oracle (OAS) 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, WE MAY NOT BE ABLE TO ACHIEVE OUR PLANNED REVENUE TARGETS. 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. 22 OUR FAILURE TO MANAGE OUR RESOURCES COULD RESULT IN OUR FAILURE TO ACHIEVE OUR FINANCIAL OBJECTIVES. Achieving our planned revenue targets and other financial objectives will place significant demands on our management and other resources, particularly because we must achieve our revenue and product development goals using both fewer people and a constrained budget. 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 SALES AND DEVELOPMENT EFFORTS 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. Revenues from licenses and services to customers outside the United States were: SIX MONTHS ENDED JUNE 30, REVENUES % OF TOTAL REVENUES ------------------------- -------- ------------------- 2004 $2.2 million 50% 2003 2.2 million 41 YEAR ENDED DECEMBER 31, REVENUES % OF TOTAL REVENUES ----------------------- -------- ------------------- 2003 $3.8 million 40% 2002 4.8 million 33
23 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; 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, WHICH COULD BE TIME CONSUMING AND EXPENSIVE, AND, IF SUCCESSFUL, COULD REQUIRE US TO CEASE SELLING OR MATERIALLY CHANGE OUR PRODUCTS. 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. 24 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, the market price of our common stock could fall. As of June 30, 2004, we had approximately 2,715,918 shares of common stock outstanding. Virtually all of our shares, other than shares held by affiliates, are freely tradable. Shares held by affiliates are tradable, subject to volume and other restrictions of Rule 144. These sales of common stock could impede our ability to raise funds at an advantageous price, or at all, through the sale of securities. IF OUR STOCKHOLDERS' EQUITY FALLS BELOW $2.5 MILLION, OUR STOCK COULD BE DELISTED FROM NASDAQ SMALLCAP MARKET. Our stockholders' equity as of June 30, 2004 was $3.2 million, which is in excess of the $2.5 million minimum stockholders' equity requirement for listing on the Nasdaq SmallCap Market. However, if we do not achieve our target revenues, we may incur additional net losses, which would result in a decrease in our stockholders' equity. If our stockholders' equity falls below $2.5 million, our stock could be subject to delisting by Nasdaq, in which case our stock would trade on the OTC "bulletin board." Delisting of our stock from the Nasdaq SmallCap Market could reduce the liquidity in the market for our stock and negatively impact our reputation and consequently our business. OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE. 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. In addition, the market price of our common stock may rise or fall in the future as a result of many factors, such as: o variations in our quarterly results; o announcements of technology innovations by us or our competitors; o introductions of new products by us or our competitors; o acquisitions or strategic alliances by us or our competitors; o hiring or departure of key personnel; o the gain or loss of a significant customer or order; o changes in estimates of our financial performance or changes in recommendations by securities analysts; o market conditions and expectations regarding capital spending in the software industry and in our customers' industries; and o adoption of new accounting standards affecting the software industry. The market prices of the common stock of many companies in the software and Internet industries have experienced extreme price and volume fluctuations, which have often been unrelated to these companies' operating performance. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its stock. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could harm our business. 25 IF WE DEFAULT ON OUR BANK COVENANTS, THE BANK MAY, AMONG OTHER THINGS, CEASE ADVANCING FUNDS, DEMAND IMMEDIATE REPAYMENT AND EXERCISE ALL OTHER RIGHTS AS A CREDITOR UNDER OUR AGREEMENTS. We were in compliance with the covenants in our loan agreement with Comerica Bank at June 30, 2004, however, we have not been able to comply with the covenants of our loan agreement in the past, and we may not be able to be in compliance with our financial covenants in our loan agreement in the future if we fail to meet our revenue targets or continue to have net losses. Our covenant structure requires us, among other things, to maintain certain working capital and profitability covenants. We expect to meet these covenants if we are able to achieve our target revenues. Borrowings under the facility are collateralized by substantially all of our assets. If we violate any covenant in our agreements with Comerica Bank, the bank may declare us in default of our obligations and could, among other things, refuse to advance us any additional funds under the line of credit, accelerate our repayment obligations under all our facilities, and exercise all of its other rights as a creditor under our facilities, including the sale of our assets, including our intellectual property. THE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A TAKEOVER THAT CERTAIN OF OUR STOCKHOLDERS MAY CONSIDER DESIRABLE. 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. ITEM 3. