<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration No. 333-76867
3,000,000 SHARES
PERSISTENCE LOGO
PERSISTENCE SOFTWARE, INC.
COMMON STOCK
We are offering 3,000,000 shares of our common stock. This is our initial
public offering, and no public market currently exists for our shares. The
shares have been approved for quotation on the Nasdaq National Market under the
symbol "PRSW."
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $11.00 $ 33,000,000
Underwriting discounts and commissions...................... $ 0.77 $ 2,310,000
Proceeds to Persistence..................................... $10.23 $ 30,690,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on June 30, 1999.
-------------------------
BANCBOSTON ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
The date of this prospectus is June 24, 1999
<PAGE> 2
3,000,000 SHARES
PERSISTENCE LOGO
PERSISTENCE SOFTWARE, INC.
COMMON STOCK
We are offering 3,000,000 shares of our common stock. This is our initial
public offering, and no public market currently exists for our shares. The
shares have been approved for quotation on the Nasdaq National Market under the
symbol "PRSW."
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $11.00 $33,000,000
Underwriting discounts and commissions...................... $ 0.77 $ 2,310,000
Proceeds to Persistence..................................... $10.23 $30,690,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on June 30, 1999.
-------------------------
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
The date of this prospectus is June 24, 1999
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
THE "COMPANY," "PERSISTENCE," "WE," "US," AND "OUR" REFER TO PERSISTENCE
SOFTWARE, INC., AND OUR SUBSIDIARY.
-------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Special Note Regarding Forward-Looking Statements........... 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 34
Management.................................................. 47
Certain Transactions........................................ 58
Principal Stockholders...................................... 61
Description of Capital Stock................................ 63
Shares Eligible for Future Sale............................. 66
Underwriting................................................ 68
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 71
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence," as well
as "PowerTier." "PowerSync" and "Command Center" are also trademarks of ours.
This prospectus also makes reference to trademarks and trade names of other
companies that belong to them.
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PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock.
PERSISTENCE SOFTWARE, INC.
Persistence is a leading provider of transactional application
servers -- software which processes transactions between users and back-end
computer systems for electronic commerce systems. By caching data, or moving
information stored in back-end computer systems closer to users, our software
dramatically reduces network traffic, resulting in both better network
performance and faster transaction processing. Our PowerTier family of
transactional application servers offers the speed and reliability to enable the
next generation of sophisticated, high-volume electronic commerce applications.
As the Internet has evolved into a global communications medium, companies
in many industries have begun to extend their business over the Internet to
conduct transactions with customers, suppliers and partners. While creating new
business opportunities, the growth of electronic commerce has also created
tremendous technological challenges. In particular, this growth has placed
stress on the underlying application server infrastructure which processes these
electronic commerce transactions. The first generation of application servers
was typically designed to handle simple information publishing, not to
accommodate the high transaction volumes and performance requirements that
characterize electronic commerce today. Even casual users of the Internet are
familiar with the effects of these infrastructure limitations, such as slow
response times and system failures.
Our PowerTier transactional application servers are specifically designed
to meet the needs of the next generation of high-volume electronic commerce
applications. Our products, PowerTier for EJB and PowerTier for C++, use our
patented caching technology to move data stored in back-end computer systems
closer to users. This cached data may then be accessed simultaneously from the
transactional application server by multiple users, saving each user from having
to access the back-end system for that information. We believe our PowerTier
application servers are orders of magnitude faster than traditional application
servers, which do not use caching technology. In addition, PowerTier is one of
the few application servers that implements Sun Microsystems' full Enterprise
JavaBeans standard to enable businesses to deploy sophisticated Java
applications, which readily scale, or accommodate rapidly increasing numbers of
users.
Our PowerTier products offer customers launching sophisticated electronic
commerce applications the following benefits:
- real-time response times for up to thousands of concurrent users and
transactions;
- reliability to prevent system crashes and downtime;
- the ability to scale to accommodate a growing number of users;
- dramatic reductions in customers' time-to-market for building and
deploying electronic commerce applications;
- the ability to extend transaction processing across organizational
boundaries; and
- support of open Internet standards.
Our strategy is to provide the leading software platform for the deployment
of high performance electronic commerce applications. Key elements of our
strategy include:
- capturing additional market share in the emerging business-to-business
electronic commerce market;
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- extending our technology leadership in standards-based platforms for the
next generation of electronic commerce;
- expanding our product platform to offer complementary solutions;
- increasing our partnerships with systems integrators;
- leveraging our existing base of customers; and
- strengthening our international presence.
Our customers use PowerTier as the platform for a broad range of electronic
commerce applications, from real-time electronic trading and supply chain
management to Internet network management, application outsourcing and customer
relationship management. We believe our PowerTier products are particularly
well-suited for business-to-business electronic commerce applications requiring
communications among many computer systems in multi-party, multi-step
transactions. Our major customers include AT&T, Boeing, Cisco, FedEx, IBM,
Instinet, Lucent, Morgan Stanley Dean Witter, Norwest, Perkin-Elmer and
SuperValu.
We market and sell our products primarily through a direct sales force in
the United States, United Kingdom and Germany, as well as through distributors.
We were incorporated in May 1991 as Fulcrum Innovations, Inc. and
subsequently changed our name to Persistence Software, Inc. Our principal
executive offices are located at 1720 South Amphlett Blvd., Third Floor, San
Mateo, California 94402. Our telephone number at that location is (650)
372-3600. Information contained on our website at http://www.persistence.com
does not constitute part of this prospectus.
THE OFFERING
Common stock offered............... 3,000,000 shares
Common stock to be outstanding
after the offering................. 18,447,941 shares
Use of proceeds.................... Working capital and general corporate
purposes, funding product development and
expanding our sales and marketing
organization.
Nasdaq National Market symbol...... PRSW
This table is based on shares outstanding as of March 31, 1999 and excludes
shares that may be issued on exercise of the following options and warrants:
- 1,388,036 shares subject to outstanding options at a weighted average
exercise price of $0.64;
- 80,556 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $0.90 per share; and
- an aggregate of 4,495,033 shares available for future issuance under our
stock plans.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License................................... $ 2,603 $ 3,546 $ 7,478 $ 1,004 $ 2,116
Service................................... 1,171 1,867 2,682 706 747
------- ------- ------- ------- -------
Total revenues.................... $ 3,774 $ 5,413 $10,160 $ 1,710 $ 2,863
------- ------- ------- ------- -------
Loss from operations........................ (3,345) (4,686) (4,090) (1,708) (1,963)
Net loss.................................... (3,311) (4,674) (4,089) (1,704) (1,915)
Basic and diluted net loss per share........ $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27)
======= ======= ======= ======= =======
Shares used in basic and diluted net loss
per share calculation..................... 6,135 6,366 6,879 6,733 7,044
======= ======= ======= ======= =======
Pro forma basic and diluted net loss per
share..................................... $ (0.31) $ (0.13)
======= =======
Shares used in pro forma basic and diluted
net loss per share calculation............ 13,183 14,320
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 7,386 $ 7,386 $37,176
Working capital..................................... 6,285 6,285 36,075
Total assets........................................ 10,455 10,455 40,245
Long-term obligations............................... 683 683 683
Total stockholders' equity.......................... 6,309 6,309 36,099
</TABLE>
- -------------------------
See notes 1 and 6 of notes to consolidated financial statements for an
explanation of the method used to determine the number of shares used to compute
the net loss per share and pro forma net loss per share amounts.
The pro forma column in the consolidated balance sheet data reflects the
automatic conversion of each outstanding share of preferred stock into one share
of common stock immediately before the completion of the offering.
The pro forma as adjusted numbers in the table above are adjusted to give
effect to receipt of the net proceeds from the sale of shares of common stock
offered by us at the initial public offering price of $11.00 per share after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us.
Except as otherwise indicated, all information in this prospectus is based
on the following assumptions: (a) the conversion of each outstanding share of
preferred stock into one share of common stock immediately before the completion
of this offering, (b) no exercise of the underwriters' overallotment option, (c)
our recent reincorporation in Delaware and (d) the filing of our amended and
restated certificate of incorporation upon completion of this offering.
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RISK FACTORS
You should carefully consider the following risks in addition to the
remainder of this prospectus before purchasing our common stock. The risks and
uncertainties described below are intended to be the ones that are specific to
our company and are not the only ones that we face. Additional risks and
uncertainties that generally apply to businesses in our industry or to companies
that are going public may also impair our business.
WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. You should consider
our prospectus in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in the rapidly changing software industry. These risks include:
- our substantial dependence for revenue from our PowerTier for C++
product, which was first introduced in 1997 and has achieved only limited
market acceptance;
- our need to successfully sell our PowerTier for EJB product, which was
first introduced in 1998 and has achieved only limited market acceptance;
- our need to expand our distribution capability through both a direct
sales organization and third party distributors and systems integrators;
- our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for application
servers;
- our unproven ability to compete in a highly competitive market;
- uncertainty as to the growth rate in the electronic commerce market and,
in particular, the business-to-business electronic commerce market;
- our dependence on Enterprise JavaBeans, commonly known as EJB, becoming a
widely accepted standard in the transactional application server market;
and
- our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
Our revenues may not continue to grow and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $3.3 million in 1996, $4.7
million in 1997, $4.1 million in 1998 and $1.9 million in the three months ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of
approximately $14.7 million. In addition, while we are unable to predict
accurately our future operating expenses, we currently expect these expenses to
increase substantially, as we expand our product development and sales and
marketing efforts and assume the increased administrative duties associated with
our public company status. Thus, we will need to increase our revenues to become
profitable. Because our product market is new and evolving, we cannot accurately
predict either the future growth rate, if any, or the ultimate size of the
market for our products.
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WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through private sales of
preferred stock and not through cash generated by our operations. We expect to
continue to have negative cash flow from operations for the next several
quarters.
We may need to raise additional capital in the future.
Although we believe that the net proceeds from this offering, together with
our current cash balances, will be sufficient to meet our anticipated operating
cash needs for the next 18 months, we may need to raise additional funds prior
to that time. We face several risks in connection with this possible need to
raise additional capital:
- the issuance of additional securities could result in:
- debt securities with rights senior to the common stock;
- dilution to existing stockholders as a result of issuing additional
equity or convertible debt securities;
- debt securities with restrictive covenants that could restrict our
ability to run our business as desired; or
- securities issued on disadvantageous financial terms.
- the failure to procure needed funding could result in:
- a reduction in scope in our planned product development or marketing
efforts; or
- an inability to respond to competitive pressures or take advantage of
market opportunities, which could adversely affect our ability to
achieve profitability or positive cash flow.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our operating results have fluctuated significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. In particular, the fourth quarter of each year
has in the past tended to account for the greatest percentage of total revenues
for the year, and we have often experienced an absolute decline in revenues from
the fourth quarter to the first quarter of the next year. If our future
quarterly operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier for C++ and PowerTier
for EJB products;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
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- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server
market;
- our lengthy sales cycle;
- our success in expanding our direct sales force and indirect distribution
channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer. Due to the relative importance of many of our
product sales, a lost or delayed sale could adversely affect our quarterly
operating results. Our sales cycle is affected by seasonal fluctuations as a
result of our customers' fiscal year budgeting cycles and slow summer purchasing
patterns in Europe. Also, our revenues are typically higher in the fourth
quarter than in other quarters of the year.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In 1998, sales of products and
services to Cisco accounted for 14% of our total revenues, sales of products and
services to Instinet accounted for 17% of our total revenues, and sales of
products and services to our top five customers accounted for 55% of total
revenues. In 1997, sales of products and services to Lucent accounted for 11% of
our total revenues, and sales of products and services to our top five customers
accounted for 15% of our total revenues. In addition, the identity of our top
five customers has changed from year to year. If we lose a significant customer,
or fail to increase product sales to an existing customer as planned, we may not
be able to replace
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the lost revenues with sales to other customers. In addition, because our
marketing strategy is to concentrate on selling products to industry leaders,
any loss of a customer could harm our reputation within the industry and make it
harder for us to sell our products to other companies in that industry. The loss
of, or a reduction in sales to, one or more significant customers would likely
result in a decrease in our revenues.
WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE
TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER.
We are focusing significant marketing efforts on our PowerTier for EJB
application server, which is based on three relatively new technologies, none of
which have been widely adopted by companies. These three technologies are a
distributed object computing architecture, Sun Microsystems' Java programming
language and Enterprise JavaBeans, or EJB. Distributed object computing combines
the use of software modules, or objects, communicating across a computer network
to software applications, such as our PowerTier application server. EJB is the
Java programming standard for use in an application server. In 1998, we launched
our PowerTier for EJB product, which is a transactional application server that
uses Java and conforms to the EJB standard. Sun Microsystems released the EJB
standard in 1998, and thus far EJB has had limited market acceptance. We expect
a substantial portion of our future revenues will come from sales of products
based on the EJB standard. Thus, our success depends significantly upon broad
market acceptance of distributed object computing in general, and Java
application servers in particular. If EJB does not become a widespread
programming standard for application servers, our revenues and business could
suffer.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We need to increase our research and
development investment to maintain our technological leadership. Our future
success depends on our ability to continue to enhance our current products and
to continue to develop and introduce new products that keep pace with
competitive product introductions and technological developments. For example,
as Sun Microsystems introduces new EJB specifications, we will need to introduce
new versions of PowerTier for EJB designed to support these new specifications
to remain competitive. If we do not bring enhancements and new versions of our
products to market in a timely manner, our market share and revenues could
decrease and our reputation could suffer. If we fail to anticipate or respond
adequately to changes in technology and customer needs, or if there are any
significant delays in product development or introduction, our revenues and
business could suffer.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO BUILD AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must expand our direct sales team to generate increased revenue. In
1998, we hired several new salespeople, replacing most of our preexisting sales
force. In order to meet our future sales goals, we will need to hire many more
salespeople within the next
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two years for both our domestic and international sales efforts. In the past,
newly hired employees have required training and approximately six to nine
months experience to achieve full productivity. Because our entire sales team is
relatively new, we cannot be certain that they will meet our sales goals. In
addition, our recently hired employees may not become productive, and we may not
be able to hire enough qualified individuals in the future.
BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH SYSTEMS INTEGRATORS AND OTHER THIRD PARTIES, ANY FAILURE TO
DEVELOP THIS CHANNEL MAY RESULT IN LOWER REVENUES.
To date, we have sold our products primarily through our direct sales
force, but our ability to achieve significant revenue growth in the future will
depend in large part on our success in establishing and leveraging relationships
with systems integrators and other third parties. It may be difficult for us to
establish these relationships, and, even if we establish these relationships, we
will then depend on the systems integrators' and other third parties' sales
efforts. In addition, because these relationships are nonexclusive, systems
integrators may choose to use application servers or other alternative solutions
offered by our competitors, and not our products. If we fail to successfully
build our third-party distribution channels or if our systems integrator and
other third party partners do not perform as expected, our business could be
harmed.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
enormous projects to fully deploy our products and achieve our revenue goals.
These enterprise projects often take many years to complete and can be delayed
by a variety of factors, including general or industry-specific economic
downturns, our customers' budget constraints, year 2000 problems or other
customer-specific delays, problems with other system components or delays caused
by the systems integrators who may be managing the system deployment. If our
customers cannot successfully implement large-scale deployments, or they
determine for any reason that our products cannot accommodate large-scale
deployments or that our products are not appropriate for widespread use, our
business could suffer. In addition, if a systems integrator fails to complete a
project utilizing our product for a customer in a timely manner, our revenues or
business reputation could suffer.
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Our success depends on achieving widespread market acceptance of our
PowerTier for EJB application server. Because Sun Microsystems controls the EJB
standard, we need to maintain a good working relationship with Sun Microsystems
to develop future versions of PowerTier for EJB, as well as additional products
using EJB, that will gain market acceptance. In March 1998, we entered into a
license agreement with Sun Microsystems, pursuant to which we granted Sun
Microsystems rights to manufacture and sell, by itself and not jointly with
others, products under a number of our patents and Sun Microsystems granted us
rights to manufacture and sell, by ourselves and not jointly with others,
products under a number of Sun Microsystems' patents. As a result, Sun
Microsystems may develop and sell some competing products that would, in the
absence of this license
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agreement, infringe our patents. Because Sun Microsystems controls the EJB
standard, it could develop the EJB standard in a more proprietary way to favor a
product offered by one of its subsidiaries, NetDynamics or KIVA Software, or a
third party, which could make it much harder for us to compete in the EJB
application server market.
MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD
DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD
ACCEPTANCE.
Microsoft has established a competing standard for distributed computing,
COM, which includes an application server product. If this standard gains
widespread market acceptance over the EJB or CORBA standards, on which our
products are based, our business would suffer. Because of Microsoft's resources
and commanding position with respect to other markets and technologies,
Microsoft's entry into the application server market may cause our potential
customers to delay purchasing decisions. We expect that Microsoft's presence in
the application server market will increase competitive pressure in this market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- quality of support and service;
- security;
- company reputation; and
- price.
Our competitors include both publicly and privately-held enterprises,
including BEA Systems (WebLogic), Gemstone Systems, IBM (WebSphere), Inprise,
Iona Technologies, Oracle (OAS) and Sun Microsystems (NetDynamics). Many
customers may not be willing to purchase our PowerTier platform because they
have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
preexisting customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. Moreover, there are other
very large and established companies, including Microsoft and Netscape, who
offer alternative solutions and are thus indirect competitors. Further, dozens
of companies have announced their intention to support EJB and may compete
against us in the future. These competitors and potential competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than we can. In addition, in the PowerTier
for C++ market, many potential customers build their own
9
<PAGE> 13
custom application servers, so we effectively compete against our potential
customers' internal information technology departments.
IF THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVER THE INTERNET
DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR
REVENUES COULD DECLINE.
Our performance and future success will depend on the growth and widespread
adoption of the market for business-to-business electronic commerce over the
Internet. If business-to-business electronic commerce does not develop in the
manner currently envisioned, our business could be materially and adversely
affected. Moreover, critical issues concerning the commercial use of the
Internet, including security, cost, accessibility and quality of network
service, remain unresolved and may negatively affect the growth of the Internet
as a platform for conducting business-to-business electronic commerce. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols to handle increased activity or due
to increased government regulation and taxation of Internet commerce.
OUR FAILURE TO MANAGE GROWTH COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue growth and other financial objectives will
place significant demands on our management and other resources. We anticipate
increasing our headcount significantly over the next two years. Our ability to
manage this growth effectively will require us to continue to develop and
improve our operational, financial and other internal systems and controls, as
well as our business development capabilities, and to train, motivate and manage
our employees. If we are unable to manage our growth effectively, we may not be
able to retain key personnel and the quality of our services and products may
suffer.
OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY
EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer and Chairman of the Board. We
do not have a key person life insurance policy covering Mr. Keene or any other
officer or key employee. Our success will depend in large part upon our ability
to attract and retain highly-skilled employees, particularly sales personnel and
software engineers. There is significant competition for skilled employees,
especially for people who have experience in both the software and Internet
industries. If we are not successful in attracting and retaining these skilled
employees, our sales and product development efforts would suffer. In addition,
if one or more of our key employees resigns to join a competitor or to form a
competing company, the loss of that employee and any resulting loss of existing
or potential customers to a competitor could harm our business. If we lose any
key personnel, we may not be able to prevent the unauthorized disclosure or use
of our technical knowledge or other trade secrets by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly
when first introduced or when new versions or enhancements are released. Our
products have in the past contained and may in the future contain errors and
defects, which may be serious or
10
<PAGE> 14
difficult to correct and which may cause delays in subsequent product releases.
Delays in shipment of scheduled software releases or serious defects or errors
could result in lost revenues or a delay in market acceptance, which could have
a material adverse effect on our revenues and reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 29% of our revenues came
from sales of products and services outside the United States in the year ended
December 31, 1998. Approximately 22% of our revenues came from sales of products
and services outside the United States during the three months ended March 31,
1999. We expect international revenues to continue to represent a significant
portion of our total revenues. To date, almost all of our international revenues
have resulted from our direct sales efforts. In international markets, however,
we expect that we will depend more heavily on third party distributors to sell
our products in the future. The success of our international strategy will
depend on our ability to develop and maintain productive relationships with
these third parties. The failure to develop key international markets for our
products could cause a reduction in our revenues. Additional risks related to
our international expansion and operation include:
- difficulties of staffing and managing foreign operations;
- our dependence on the sales efforts of our third party distributors;
- longer payment cycles typically associated with international sales;
- tariffs and other trade barriers;
- failure to comply with a wide variety of complex foreign laws and
changing regulations;
- exposure to political instability and economic downturns;
- failure to localize our products for foreign markets;
- restrictions on the export of technologies;
- potentially adverse tax consequences;
- reduced protection of intellectual property rights in some countries; and
- currency fluctuations.