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer) as of the end of the period covered by this Quarterly Report on Form 10-QSB, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by us in reports that we file, or submit, under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. (b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change in our internal control over financial reporting during the six months ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting consists of control processes designed to provide assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with Generally Accepted Accounting Principles. To the extent that components of our internal control over financial reporting are included in our disclosure controls, they are included in the scope of the evaluation by our principal executive officer and principal financial officer referenced above. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is not currently subject to any material legal proceedings, though it may from time to time become a party to various legal proceedings that arise in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On June 16, 2004, we held our annual meeting of stockholders for the year ended December 31, 2003. The following summarizes the matters submitted to a vote of the stockholders: 1. To amend and restate the Company's Certificate of Incorporation to (i) decrease the number of authorized shares of Common Stock from 75,000,000 shares to 7,500,000 shares and (ii) decrease the number of authorized shares of preferred stock from 5,000,000 shares to 500,000 shares. BROKER NON- IN FAVOR OPPOSED ABSTAIN VOTES -------- ------- ------- ------- 1,705,407 1,120 577 940,420 2. The election of two (2) Class II directors to serve until the Annual Meeting of the stockholders for the year ending December 31, 2006: NOMINEE IN FAVOR OPPOSED ABSTAIN ------- -------- ------- ------- James Sutter 2,645,569 0 1,955 Sanjay Vaswani 2,645,569 0 1,955 3. To ratify the appointment of Burr, Pilger & Mayer LLP as the independent auditors of the Company for the fiscal year ending December 31, 2004. IN FAVOR OPPOSED ABSTAIN -------- ------- ------- 2,645,435 1,505 584 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS: 3.2 Amended and Restated Certificate of Incorporation of Persistence as filed on July 12, 2004. 3.4 Amended and Restated Bylaws of Persistence as amended on July 21, 2004. 31.1 Certificate of Chief Executive Officer, pursuant to Rule 13a-14(a). 31.2 Certificate of Chief Financial Officer, pursuant to Rule 13a-14(a). 32.1 Certificate of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350. 32.2 Certificate of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350. 27 (b) REPORTS ON FORM 8-K: Reports on Form 8-K. Two reports on Form 8-K and one report on Form 8-K/A were filed during the quarter ended June 30, 2004: one report on From 8-K was filed on May 18, 2004, reporting matters under Item 4 (Changes in Registrant's Certifying Accountant), one report on Form 8-K/A was filed on May 27, 2004, reporting matters under Items 4 (Changes in Registrant's Certifying Accountant) and 7 (Financial Statements, Pro Forma Financial Information and Exhibits), and one report on Form 8-K was filed on July 22, 2004, reporting matters under Items 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and 12 (Results of Operations and Financial Condition.) 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PERSISTENCE SOFTWARE, INC. By: /s/ BRIAN TOBIN ------------------------------- BRIAN TOBIN ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Date: August 13, 2004 29 EXHIBIT INDEX Exhibit No. Description --- ----------- 3.2 Amended and Restated Certificate of Incorporation of Persistence, as filed on July 12, 2004. 3.4 Amended and Restated Bylaws of Persistence, as amended on July 21, 2004. 31.1 Certificate of Chief Executive Officer, pursuant to Rule 13a-14(a). 31.2 Certificate of Chief Financial Officer, pursuant to Rule 13a-14(a). 32.1 Certificate of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350. 32.2 Certificate of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350. 30 EX-3.2 2 persistence_10qex3-2.txt Exhibit 3.2 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PERSISTENCE SOFTWARE, INC. The undersigned, Christopher T. Keene, hereby certifies that: 1. He is the duly elected and acting Chief Executive Officer and Secretary of Persistence Software, Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on April 28, 1999. 3. Pursuant to Section 242 of the General Corporation Law of the State of Delaware, this Certificate of Amendment amends and restates Article IV of this corporation's Amended and Restated Certificate of Incorporation: "(A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Eight Million (8,000,000) shares, each with a par value of $0.001 per share. Seven Million Five Hundred Thousand (7,500,000) shares shall be Common Stock and Five Hundred Thousand (500,000) shares shall be Preferred Stock." 4. The foregoing Certificate of Amendment has been duly adopted by this corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. This Certificate of Amendment is executed at San Mateo, California, July 12, 2004. /S/ CHRISTOPHER T. KEENE ------------------------------------- Christopher T. Keene Chief Executive Officer and Secretary CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PERSISTENCE SOFTWARE, INC. The undersigned, Christopher Keene and Christine Russell, hereby certify that: 1. They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of Persistence Software, Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on April 28, 1999. 