11
<PAGE> 15
We sell products outside the United States in U.S. dollars. We do not
currently engage in any hedging transactions to reduce our exposure to currency
fluctuations as a result of our foreign operations. We are not currently ISO
9000 compliant, nor are we attempting to meet all foreign technical standards
that may apply to our products. Our failure to develop our international sales
channel as planned could cause a decline in our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success may depend on our ability to protect our proprietary rights to
the technologies used in our products, and yet the measures we are taking to
protect these rights may not be adequate. If we are not adequately protected,
our competitors could use the intellectual property that we have developed to
enhance their products, which could harm our business. We rely on patent
protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual restrictions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Further, litigation may be necessary
to enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
WE MAY BE SUED FOR VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As the number of
competitors in the application server market grows and the functionality of
products in different market segments overlaps, the possibility of an
intellectual property claim against us increases. For example, we may
inadvertently infringe a patent of which we are unaware. In addition, because
patent applications can take many years to issue, there may be a patent
application now pending of which we are unaware, which will cause us to be
infringing when it is issued in the future. To address these patent infringement
or other intellectual property claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim against us, and our
failure to license the infringed or similar technology, would harm our business.
In addition, any infringement or other intellectual property claims, with or
without merit, which are brought against us could be time consuming and
expensive to litigate or settle and could divert management attention from
administering our core business.
WE FACE RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE, INCLUDING THE RISK THAT OUR
PRODUCTS OR INTERNAL SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT AND THE RISK THAT
OUR CUSTOMERS MAY DELAY THE PURCHASE OF OUR POWERTIER PLATFORM AS A RESULT OF
THEIR OWN YEAR 2000 CONCERNS.
We have designed and tested the most current versions of our products to be
year 2000 compliant. However, we have not tested our products on all platforms
or all versions of operating systems that we currently support. Despite this
testing, our products may contain undetected errors or defects associated with
year 2000 date functions that may be expensive for us to remedy. Because our
products are generally incorporated into a large enterprise-wide system
enhancement, we may face claims based on year 2000 issues arising
12
<PAGE> 16
from the integration of multiple products, including ours, within an overall
system. Some commentators have stated that a significant amount of litigation
will arise out of year 2000 issues, and we are aware of a growing number of
lawsuits against other software vendors.
We may experience serious unanticipated problems and material costs caused
by undetected errors or defects in the technology used in our internal systems
relating to the year 2000 transition. These systems include the hardware and
third-party software products that our research and development staff use in
their daily activities, as well as our management information systems. The most
likely worst case scenarios include:
- hardware or software failures that would prevent our research and
development staff from effectively performing their duties;
- corruption of data contained in our internal information systems; and
- the failure of infrastructure services provided by government agencies
and other third parties, including public utilities and Internet service
providers.
Finally, our potential customers may cease or delay the purchase and
installation of new complex systems, such as systems incorporating our PowerTier
application server, or may defer an enterprise-wide deployment of our PowerTier
platform, as a result of, and during, their own internal year 2000 testing. Any
resulting delay or decrease in orders for our products could cause our revenues
to decline, either on a quarterly or absolute basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock after the offering could impede our
ability to raise funds at an advantageous price through the sale of securities.
After this offering, we will have outstanding 18,447,941 shares of common stock.
The 3,000,000 shares sold in this offering will be immediately available for
sale in the public market. Beginning 90 days after the effective date of this
prospectus, approximately 147,790 shares will be eligible for sale. Beginning
180 days after the effective date, approximately 14,434,150 shares will be
eligible for sale, 7,014,673 of which will be subject to volume and other
restrictions under Rule 144. The remaining 866,001 shares will be eligible for
sale upon the expiration of various one-year holding periods during the six
months following 180 days after the effective date, subject to volume and other
restrictions under Rule 144.
OUR STOCK PRICE MAY BE VOLATILE.
Before this offering, there has been no public market for our common stock.
An active public market for our common stock may not develop or be sustained
after this offering. If you purchase shares in this offering, you will pay a
price that was not established in a competitive market, but was rather a price
that we negotiated with the underwriters. After the offering, the market price
of our common stock is likely to be highly volatile and may rise or fall as a
result of many factors, such as:
- variations in our quarterly results;
- announcements of technological innovations by us or our competitors;
- introductions of new products by us or our competitors;
13
<PAGE> 17
- acquisitions or strategic alliances by us or our competitors;
- hiring or departure of key personnel;
- the gain or loss of a significant customer or order;
- changes in estimates of our financial performance or changes in
recommendations by securities analysts;
- market conditions in the software industry and in our customers'
industries; and
- adoption of new accounting standards affecting the software industry.
The stock market in general has experienced extreme price and volume
fluctuations, which could adversely affect the market price of our stock. In
particular, the market prices of the common stock of many companies in the
software and Internet industries have experienced this volatility, which has
often been unrelated to these companies' operating performance. In the past,
securities class action litigation has often been brought against a company
after a period of volatility in the market price of its stock. We may in the
future be a target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
harm our business.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL AFTER THIS OFFERING.
Immediately after this offering, our executive officers and directors, and
entities affiliated with them, will continue to own approximately 60% of our
outstanding common stock. Accordingly, these stockholders may, as a practical
matter, continue to control the election of a majority of the directors and the
determination of all corporate actions after this offering. This concentration
of voting control could have the effect of delaying or preventing a merger or
other change in control, even if it would benefit our other stockholders.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
- establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
- authorizing the board to issue preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
14
<PAGE> 18
See "Management -- Board Composition" and "Description of Capital Stock --
Delaware Antitakeover Law and Provisions of our Certificate of Incorporation and
Bylaws."
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. For
example, we have recently acquired object request broker technology, which
provides the communications between the transactional application server and the
client. While we have no current agreements or negotiations underway with
respect to any major acquisitions, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- incur substantial debt;
- assume contingent liabilities; or
- take substantial charges in connection with the amortization of goodwill
and other intangible assets.
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations, products and personnel
with our pre-existing business;
- unanticipated costs;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have limited or no prior
experience; and
- potential loss of key employees from either our preexisting business or
the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
YOU WILL PAY SUBSTANTIALLY MORE FOR YOUR SHARES THAN THE NET TANGIBLE BOOK VALUE
PER SHARE OF THE SHARES YOU ACQUIRE.
If you purchase shares of common stock in this offering, you will pay
$11.00 per share, which substantially exceeds $0.41, which is the net tangible
book value per share of the shares you would acquire. The stockholders who
purchase shares in this offering will contribute 62% of the total amount of our
funding to date, but will only own a total of 16% of our shares outstanding.
This dilution is in large part because our earlier investors paid substantially
less than the public offering price when they purchased their shares of common
stock. You will experience additional dilution upon the exercise of outstanding
stock options or warrants to purchase common stock.
15
<PAGE> 19
WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THIS OFFERING,
AND THUS MAY USE THE PROCEEDS TO FUND OPERATING LOSSES, FOR ACQUISITIONS OR FOR
OTHER CORPORATE PURPOSES.
We have not designated any specific use for the net proceeds of this
offering. As a result, our management and board of directors will have broad
discretion in spending the proceeds of this offering. We currently expect to use
the net proceeds primarily for working capital and general corporate purposes,
funding product development and expanding our sales and marketing organization.
In addition, we may use a portion of the net proceeds for further development of
our product lines through acquisitions of products, technologies and businesses.
16
<PAGE> 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. These statements relate to future events or our future financial
performance, and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
In some cases, you can identify forward-looking statements by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of these and
other similar words.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results.
17
<PAGE> 21
USE OF PROCEEDS
Our net proceeds from the sale of the 3,000,000 shares of common stock we
are offering at the initial public offering price of $11.00 per share are
estimated to be $29,790,000 ($34,394,000 if the underwriters' over-allotment
option is exercised in full) after deducting the underwriting discounts and
commissions and estimated offering expenses.
We currently expect to use the net proceeds primarily for working capital
and general corporate purposes, funding product development and expanding our
sales and marketing organization. In addition, we may use a portion of the net
proceeds for further development of our product lines through acquisitions of
products, technologies and businesses, although we have no present commitments
or agreements to make any major acquisitions. The amount of cash that we
actually expend for working capital purposes will vary significantly depending
on a number of factors, including future revenue growth, if any, and the amount
of cash we generate from operations. Thus, management will have significant
discretion in applying the net proceeds of this offering. Pending the uses
described above, we will invest the net proceeds in short-term, investment
grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid dividends on our common stock or preferred stock. We
currently intend to retain any future earnings to fund the development of our
business. Therefore, we do not currently anticipate declaring or paying
dividends in the foreseeable future. In addition, our line of credit agreement
prohibits us from paying dividends.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth the following information:
- the actual capitalization of Persistence as of March 31, 1999;
- the pro forma capitalization of Persistence, after giving effect to the
automatic conversion of all outstanding shares of preferred stock into
7,697,885 shares of common stock;
- the pro forma as adjusted capitalization, after giving effect to the sale
of shares of common stock at the initial public offering price of $11.00
per share in this offering, after deducting the underwriting discounts
and commissions and estimated offering expenses that Persistence expects
to pay in connection with this offering; and
- the authorization of 75,000,000 shares of common stock and 5,000,000
shares of preferred stock upon our recent reincorporation in Delaware.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes to the consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current
portion................................... $ 683 $ 683 $ 683
-------- -------- --------
Stockholders' equity:
Preferred stock, par value $0.001 per share;
7,900,000 shares authorized, actual,
7,697,885 shares issued and outstanding;
7,900,000 shares authorized, none issued
or outstanding, pro forma; 5,000,000
shares authorized, none issued or
outstanding, pro forma as adjusted........ 19,859 -- --
Common stock, par value $0.001 per share;
41,100,000 shares authorized, 7,750,056
shares issued and outstanding, actual;
41,100,000 shares authorized, 15,447,941
issued and outstanding, pro forma;
75,000,000 shares authorized, 18,447,941
shares issued and outstanding, pro forma
as adjusted............................... 3,997 23,856 53,646
Deferred stock compensation................. (2,705) (2,705) (2,705)
Notes receivable from stockholders.......... (161) (161) (161)
Accumulated deficit......................... (14,681) (14,681) (14,681)
-------- -------- --------
Total stockholders' equity........ 6,309 6,309 36,099
-------- -------- --------
Total capitalization.............. $ 6,992 $ 6,992 $ 36,782
======== ======== ========
</TABLE>
- ---------------
This table excludes the following shares:
- 1,388,036 shares issuable upon exercise of outstanding options at a weighted
average exercise price of $0.64 per share as of March 31, 1999,
- 80,556 shares issuable upon exercise of outstanding warrants at a weighted
average exercise price of $0.90 per share as of March 31, 1999, and
- an aggregate of 4,495,033 shares available for future issuance under our
1997 stock plan, 1999 directors' stock option plan and 1999 employee stock
purchase plan as of March 31, 1999. See "Management -- Stock Plans" and
notes 5 and 11 of notes to consolidated financial statements.
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<PAGE> 23
DILUTION
The pro forma net tangible book value on March 31, 1999 was $6,309,000, or
$0.41 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding, after giving effect
to the conversion of all outstanding shares of preferred stock into common stock
immediately prior to the closing of this offering. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of our common stock in this offering and the net tangible
book value per share of our common stock immediately following this offering.
After giving effect to our sale of shares of common stock in this offering and
after deducting the underwriting discount and commissions and our estimated
offering expenses, our pro forma net tangible book value as of March 31, 1999
would have been $36,099,000 or $1.96 per share of common stock. This represents
an immediate increase in net tangible book value of $1.55 per share to existing
stockholders and an immediate dilution of $9.04 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $11.00
Pro forma net tangible book value per share as of March
31, 1999............................................... 0.41
Increase per share attributable to new investors.......... 1.55
-----
Pro forma net tangible book value after the offering........ 1.96
------
Dilution per share to new investors......................... $ 9.04
======
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 1999,
the differences between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid. The information
presented is based upon the initial public offering price of $11.00 per share,
before deducting the underwriting discounts and commissions and estimated
offering expenses of this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 15,447,941 84% $20,316,000 38% $ 1.32
New investors............................. 3,000,000 16 33,000,000 62 11.00
---------- ----- ----------- -----
Totals.................................... 18,447,941 100.0% $53,316,000 100.0%
========== ===== =========== =====
</TABLE>
This table excludes the following shares:
- 1,388,036 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $0.64 per share as of March 31, 1999,
- 80,556 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $0.90 per share as of March 31, 1999,
and
- an aggregate of 4,495,033 shares available for future issuance under our
1997 stock plan, 1999 directors' stock option plan and 1999 employee
stock purchase plan as of March 31, 1999. See "Management -- Stock Plans"
and notes 5 and 11 of notes to consolidated financial statements.
If the underwriters' over-allotment option is exercised in full, the
following will occur:
- the number of shares of common stock held by existing stockholders will
decrease to approximately 82% of the total number of shares of our common
stock outstanding after this offering; and
- the number of shares held by new investors will be increased to 3,450,000
or approximately 18% of the total number of shares of our common stock
outstanding after this offering.
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended December 31, 1996, 1997 and
1998, and the consolidated balance sheet data at December 31, 1997 and 1998, are
derived from audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statements of operations data for the years
ended December 31, 1994 and 1995, and the consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 are derived from audited financial statements
not included in this prospectus. The consolidated statements of operations data
for the three-months ended March 31, 1998 and 1999 and the consolidated balance
sheet data as of March 31, 1999 are derived from unaudited consolidated
financial statements included elsewhere in this prospectus. In our opinion,
these unaudited statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the information when
read in conjunction with the consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License............................................ $ 978 $ 3,053 $ 2,603 $ 3,546 $ 7,478 $ 1,004 $ 2,116
Service............................................ 318 954 1,171 1,867 2,682 706 747
------- ------- ------- ------- ------- ------- -------
Total revenues................................... 1,296 4,007 3,774 5,413 10,160 1,710 2,863
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License............................................ 32 16 139 342 239 56 42
Service............................................ 60 142 221 729 1,372 326 580
------- ------- ------- ------- ------- ------- -------
Total cost of revenues........................... 92 158 360 1,071 1,611 382 622
------- ------- ------- ------- ------- ------- -------
Gross profit......................................... 1,204 3,849 3,414 4,342 8,549 1,328 2,241
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................................ 1,092 2,011 3,798 4,712 7,168 1,687 2,015
Research and development........................... 542 1,129 1,976 2,954 4,234 1,038 1,806
General and administrative......................... 361 590 985 1,362 1,237 311 383
------- ------- ------- ------- ------- ------- -------
Total operating expenses......................... 1,995 3,730 6,759 9,028 12,639 3,036 4,204
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........................ (791) 119 (3,345) (4,686) (4,090) (1,708) (1,963)
Interest income (expense), net....................... 12 (1) 34 12 1 4 48
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................... $ (779) $ 118 $(3,311) $(4,674) $(4,089) $(1,704) $(1,915)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic.............................................. $ (0.15) $ 0.02 $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27)
======= ======= ======= ======= ======= ======= =======
Diluted............................................ $ (0.15) $ 0.02 $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27)
======= ======= ======= ======= ======= ======= =======
Shares used in computing net income (loss) per share:
Basic.............................................. 5,196 5,360 6,135 6,366 6,879 6,733 7,044
======= ======= ======= ======= ======= ======= =======
Diluted............................................ 5,196 5,365 6,135 6,366 6,879 6,733 7,044
======= ======= ======= ======= ======= ======= =======
Pro forma basic and diluted net loss per share....... $ (0.31) $ (0.13)
======= =======
Shares used in pro forma basic and diluted net loss
per share.......................................... 13,183 14,320
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ MARCH 31,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 368 $ 370 $4,535 $2,610 $4,938 $ 7,386
Working capital............................................. 207 264 4,437 1,604 3,384 6,285
Total assets................................................ 821 1,424 6,478 5,447 7,604 10,455
Long-term obligations, net of current portion............... 24 121 528 419 714 683
Total stockholders' equity.................................. 422 592 4,697 2,057 3,422 6,309
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of our prospectus includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," "intends" and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. For a description of these risks, see "Risk Factors."
OVERVIEW
We are a leading provider of transactional application server software
products that comprise the Internet software infrastructure for high volume,
high performance electronic commerce applications. We were incorporated and
began operations in 1991. Our first products incorporated patented
object-to-relational mapping and caching technologies, which have since become
the foundation for our PowerTier product family. From 1992 to 1996, we
introduced a variety of enhancements to these products, including a patented
data transformation technology for mapping objects to database tables, and
caching capabilities.
In 1996, we developed our PowerTier transactional application server, which
integrates all of these previously released Persistence products with new shared
transactional caching technologies, which enable multiple users to
simultaneously access the same cached data. We first shipped our PowerTier for
C++ transactional application server in 1997. Sales of PowerTier for C++
accounted for the majority of our revenues in 1997 and 1998, during which years
we added a professional services staff to enable our customers to implement
PowerTier more rapidly. We were one of the first companies to adopt and
implement the EJB specification. In 1998, we introduced PowerTier for EJB, which
customers have frequently purchased together with PowerTier for C++. Our next
version of PowerTier for EJB is currently in use by several major customers and
is expected to be commercially released later in 1999. We currently plan to
continue to focus product development efforts on enhancements to both the
PowerTier for C++ and the PowerTier for EJB products.
Our revenues, which consist of software license revenues and service
revenues, totaled $3.8 million in 1996, $5.4 million in 1997, $10.2 million in
1998 and $2.9 million in the three months ended March 31, 1999. License revenues
consist of licenses of our software products, which generally are priced based
on the number of users or servers. Service revenues consist of professional
services consulting, customer support and training. Because we only commenced
selling application servers in 1997, we have a limited operating history in the
application server market. We expect that, in the near term, the majority of our
revenues will be derived from PowerTier for C++ transactional server and related
services. In the longer term, we expect that PowerTier for EJB will increase as
a component of our total revenues.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom and Germany. Revenues
from PowerTier licenses and services to customers outside the United States
represented approximately $566,000, or 15% of total revenues, in 1996, $639,000,
or 12% of total revenues, in 1997, $2.9 million, or 29% of total revenues, in
1998, and $626,000, or 22% of total revenues, in the three months ended March
31, 1999. Our future success will depend, in part, on our successful development
of international markets for our products.
22
<PAGE> 26
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. Sales of products to our top
five customers accounted for 15% of total revenues in 1997 and 55% of total
revenues in 1998. In the future, we expect to have relatively few large
customers continue to account for a relatively large proportion of our revenues.
To date, we have sold our products primarily through our direct sales
force, and we will need to hire many more sales people within the next two years
in order to meet our sales goals. In addition, our ability to achieve
significant revenue growth will depend in large part on our success in
establishing and leveraging relationships with systems integrators and other
third parties.
For 1997 and prior years, we recognized revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Commencing in 1998, we began recognizing revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition," or SOP 97-2, as amended by Statements of
Position 98-4 and 98-9. Our adoption of these new standards has not to date had
any material effect on our revenue recognition. Further implementation
guidelines relating to these standards may result in unanticipated changes in
our revenue recognition practices, and these changes could affect our future
revenues and earnings.
We recognize license revenues upon shipment of the software if collection
of the resulting receivable is probable, an executed agreement has been signed,
the fee is fixed or determinable and vendor-specific objective evidence exists
to allocate a portion of the total fee to any undelivered elements of the
arrangement. Undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return. We recognize revenues from
customer training, support and consulting services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority.
Arrangements which require significant modification or customization of software
are recognized under the percentage of completion method.
Since inception, we have incurred substantial research and development
costs and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. The number of our full-time employees increased from
64 as of December 31, 1997 to 77 as of December 31, 1998, representing an
increase of 20%. As a result of investments in our infrastructure, we have
incurred net losses in each fiscal quarter since 1996 and, as of March 31, 1999,
had an accumulated deficit of $14.7 million. We anticipate that our operating
expenses will increase substantially for the foreseeable future as we expand our
product development, sales and marketing and other staff. In addition, we expect
to incur substantial expenses associated with sales personnel, referral fees,
marketing programs and increased administrative expenses associated with being a
public company. Accordingly, we expect to incur net losses for the foreseeable
future.