3. Pursuant to Section 242 of the General Corporation Law of the State of Delaware, this Certificate of Amendment adds the following paragraph to the end of Article IV of this corporation's Amended and Restated Certificate of Incorporation: "At 12:00 a.m. Eastern Standard Time on June 12, 2003 (the "EFFECTIVE DATE"), each one outstanding share of this corporation's Common Stock shall be converted and reconstituted into 1/10th of a share of this corporation's Common Stock (the "REVERSE SPLIT"). In lieu of issuing any fractional shares, each holder of Common Stock who would otherwise have been entitled to a fraction of a share upon surrender of such holder's certificate(s) will be entitled to receive a cash payment, without interest, determined by multiplying (i) the fractional share interest to which the holder would otherwise be entitled, after taking into account all shares of Common Stock then held on the record date by the holder, and (ii) the average closing sale price of shares of Common Stock for the 10 trading days immediately prior to the Effective Date (on a post-Reverse Split basis) or, if no such sale takes place on such days, the average of the closing bid and asked prices for such days, in each case as officially reported by Nasdaq. Shares of Common Stock that were outstanding prior to the Reverse Split, and that are not outstanding after and as a result of the Reverse Split, shall resume the status of authorized but unissued shares of Common Stock." 4. The foregoing Certificate of Amendment has been duly adopted by this corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. This Certificate of Amendment is executed at San Mateo, California, June 6, 2003. /S/ CHRISTOPHER KEENE ------------------------------ Christopher Keene Chief Executive Officer /S/ CHRISTINE RUSSELL ------------------------------ Christine Russell Secretary AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PERSISTENCE SOFTWARE, INC. Christopher T. Keene and Christine Russell hereby certify that: 1. The date of filing the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is April 28, 1999. 2. They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of Persistence Software, Inc., a Delaware corporation. 3. The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: ARTICLE I "The name of this corporation is Persistence Software, Inc. (the "CORPORATION"). ARTICLE II The address of the registered office of the Corporation in the State of Delaware is: Corporation Trust Company 1209 Orange Street Wilmington, County of New Castle Delaware, 19801 The name of the Corporation's registered agent at said address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total number of shares which the Corporation is authorized to issue is 80,000,000 shares, each with a par value of $0.001 per share. 75,000,000 of such shares shall be Common Stock, and 5,000,000 of such shares shall be Preferred Stock. (B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. ARTICLE VI "LISTING EVENT" as used in this Amended and Restated Certificate of Incorporation shall mean the first annual meeting of stockholders following such time as the Corporation meets the criteria set forth in subdivisions (1), (2) or (3) of Section 2115(c) the California Corporations Code as of the record date of such meeting. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, its directors and its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the occurrence of the Listing Event: (i) The number of directors which shall constitute the entire Board of Directors, and the number of directors in each class, shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. Until changed by a resolution of the Board of Directors, Class I shall consist of three directors, each of whom shall be designated by the Board of Directors; Class II shall consist of three directors, each of whom shall be designated by the Board of Directors; and Class III shall consist of three directors, each of whom shall be designated by the Board of Directors. Upon the occurrence of the Listing Event, the terms of office of the Class I directors shall expire, and Class I directors shall be elected for a full term of three years. At the first annual meeting of stockholders following the Listing Event, the term of office of the Class II directors shall expire, and Class II directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Listing Event, the term of office of the Class III directors shall expire, and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "VOTING STOCK") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. In addition to the requirements of law and any other provisions hereof (and notwithstanding the fact that approval by a lesser vote may be permitted by law or any other provision hereof), the affirmative vote of the holders of at least 66 2/3 percent of the voting power of the then outstanding shares of stock of all classes and all series of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter, repeal, or adopt any provision inconsistent with this Section (i) of this Article VI. (ii) There shall be no right with respect to shares of stock of the Corporation to cumulate votes in the election of directors. (iii) Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least 66-2/3% of the voting power of the then-outstanding shares of the Voting Stock. ARTICLE VII No action shall be taken by the stockholders of the Corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the Corporation's bylaws. ARTICLE VIII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE IX The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI The Corporation shall have perpetual existence. ARTICLE XII (A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of the Corporation's directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended. (B) Any repeal or modification of the foregoing provisions of this Article XII shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification. ARTICLE XIII (A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) though bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others. (B) Any repeal or modification of any of the foregoing provisions of this Article XIII shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification." * * * The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at San Mateo, California, on June 30, 1999. /s/ Christopher T. Keene --------------------------------- Christopher T. Keene Chief Executive Officer /s/ Christine Russell --------------------------------- Christine Russell Secretary EX-3.4 3 persistence_10qex3-4.txt Exhibit 3.4 BYLAWS OF PERSISTENCE SOFTWARE, INC. (AS AMENDED AND RESTATED EFFECTIVE JULY 21, 2004)
TABLE OF CONTENTS Page ---- ARTICLE I - CORPORATE OFFICES....................................................................3 1.1 Registered Office...................................................................3 1.2 Other Offices.......................................................................3 ARTICLE II - MEETINGS OF STOCKHOLDERS............................................................3 2.1 Place Of Meetings...................................................................3 2.2 Annual Meeting......................................................................1 2.3 Special Meeting.....................................................................3 2.4 Notice of Shareholder's Meeting; Affidavit Of Notice................................3 2.5 Advance Notice of Stockholder Nominees..............................................3 2.6 Quorum..............................................................................4 2.7 Adjourned Meeting; Notice...........................................................4 2.8 Conduct Of Business.................................................................4 2.9 Voting..............................................................................5 2.10 Waiver Of Notice...................................................................5 2.11 Record Date For Stockholder Notice; Voting.........................................5 2.12 Proxies............................................................................6 ARTICLE III - DIRECTOR...........................................................................6 3.1 Powers..............................................................................6 3.2 Number Of Directors.................................................................6 3.3 Election, Qualification And Term Of Office Of Directors.............................6 3.4 Resignation And Vacancies...........................................................6 3.5 Place Of Meetings; Meetings By Telephone............................................7 3.6 Regular Meetings....................................................................8 3.7 Special Meetings; Notice............................................................8 3.8 Quorum..............................................................................8 3.9 Waiver Of Notice....................................................................8 3.10 Board Action By Written Consent Without A Meeting..................................9 3.11 Fees And Compensation Of Directors.................................................9 3.12 Approval Of Loans To Officers......................................................9 3.13 Removal Of Directors...............................................................9 3.14 Chairman Of The Board Of Directors.................................................10 ARTICLE IV - COMMITTEES..........................................................................10 4.1 Committees Of Directors.............................................................10 4.2 Committee Minutes...................................................................10 4.3 Meetings And Action Of Committees...................................................11 ARTICLE V - OFFICERS.............................................................................13 5.1 Officers............................................................................13 -i- 5.2 Appointment Of Officers.............................................................13 5.3 Subordinate Officers................................................................13 5.4 Removal And Resignation Of Officers.................................................14 5.5 Vacancies In Offices................................................................12 5.6 Chief Executive Officer.............................................................14 5.7 President...........................................................................14 5.8 Vice Presidents.....................................................................13 5.9 Secretary...........................................................................13 5.10 Chief Financial Officer............................................................15 5.11 Representation Of Shares Of Other Corporations.....................................15 5.12 Authority And Duties Of Officers...................................................16 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.................16 6.1 Indemnification Of Directors And Officers...........................................16 6.2 Indemnification Of Others...........................................................16 6.3 Payment Of Expenses In