We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance. Our
23
<PAGE> 27
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in early stages of development, particularly
companies in new and rapidly evolving markets. Although we have experienced
significant revenue growth recently, this trend may not continue. We may not
achieve or maintain profitability in the future. Our success depends
significantly upon broad market acceptance of our PowerTier for EJB application
server. Because Sun Microsystems controls the EJB standard, we need to maintain
a good working relationship with them to develop future versions of PowerTier
for EJB, as well as additional products using the EJB standard. Our performance
will also depend on the growth and widespread adoption of the market for
business-to-business electronic commerce over the Internet.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Revenues
Our revenues were $1.7 million for the three months ended March 31, 1998
and $2.9 million for the three months ended March 31, 1999, representing an
increase of 67%. International revenues were $390,000 for the three months ended
March 31, 1998 and $626,000 for the three months ended March 31, 1999.
License Revenues. License revenues were $1.0 million for the three months
ended March 31, 1998 and $2.1 million for the three months ended March 31, 1999,
representing an increase of 111%. License revenues represented 59% of total
revenues for the three months ended March 31, 1998 and 74% of total revenues for
the three months ended March 31, 1999. The increase in software license revenues
was primarily due to sales of our new PowerTier for EJB application server and
the increased size and productivity of our sales team.
Service Revenues. Our service revenues were $706,000 for the three months
ended March 31, 1998 and $747,000 for the three months ended March 31, 1999,
representing an increase of 6%. The dollar increase in service revenues was
primarily due to an increase in customer support fees related to increased sales
of our PowerTier platform. Service revenues represented 41% of total revenues
for the three months ended March 31, 1998 and 26% of total revenues for the
three months ended March 31, 1999. This decrease as a proportion of total
revenues was primarily attributed to an increase in sales of our new PowerTier
for EJB platform.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$56,000 for the three months ended March 31, 1998 and $42,000 for the three
months ended March 31, 1999. As a percentage of license revenues, cost of
license revenues were 6% for the three months ended March 31, 1998 and 2% for
the three months ended March 31, 1999. This decrease was primarily attributable
to lower packaging and document distribution costs as a result of a change to
electronic distribution of these materials.
Cost of Service Revenues. Cost of service revenues consists of personnel
and other costs related to professional services, technical support and
training. Our cost of service revenues was $326,000 for the three months ended
March 31, 1998 and $580,000 for the three months ended March 31, 1999,
representing an increase of 78%. This increase was primarily due to increased
staffing in our professional services organization to support a greater
installed base of customers. As a percentage of service revenues, cost of
service
24
<PAGE> 28
revenues were 46% for the three months ended March 31, 1998 and 78% for the
three months ended March 31, 1999. In particular, cost of service revenues as a
percentage of service revenues may vary between periods due to our use of third
party professional services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $1.7 million for the three months ended March 31, 1998 and $2.0
million for the three months ended March 31, 1999, representing an increase of
19%. This increase was primarily due to our investment in our sales and
marketing infrastructure, which included significant personnel-related costs to
recruit and hire sales people and sales engineers, sales commissions and trade
show expenses. Sales and marketing expenses represented 99% of total revenues
for the three months ended March 31, 1998 and 70% of total revenues for the
three months ended March 31, 1999. We believe that a significant increase in our
sales and marketing efforts is essential for us to maintain our market position
and further increase acceptance of our products. Accordingly, we anticipate we
will continue to invest significantly in sales and marketing for the foreseeable
future, and sales and marketing expenses will increase in future periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside software developers. Our
research and development expenses were $1.0 million for the three months ended
March 31, 1998 and $1.8 million for the three months ended March 31, 1999,
representing an increase of 74%. This increase was primarily related to an
increase in employee and consultant software developers and program management
and documentation personnel hired to support product development. We also
recognized a one-time $303,000 compensation charge associated with the issuance
of common stock to an investor at a price which was less than the deemed fair
value for accounting purposes. Research and development expenses represented 61%
of total revenues for the three months ended March 31, 1998 and 63% of total
revenues for the three months ended March 31, 1999. We believe that a
significant increase in our research and development investment is essential for
us to maintain our market position, to continue to expand our product line and
to enhance our technology. Accordingly, we anticipate that we will continue to
invest significantly in product research and development for the foreseeable
future, and research and development expenses are likely to increase in future
periods.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $311,000 for the three months ended March 31, 1998 and $383,000
for the three months ended March 31, 1999, representing an increase of 23%. This
increase was primarily the result of the hiring of additional finance and
administrative personnel. General and administrative expenses represented 18% of
total revenues for the three months ended March 31, 1998 and 13% of total
revenues for the three months ended March 31, 1999. We believe that our general
and administrative expenses will continue to increase as a result of the
expenses associated with being a public company, including annual and other
public reporting costs, directors' and officers' liability insurance, investor
relations programs and accounting and legal expenses.
25
<PAGE> 29
Net Interest Income. Net interest income was $4,000 for the three months
ended March 31, 1998 and $48,000 for the three months ended March 31, 1999,
representing an increase of $44,000. Net interest income consists primarily of
earnings on our cash and cash equivalent balances.
Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1997 and 1998 and during the three months
ended March 31, 1999 have been considered to be compensatory, as the estimated
fair value for accounting purposes was greater than the stock price as
determined by the board of directors on the date of grant or issuance. Total
deferred stock compensation associated with equity transactions as of March 31,
1999 amounted to $2.7 million, net of amortization. Deferred stock compensation
is being amortized ratably over the vesting periods of these securities.
Amortization expense was $25,000 in the three months ended March 31, 1998 and
$504,000 in the three months ended March 31, 1999.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues
Our revenues were $3.8 million in 1996, $5.4 million in 1997 and $10.2
million in 1998, representing increases of 88% from 1997 to 1998 and 43% from
1996 to 1997. Revenues derived from international operations were $566,000 in
1996, $639,000 in 1997 and $2.9 million in 1998. In 1998, sales of software
licenses to Cisco accounted for 14% of total revenues, and sales of software
licenses to Instinet accounted for 17% of total revenues. In 1997, sales of
products to Lucent accounted for 11% of total revenues.
License Revenues. Our license revenues were $2.6 million in 1996, $3.5
million in 1997 and $7.5 million in 1998, representing increases of 111% from
1997 to 1998 and 36% from 1996 to 1997. License revenues represented 69% of
total revenues in 1996, 66% of total revenues in 1997 and 74% of total revenues
in 1998. The increase in license revenues from 1997 to 1998 was attributable
primarily to an increase in the size and productivity of our sales force,
including the introduction of our direct sales team in Europe, and the release
of our PowerTier for EJB product. The increase in revenues from 1996 to 1997 was
primarily due to the introduction of our PowerTier product family.
Service Revenues. Our service revenues were $1.2 million in 1996, $1.9
million in 1997 and $2.7 million in 1998, representing increases of 44% from
1997 to 1998 and 59% from 1996 to 1997. Service revenues represented 31% of
total revenues in 1996, 34% of total revenues in 1997 and 26% of total revenues
in 1998. The increase in service revenues between 1997 and 1998 was primarily
due to an increase in customer support fees related to an increase in our
installed base of PowerTier customers, and, to a lesser extent, an increase in
professional services fees. The increase in service revenues between 1996 and
1997 was primarily due to an increase in both professional services and customer
support fees.
Cost of Revenues
Cost of License Revenues. Cost of license revenues was $139,000 in 1996,
$342,000 in 1997 and $239,000 in 1998, representing a decrease of 30% from 1997
to 1998 and an increase of 146% from 1996 to 1997. Cost of license revenues as a
percentage of license revenues was 5% in 1996, 10% in 1997 and 3% for 1998. The
decrease in cost of license revenues from 1997 to 1998 was attributable
primarily due to lower packaging and document distribution costs. The increase
in cost of license revenues from 1996 to 1997 was attributable primarily to a
higher level of printed documentation.
26
<PAGE> 30
Cost of Service Revenues. Cost of service revenues was $221,000 in 1996,
$729,000 in 1997 and $1.4 million in 1998, representing increases of 88% from
1997 to 1998 and 230% from 1996 to 1997. Cost of service revenues as a
percentage of service revenues was 19% in 1996, 39% in 1997 and 51% for 1998.
The increases during these periods were due to increased staffing in our
professional services and support organizations.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $3.8 million in
1996, $4.7 million in 1997 and $7.2 million in 1998, representing increases of
52% from 1997 to 1998 and 24% from 1996 to 1997. Sales and marketing expenses
represented 101% of total revenues in 1996, 87% of total revenues in 1997 and
71% of total revenues for 1998. The dollar increases during these periods
primarily reflected our investment in our sales and marketing infrastructure,
which included significant personnel-related expenses such as salaries, benefits
and commissions, and, to a lesser extent, travel and entertainment expenses,
trade shows and other marketing expenses.
Research and Development. Research and development expenses were $2.0
million in 1996, $3.0 million in 1997 and $4.2 million in 1998, representing
increases of 43% from 1997 to 1998 and 50% from 1996 to 1997. Research and
development expenses represented 52% of total revenues in 1996, 55% of total
revenues in 1997 and 42% of total revenues in 1998. The dollar increases during
these periods were primarily related to the increase in headcount to support
product development and, to a lesser extent, an increase in average
compensation.
General and Administrative. General and administrative expenses were $1.0
million in 1996, $1.4 million in 1997 and $1.2 million in 1998, representing a
decrease of 9% from 1997 to 1998 and an increase of 38% from 1996 to 1997.
General and administrative expenses represented 26% of total revenues in 1996,
25% of total revenues in 1997 and 12% of total revenues in 1998. The dollar
decrease in general and administrative expenses from 1997 to 1998 was
attributable primarily to a decrease in consulting fees, offset in part by an
increase in headcount and average compensation. The dollar increase in general
and administrative expenses from 1996 to 1997 was attributable primarily to an
increase in headcount, and legal and accounting expenses.
Net Interest Income. Net interest income was $34,000 in 1996, $12,000 in
1997 and $1,000 in 1998. Net interest income consists primarily of earnings on
our cash and cash equivalent balances, offset by interest expense related to
obligations under capital leases and other borrowings. The decrease in net
interest income from 1997 to 1998 was due to an increase in interest expense
related to obligations under capital leases and an equipment loan. The decrease
in interest income from 1996 to 1997 was due to a lower level of average cash
and cash equivalent balances.
Stock-Based Compensation. We recorded no stock-based compensation expense
for 1996 and 1997. As of December 31, 1998, total deferred stock compensation
associated with equity transactions amounted to $2.2 million, net of
amortization. Amortization expense was $331,000 in 1998. We expect to record
amortization expense related to these securities of approximately $1.1 million
in 1999, $800,000 in 2000 and $800,000 in 2001.
Provision for Income Taxes. Since inception, we have incurred net
operating losses for federal and state tax purposes and have not recognized any
tax provision or benefit. As of December 31, 1998, we had $10.8 million of
federal and $3.6 million of state net operating loss carryforwards available to
offset future taxable income. The federal net
27
<PAGE> 31
operating loss carryforwards expire through 2018, while the state net operating
loss carryforwards expire through 2003. The net operating loss carryforwards for
state tax purposes are substantially less than for federal tax purposes,
primarily because only 50% of state net operating loss carryforwards can be
utilized to offset future state taxable income. The Tax Reform Act of 1986
limits the use of net operating loss carryforwards in situations where changes
occur in the stock ownership of a company. If we should be acquired or otherwise
have an ownership change, as defined in the Tax Reform Act of 1986, our
utilization of these carryforwards could be restricted.
As of December 31, 1998, the Company also had research and development tax
credit carryforwards of $570,000 and $320,000 available to offset future federal
and state income taxes. The federal credit carryforward expires in 2018, while
the state credit carryforward has no expiration.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
28
<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statement of
operations data for the nine quarters in the 27-month period ended March 31,
1999, as well as this data expressed as a percentage of our total revenues for
the periods indicated. This data has been derived from our unaudited
consolidated financial statements, which have been prepared on the same basis as
the audited consolidated financial statements and, in the opinion of our
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the information when read in conjunction
with the consolidated financial statements and notes thereto. Our quarterly
results have been in the past and may in the future be subject to significant
fluctuations. As a result, we believe that results of operations for interim
periods should not be relied upon as any indication of the results to be
expected in any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
License...................... $ 659 $ 1,044 $ 696 $ 1,147 $ 1,004 $ 1,447 $2,250 $2,777 $ 2,116
Service...................... 271 315 414 867 706 604 643 729 747
------- ------- ------- ------- ------- ------- ------ ------ -------
Total revenues............. 930 1,359 1,110 2,014 1,710 2,051 2,893 3,506 2,863
------- ------- ------- ------- ------- ------- ------ ------ -------
Cost of revenues:
License...................... 39 67 120 116 56 63 93 27 42
Service...................... 59 123 164 383 326 345 334 367 580
------- ------- ------- ------- ------- ------- ------ ------ -------
Total cost of revenues... 98 190 284 499 382 408 427 394 622
------- ------- ------- ------- ------- ------- ------ ------ -------
Gross profit................... 832 1,169 826 1,515 1,328 1,643 2,466 3,112 2,241
------- ------- ------- ------- ------- ------- ------ ------ -------
Operating expenses:
Sales and marketing.......... 1,069 1,257 1,116 1,270 1,687 1,449 1,885 2,147 2,015
Research and development..... 558 724 722 950 1,038 1,072 1,032 1,092 1,806
General and administrative... 257 336 306 463 311 272 290 364 383
------- ------- ------- ------- ------- ------- ------ ------ -------
Total operating expenses... 1,884 2,317 2,144 2,683 3,036 2,793 3,207 3,603 4,204
------- ------- ------- ------- ------- ------- ------ ------ -------
Loss from operations........... (1,052) (1,148) (1,318) (1,168) (1,708) (1,150) (741) (491) (1,963)
Interest income (expense),
net.......................... 9 6 -- (3) 4 (20) (20) 37 48
------- ------- ------- ------- ------- ------- ------ ------ -------
Net loss....................... $(1,043) $(1,142) $(1,318) $(1,171) $(1,704) $(1,170) $ (761) $ (454) $(1,915)
======= ======= ======= ======= ======= ======= ====== ====== =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License...................... 70.9% 76.8% 62.7% 57.0% 58.7% 70.6% 77.8% 79.2% 73.9%
Service...................... 29.1 23.2 37.3 43.0 41.3 29.4 22.2 20.8 26.1
------- ------- ------- ------- ------- ------- ------ ------ -------
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------ ------ -------
Cost of revenues:
License...................... 4.2 4.9 10.8 5.8 3.3 3.1 3.2 0.8 1.5
Service...................... 6.3 9.1 14.8 19.0 19.0 16.8 11.5 10.4 20.2
------- ------- ------- ------- ------- ------- ------ ------ -------
Total cost of revenues..... 10.5 14.0 25.6 24.8 22.3 19.9 14.7 11.2 21.7
------- ------- ------- ------- ------- ------- ------ ------ -------
Gross margin................... 89.5 86.0 74.4 75.2 77.7 80.1 85.3 88.8 78.3
------- ------- ------- ------- ------- ------- ------ ------ -------
Operating expenses:
Sales and marketing.......... 114.9 92.5 100.5 63.1 98.7 70.6 65.2 61.2 70.4
Research and development..... 60.1 53.3 65.0 47.2 60.7 52.3 35.7 31.1 63.1
General and administrative... 27.6 24.7 27.6 22.9 18.1 13.3 10.0 10.5 13.4
------- ------- ------- ------- ------- ------- ------ ------ -------
Total operating expenses... 202.6 170.5 193.1 133.2 177.5 136.2 110.9 102.8 146.9
------- ------- ------- ------- ------- ------- ------ ------ -------
Loss from operations........... (113.1) (84.5) (118.7) (58.0) (99.8) (56.1) (25.6) (14.0) (68.6)
Interest income (expense),
net.......................... 0.9 0.5 -- (0.1) 0.2 (0.9) (0.7) 1.1 1.7
------- ------- ------- ------- ------- ------- ------ ------ -------
Net loss....................... (112.2)% (84.0)% (118.7)% (58.1)% (99.6)% (57.0)% (26.3)% (12.9)% (66.9)%
======= ======= ======= ======= ======= ======= ====== ====== =======
</TABLE>
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<PAGE> 33
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier for C++ and PowerTier
for EJB products;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server
market;
- our lengthy sales cycle;
- our success in expanding our direct sales force and indirect distribution
channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
Our license revenues in the first quarter of 1998 were lower than those in
the fourth quarter of 1997 and our license revenues in the first quarter of 1999
were lower than those in the fourth quarter of 1998. In the future, we expect
this trend to continue, with the fourth quarter of each year accounting for the
greatest percentage of total revenues for the year and with an absolute decline
in revenues from the fourth quarter to the first quarter of the next year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through private
sales of convertible preferred stock, which totaled $19.9 million in aggregate
net proceeds through March 31, 1999. We have also financed our business through
a loan in the principal amount of $800,000 and capitalized leases. As of March
31, 1999, we had $7.4 million of cash and cash equivalents and $6.3 million of
working capital.
Net cash used for operating activities was $3.1 million in 1996, $3.1
million in 1997, $3.0 million in 1998, and $1.7 million for the three months
ended March 31, 1999. For
30
<PAGE> 34
each of 1996, 1997 and 1998, and for the three months ended March 31, 1999, cash
used for operating activities was attributable primarily to net losses and
increases in accounts receivable, offset by depreciation and amortization of
deferred stock compensation and deferred revenues.
Net cash used for investing activities was $9,000 for 1996, $589,000 for
1997, $436,000 for 1998, and $96,000 for the three months ended March 31, 1999.
For each of the periods, cash used in investing activities primarily reflected
investments in property and equipment and deposits.
Net cash provided by financing activities was $7.3 million for 1996, $1.8
million for 1997, $5.7 million for 1998, and $4.3 million for the three months
ended March 31, 1999. Cash provided by financing activities during these periods
was primarily attributable to proceeds from the issuance of preferred stock and,
in 1998, borrowings under a term loan, primarily offset by repayments of a
capital lease obligations.
In February 1998, we entered into a loan agreement with Comerica Bank for
an amount up to $2,000,000. As of March 31, 1999 we had no borrowings
outstanding under this loan. As of March 31, 1999, we had an $800,000 promissory
note in favor of Comerica. We are required to make principal payments of $22,222
per month plus interest of 7.75% per annum on the unpaid principal balance,
payable in 36 monthly installments beginning April 1, 1999. The promissory note
is collateralized by substantially all of our assets, including our patents and
intellectual property.
Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. We also may increase our capital expenditures as we expand into
additional international markets.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and short-term investments, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 18 months. If cash generated from operations is insufficient
to satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. If additional funds are raised
through the issuance of debt securities, these securities could have rights,
preferences and privileges senior to holders of common stock, and the term of
this debt could impose restrictions on our operations. The sale of additional
equity or convertible debt securities could result in additional dilution to our
stockholders, and we may not be able to obtain additional financing on
acceptable terms, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are unable to distinguish between
twentieth century dates and twenty-first century dates. These systems were
developed using two digits rather than four to determine the applicable year.
This error could result in software failures or the creation of erroneous
results.
We have conducted the first phases of a year 2000 readiness review for the
current versions of our products. The review includes assessment,
implementation, including remediation, upgrading and replacement of product
versions, validation testing and contingency planning.
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We have largely completed all phases of this plan, except for contingency
planning, for the current versions of our products. As a result, we believe all
current versions of our products to be "year 2000 compliant," as defined below,
when configured and used in accordance with the related documentation, and
provided that the underlying operating system of the host machine and any other
software used with or in the host machine or with our products are also year
2000 compliant. We have not tested our products on all platforms or all versions
of operating systems that we currently support.
We have defined "year 2000 compliant" as the ability to:
- correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
- if the date elements in interfaces and data storage specify the century,
store and provide output of date information in ways that are unambiguous
as to century; and
- recognize the year 2000 as a leap year.
We have tested software obtained from third parties, including licensed
software, shareware and freeware, that is incorporated into our products, and we
are seeking assurances from our vendors that licensed software is year 2000
compliant. We plan to continue to test our current and future products by
applying our year 2000 compliance criteria and to include any necessary
modifications the compliance process reveals. Despite testing and assurances,
our products may contain undetected errors or defects associated with year 2000
date functions. Any errors or defects in our products could result in the delay
or loss of revenue, increased service costs and damage to our reputation. We are
aware of lawsuits against software vendors involving year 2000 claims, and,
despite testing our products, we may be sued by a customer on a year 2000 claim.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have reviewed our material internal IT systems, including
both our custom software and third-party software and hardware technology, but
we have not performed an assessment of our non-IT systems. To the extent that we
cannot test the technology provided by third party vendors, we are seeking
assurances from vendors that their systems are year 2000 compliant. We are not
currently aware of any material operational issues or costs associated with
preparing our internal IT and non-IT systems for the year 2000. However, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal IT and non-IT systems.