Advance......................................................16 6.4 Indemnity Not Exclusive.............................................................17 6.5 Insurance...........................................................................17 6.6 Conflicts...........................................................................17 ARTICLE VII - RECORDS AND REPORTS................................................................18 7.1 Maintenance And Inspection Of Records...............................................18 7.2 Inspection By Directors.............................................................18 7.3 Annual Statement To Stockholders....................................................18 ARTICLE VIII - GENERAL MATTERS...................................................................18 8.1 Checks..............................................................................18 8.2 Execution Of Corporate Contracts And Instruments....................................19 8.3 Stock Certificates; Partly Paid Shares..............................................19 8.4 Special Designation On Certificates.................................................19 8.5 Lost Certificates...................................................................20 8.6 Construction; Definitions...........................................................20 8.7 Dividends...........................................................................20 8.8 Fiscal Year.........................................................................20 8.9 Seal................................................................................21 8.10 Transfer Of Stock..................................................................21 8.11 Stock Transfer Agreements..........................................................21 8.12 Registered Stockholders............................................................21 ARTICLE IX - AMENDMENTS..........................................................................21 -ii-
AMENDED AND RESTATED 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. (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 -4- 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. (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 -5- 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 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 six (6). 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 -8- shall hold 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 -9- similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a -10- 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. Subject to applicable law, including Section 13(k) of the Securities Exchange Act of 1934, 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 -11- 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. 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 -12- 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. 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 -13- such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by 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. -14- 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 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. -15- 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. 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, notes or other evidences of indebtedness that are -18- 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 or summarized on the face or back of the certificate -19- 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 AMENDED AND RESTATED 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 July 21, 2004 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 July 2004. ________________________________________________ Mark A. Medearis, Assistant Secretary -22- EX-31.1 4 persistence_10qex31-1.txt Exhibit 31.1 PERSISTENCE SOFTWARE, INC. CERTIFICATION PRUSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher T. Keene, certify that: 1. I have reviewed this report on Form 10-QSB for the period ended June 30, 2004 of Persistence Software, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) [Paragraph reserved pursuant to SEC Release 33-8238] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ CHRISTOPHER T. KEENE ------------------------ Christopher T. Keene Chief Executive Officer EX-31.2 5 persistence_10qex31-2.txt Exhibit 31.2 PERSISTENCE SOFTWARE, INC. CERTIFICATION PRUSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brian Tobin, certify that: 1. I have reviewed this report on Form 10-QSB for the period ended June 30, 2004 of Persistence Software, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) [Paragraph reserved pursuant to SEC Release 33-8238] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ BRIAN TOBIN --------------- Brian Tobin Acting Chief Financial Officer EX-32.1 6 persistence_10qex32-1.txt Exhibit 32.1 PERSISTENCE SOFTWARE, INC. CERTIFICATION PRUSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Persistence Software, Inc. (the "Company") on Form 10-QSB for the quarter ended June 30, 2004, 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 August 13, 2004 EX-32.2 7 persistence_10qex32-2.txt Exhibit 32.2 PERSISTENCE SOFTWARE, INC. CERTIFICATION PRUSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Persistence Software, Inc. (the "Company") on Form 10-QSB for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian Tobin, Acting 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/ BRIAN TOBIN - --------------- Brian Tobin Acting Chief Financial Officer August 13, 2004 -----END PRIVACY-ENHANCED MESSAGE-----