We do not currently have any information concerning the year 2000
compliance status of our customers. If our current or future customers fail to
achieve year 2000 compliance or if they delay or divert technology expenditures,
especially technology expenditures that were reserved for enterprise software
systems, to address year 2000 compliance problems, our business could suffer.
Through March 31, 1999, we have incurred nominal expenses relating to our
year 2000 compliance activities and estimate that any additional costs will be
nominal. However, we may experience material problems and costs that are not
currently identified in our year 2000 plan.
We have not yet fully developed a contingency plan to address situations
that may result if we cannot achieve year 2000 readiness of our critical
operations. The cost of
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developing and implementing a contingency plan may itself be material. We intend
to develop a contingency plan by the fourth quarter of 1999. Finally, we are
also subject to external forces that might generally affect businesses, such as
utility or transportation company year 2000 failures.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Our operating results are sensitive to changes
in the general level of U.S. interest rates, particularly because most of our
cash equivalents are invested in short-term debt instruments. If market interest
rates were to change immediately and uniformly by ten percent from levels at
March 31, 1999, the fair value of our cash equivalents would change by an
insignificant amount.
Foreign Currency Fluctuations. We have not had any significant
transactions in foreign currencies, nor do we have any significant balances that
are due or payable in foreign currencies at March 31, 1999. Therefore, a
hypothetical ten percent change in foreign currency rates would have an
insignificant impact on our financial position or results of operations. We do
not hedge any of our foreign currency exposure.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued accounting
statement No. 130, Reporting Comprehensive Income, which requires an enterprise
to report, by major components and as a single total, the change in its net
assets during the period from nonowner sources. We had no comprehensive income
items to report, other than net loss, for any of the periods presented. The FASB
also issued accounting statement No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
We currently operate in one reportable segment.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This standard requires companies to capitalize
qualifying computer software costs, which are incurred during the application
development stage, and amortize them over the software's estimated useful life.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are
currently evaluating the impact of SOP 98-1 on our financial statements and
related disclosures.
In June 1998, the Financial Accounting Standards Board issued accounting
statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement requires companies to record derivatives on the balance sheet as
assets or liabilities measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for us beginning in 2000. We are currently evaluating
the impact of SFAS No. 133 on our financial statements and related disclosures.
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BUSINESS
COMPANY OVERVIEW
Persistence is a leading provider of transactional application servers --
software that processes transactions between users and back-end computer systems
in electronic commerce systems. By caching data, or moving information stored in
back-end computer systems closer to users, our software dramatically reduces
network traffic, resulting in both better network performance and faster
transaction processing. In addition, PowerTier is one of the few application
servers that implements Sun Microsystems' full Enterprise JavaBeans standard to
enable businesses to deploy sophisticated Java applications, which readily
scale, or accommodate rapidly increasing numbers of users. Our PowerTier family
of transactional application servers offers the speed, scalability and
reliability to enable the next generation of sophisticated, high-volume
electronic commerce applications. Our major customers include AT&T, Boeing,
Cisco, FedEx, IBM, Instinet, Lucent, Morgan Stanley Dean Witter, Norwest,
Perkin-Elmer and SuperValu.
INDUSTRY BACKGROUND
The Internet has evolved into a global communications medium enabling
millions of people to share information and conduct business electronically. As
the Internet's popularity has increased, companies in industries ranging from
securities trading to book selling are extending their core business processes
over the Web to conduct electronic commerce with customers, suppliers and
partners. The growth of these electronic commerce offerings has led to
significant growth in the number of users and transactions conducted over the
Web.
While creating new business opportunities, the significant growth of
electronic commerce has also created tremendous technological challenges for
electronic commerce companies struggling to meet the needs of rapidly increasing
numbers of users. These companies are discovering that their existing Internet
software infrastructure is unable to support thousands of concurrent users or
process up to thousands of transactions per second. Even casual observers of the
Internet are familiar with these limitations, which include:
- Poor performance: Initial electronic commerce offerings were not
designed to scale to handle large numbers of users. Internet users
accessing these systems often experience lengthy delays as the number of
concurrent users increases.
- System failures: Initial electronic commerce offerings did not
anticipate the level of robustness required to operate 24 hours a day, 7
days a week. Internet users accessing these systems at peak volume can
experience frequent system crashes.
- Limited adaptability: Initial electronic commerce offerings were built
on software infrastructures that offered only limited ability for
customization and personalization. To remain competitive, companies must
continuously enhance and differentiate their electronic commerce
offerings.
While these problems have been well-publicized in the business-to-consumer
market, we believe that business-to-business interactions face even more
pronounced problems due to the added complexity of managing transactions between
multiple companies. In addition, the growth of the business-to-business
electronic commerce market is expected to outpace the growth of the
business-to-consumer market. While Forrester Research estimates that the
business-to-consumer market in the United States is expected to grow
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from $7.8 billion in 1998 to $108 billion in 2003, they estimate that the
business-to-business electronic commerce market in the United States will grow
even more rapidly, from $43 billion to $1.3 trillion, in this same period.
In large part, the problems facing these organizations, both in
business-to-business and business-to-consumer electronic commerce, are derived
from the continuing evolution and increasing sophistication of web-based
applications. In the early days of the Internet, organizations turned to the Web
for information publishing, decision support and simple transaction processing.
This first generation of web-based applications focused on extending legacy
applications to the Internet. These applications were typically not
business-critical, and had relatively simple interactions and limited
functionality. The web application server emerged as the infrastructure used to
support these first generation applications.
Today, use of the Web has changed dramatically as the Web has emerged as a
leading platform for conducting electronic commerce. The number of individuals
and organizations conducting transactions over the Internet has increased
significantly, as organizations have offered increasingly sophisticated and
feature-rich electronic commerce applications. At the same time, as
organizations have begun to conduct significant volumes of business over the
Internet, system failures and delays in transaction processing have ceased to be
mere inconveniences and have become serious impediments to doing business. To
achieve a competitive advantage in today's environment, many businesses are
looking to create web-based electronic commerce offerings that are available 24
hours per day, 7 days per week and that enhance customer loyalty by leveraging
partner, supplier and third party relationships. Complicating these challenges
further is the need to rapidly develop and deploy these applications on
"Internet time."
As the Internet has evolved into a critical business platform, the
limitations of the software infrastructure used to support electronic commerce
have become apparent. The first generation web application servers were not
designed to accommodate the high transaction volumes and high performance
requirements that characterize electronic commerce today.
The next generation of electronic commerce will require a fundamentally new
software infrastructure, based on an application server platform optimized for
high volume transaction processing over the Internet. The platform must provide:
- Real-time scalability: accommodate up to thousands of end users with
consistent sub-second response times;
- High availability: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;
- Rapid adaptability: allow companies to continuously improve their
business processing through automated development and management of
differentiated electronic commerce offerings; and
- Business-to-business integration: enable businesses to extend their
processing across organizational boundaries.
PERSISTENCE SOLUTION
Our PowerTier family of products consists of transactional application
servers that are specifically designed to enable high volume, high performance
electronic commerce applications. Our products, PowerTier for EJB and PowerTier
for C++, address the
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scalability, availability and adaptability demands that typically occur when
delivering business solutions over the Internet. Our products offer the
following key benefits:
Real-Time Response for Thousands of Concurrent Users. Our PowerTier
platform was designed specifically to accommodate high volume transaction
processing and the data integrity requirements of distributed applications. The
platform utilizes our patented caching technology. Caching is a process in which
relational data is pulled out of back-end systems and into the PowerTier server
cache, which allows the data to be shared and manipulated at the application
server level. Replication between PowerTier server caches using the PowerSync
feature allows a cluster of PowerTier servers to provide highly scalable
performance as the number of users increases. This architecture helps reduce the
work load on back-end systems and accelerates application performance. The
effect of this architecture is to minimize unnecessary network traffic and
thereby enable high performance and reliability even with significant
transaction volumes. We believe our PowerTier platform offers performance that
is orders of magnitude faster than traditional non-caching application servers.
Dramatic Reductions In Time-to-Market for Electronic Commerce
Applications. Our PowerTier platform decreases time to market and development
cycles for sophisticated electronic commerce applications due to our proprietary
and patented object-to-relational mapping technology. This technology enables
the automatic generation of software code, which minimizes basic, low-level
programming tasks, such as security and database access. The PowerTier platform
accelerates development by giving developers access to data in a familiar way,
as software components, and provides application developers with a framework to
rapidly build electronic commerce applications.
Protects and Leverages Existing Information Technology Investments. The
PowerTier platform enables developers to build new electronic commerce
applications while simultaneously integrating existing back-end systems.
PowerTier's flexible architecture integrates with disparate database servers,
web servers and multiple clients, while supporting multiple programming
languages and computing platforms. PowerTier provides enhanced flexibility and
interoperability to link existing enterprise applications and systems, allowing
businesses to leverage their investments in information technology and extend
them over the Internet.
Leadership in Emerging Standards. Customers are increasingly seeking open,
standards-based technology solutions that enable them to develop and implement
new applications rapidly. Our PowerTier products provide one of the few
application server solutions that implements the full EJB specification to
enable businesses to deploy high performance, scalable Java applications for the
enterprise. We worked with the Sun Microsystems consortium to define an
industry-wide component standard to be used when building enterprise
applications with the Java language. It is this standard upon which our
PowerTier platform is built, and we believe that this emerging platform has the
potential to dramatically simplify the development of distributed, multi-tier
electronic commerce applications. As EJB and other emerging electronic commerce
standards evolve, we intend to continue to be a leading adopter and contributor
to these technologies.
Optimized Platform For Business-to-Business Electronic Commerce. Our
transactional application server is designed and optimized to enable complex
online transactions, providing the necessary scalable, reliable and secure
infrastructure. Platforms designed to support the next generation of
business-to-business electronic commerce applications must handle hundreds and
potentially thousands of concurrent users while simultaneously providing
reliability and security, and enabling connections to a myriad of existing and
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emerging back-end applications. In addition, we believe our PowerTier products
are particularly well suited for multi-party, multi-step business-to-business
transactions that require server-to-server communication.
PERSISTENCE STRATEGY
Our objective is to become the leading provider of transactional
application server software products that comprise the Internet software
infrastructure for high volume, high performance electronic commerce
applications. To achieve this goal, we intend to:
Capture Market Share in the Emerging Business-to-Business Electronic
Commerce Market. We intend to become the market leader in providing software
infrastructure to enable sophisticated business-to-business electronic commerce
applications. To achieve this objective, we will continue to make significant
investments in building our sales and marketing organizations. We plan to launch
a variety of sales and marketing programs designed to capture market share. For
example, we plan to use a seeding strategy to extend our market share by
offering a development version of our software that may be downloaded over the
Internet to provide wide dissemination of our product to developers. We also
offer educational seminars on our products and the advantages of EJB. We will
continue to collaborate with our innovative and advanced customers to develop
and deliver product features that address their needs. We believe that this
collaboration focuses our overall product development effort and speeds our
time-to-market.
Extend Technology Leadership Position in Standards-Based Platforms for Next
Generation Electronic Commerce. We intend to extend our technology leadership
in the transactional application server market by enhancing our underlying
technology to offer real-time scalability, high availability and rapid
adaptability for the next generation of electronic commerce applications. To
achieve this objective, we will continue to make significant investments in our
research and development organization. In addition, we intend to be a leader in
the definition and adoption of emerging technology standards, such as EJB, which
we believe have the potential to dramatically simplify the development of
distributed, multi-tier applications. We have been a pioneer in the areas of
caching and object-relational mapping, and hold several patents on core
technologies. We intend to continue to innovate and create new enabling
technologies for electronic commerce.
Expand Product Platform to Offer Complementary Solutions. In addition to
extending our technology leadership, we intend to broaden and enhance our
product platform to incorporate complementary solutions for developing and
deploying sophisticated electronic commerce applications. We will continue to
make investments in our research and development organization for many of these
product initiatives. We will also consider, from time to time, bolstering these
internal efforts with strategic acquisitions. For example, we have recently
acquired object request broker technology, which provides the communications
link between the transactional application server and the client. The addition
of these complementary technologies will enable us to offer a broader platform
for our customers.
Increase Partnerships With Systems Integrators. We intend to continue to
develop and expand relationships with systems integrators. We believe these
third parties can effectively market our products through their existing
relationships with our target market customers. In addition, our PowerTier
platform is often included as part of an enterprise-wide system deployment, in
which the system integrator plays a leading role. We believe that these
relationships will provide additional marketing and sales channels for our
products and facilitate the successful deployment of customer applications. We
are
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currently working with a number of systems integrators, including: Alta
Software, Andersen Consulting, Cambridge Technology Partners, Component Systems,
Computer Sciences Corporation, Electronic Data Systems, Genesis Development
Corporation and Unisys.
Leverage Installed Customer Base. We believe that there are significant
opportunities to expand the use of our products throughout our current customer
base. Although most organizations initially deploy our products on a
departmental or pilot basis, we believe that initial customer success with these
deployments will lead to significant opportunities for enterprise-wide adoption.
Further, we believe that most companies, including our customers, are just
beginning to fully capitalize on the opportunities created by the Web. As these
companies increasingly migrate their core business processes to the Web, we
believe they will need additional licenses of our software to support and enable
their new electronic commerce applications.
Strengthen International Presence. We believe there are significant
international opportunities for our products and services. We intend to continue
to build our sales, marketing and services organizations in Europe to capitalize
on these opportunities. Currently, we have established direct sales operations
in the United Kingdom and Germany, and we intend to open an office in France. In
addition to our direct sales operations, we also distribute our products
throughout Europe with distributors and systems integrators. We intend to
continue to build and extend these international third-party distributor and
systems integrator relationships.
PRODUCTS
Our PowerTier platform is a family of transactional application server
products that deliver real-time scalability, high availability and rapid
adaptability for high volume, high performance electronic commerce applications.
Our current product line consists of PowerTier for EJB, which was released in
1998, and PowerTier for C++, which was released in 1997. The following table
describes the major features and benefits of our PowerTier platform.
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PRODUCT FEATURES BENEFITS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
POWERTIER FOR ENTERPRISE Shared transactional object cache Enables real-time scalability by
JAVABEANS reducing database traffic
Application server cache Allows cooperative processing
synchronization across organizational boundaries
Application server failover Delivers high availability by
replicating information across
clusters of application server
caches
Support for EJB standard Protects customers' IT
investments as a result of open
solution
- --------------------------------------------------------------------------------------------------
POWERTIER FOR C++ Shared transactional object cache Enables real-time scalability by
reducing database traffic
Application server cache Allows cooperative processing
synchronization across organizational boundaries
Application server failover Delivers high availability by
replicating information across
clusters of application server
caches
Support for CORBA standard Protects customers' IT
investments as a result of open
solution
- --------------------------------------------------------------------------------------------------
POWERTIER DEVELOPMENT Object-to-relational mapping Provides rapid development
ENVIRONMENT services adaptability by automating time-
consuming development tasks
Integrates with leading Enables customer to choose best
third-party developer tools. of class development tools
Supports both Java/EJB development Flexibility in selection of
and C++/CORBA development development language
- --------------------------------------------------------------------------------------------------
POWERTIER COMMAND CENTER Monitors status and performance of Increases application
remote application servers availability by simplifying
detection and resolution of
system problems
Manages configuration for clusters Increases deployment
of application servers adaptability by allowing instant
reconfiguration of application
servers to meet changing
business requirements
- --------------------------------------------------------------------------------------------------
</TABLE>
PowerTier for EJB
Our PowerTier for EJB application server platform incorporates our patented
technologies into one of the few transactional application servers to deliver
the full EJB version 1.0 standard. The EJB standard, as defined by the JavaSoft
division of Sun Microsystems, is gaining rapid acceptance as a programming
language for complex enterprise applications. EJB provides a consistent way to
program and integrate services for companies building distributed
business-to-business applications with the Java programming language.
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The EJB standard specifies container-managed persistent objects, which
automate the mapping between EJB components and relational database tables. This
feature allows programmers to build complex applications quickly by making
relational data look like software components, which can be easily manipulated.
We worked with the Sun Microsystems consortium to help define the initial EJB
standard, and we continue to contribute to new versions of the EJB standard. Our
PowerTier for EJB platform runs on the Windows NT and Unix operating systems.
The latest version of our PowerTier for EJB adds a new architecture,
PowerSync, to enable enterprise scalability and interoperability. PowerSync is a
cache replication architecture, which allows companies to deploy tens to
hundreds of PowerTier servers, each with a mirror image of every other server's
data. This PowerSync feature enables companies to address increasing demands on
an application by easily adding additional servers, all operating with
synchronized, high-performance PowerTier caching. This version of PowerTier for
EJB is currently in use by several of our major customers and is scheduled for
commercial release in 1999.
[PowerTier Graphics]
PowerTier for C++
Our PowerTier for C++ product is a high-performance transactional
application server platform, which is based on our patented technologies and the
Common Object Request Broker Architecture, or CORBA, standard for communication
between distributed applications. The CORBA standard is managed by an industry
group called the Object Management Group, of which we are a contributing member.
We are also one of the authors, along with Oracle, IBM and others, of an
emerging component of the overall CORBA standard, called the Persistent State
Service specification. Our PowerTier for C++ platform runs on the Windows NT and
Unix operating systems.
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Patented Technology Platform
Our application server cache software architecture and cache replication
technology have been designed to serve as the foundation for a variety of
scalable electronic commerce applications.
- Shared Caching. Our cache technology is the foundation for the high
performance characteristics of our transactional application server. To
maximize performance, dynamic information such as product inventory data
is retrieved from a database into the application server cache. This
in-memory information may be accessed simultaneously by multiple users,
saving each user from having to access a disk-based database for that
information. This feature reduces network traffic between the application
server and the database, delivering higher performance.
- Transactional Caching. To enable users to get a consistent view of
information within the shared cache, our technology prevents one user
from seeing uncommitted changes made by another user. The ability of our
shared application server cache to isolate users from dynamic changes to
component information, such as inventory data, differentiates our
application server cache from other caching technologies which can only
manage static information, such as web pages. This feature allows high
performance caching of dynamic or transactional information.
- Cache Replication. Our cache replication technology provides the
foundation for the scalability, stateful availability and fault tolerance
of our transactional application server. We define stateful availability
as a system that can transfer a user in the middle of a complex business
operation, such as a portfolio valuation, from one application server to
another without interruption or losing business state, such as the user's
portfolio information. To provide stateful scalability, information from
one application server cache can be synchronized with information in one
or more other application server caches. Companies can deploy additional
replicated application server caches to increase their ability to support
more users, allowing them to use several smaller computers to do the work
of one larger and more expensive computer. Users' requests are
automatically routed to the application server with the most free
capacity, enabling high performance, notwithstanding increases in user
volumes. In the event of an application server failure, that application
server's responsibilities are automatically reassigned to another
application server, improving system availability.
- Cluster Management. We have developed complementary, proprietary
administration software, which enables remote administration for clusters
of application servers, reducing both administrative costs and the
possibility of error. This management software also enables centralized
monitoring, via a standard web browser, of the cluster through any
individual application server. This feature contributes to greater system
availability and reduced administrative costs.
- Development Automation. Our PowerTier development environment includes
frameworks to automate or eliminate many development tasks. The
proprietary and patented object-relational mapping feature automatically
generates the software code to translate software components into
relational databases. This feature reduces the programming time required
to build enterprise applications. The PowerTier application server
includes pre-built software services for data management, transaction
management and communications, relieving the developer from having to
build these services from scratch.
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- Standards-based. The PowerTier application server platform uses an open
architecture that is based on industry standards such as Java, C++,
CORBA, Windows NT, UNIX, SQL and others.
We believe that research and product development will be a key to our
success as a leader in the transactional application server market. Our research
and development expenditures totaled $2.0 million for 1996, $3.0 million for
1997, $4.2 million for 1998, and $1.8 million for the three months ended March
31, 1999.
CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of electronic commerce applications, including real-time electronic
trading, supply chain management, internet network management, application
outsourcing and customer relationship management. The following table lists a
representative selection of customers who have purchased our products.
INTERNET/COMMUNICATIONS
AT&T*
BellCore*
BellSouth
Bull Ingenerie (France Telecom)
CellularOne Group
Cisco
Cross Keys Systems
Globe ID
Imind
Lucent
Motorola
Netscape
Nokia
Scientific-Atlanta
Sequel Systems
Telstra (Australia)
MANUFACTURING & DISTRIBUTION
Asea Brown Boveri Power T&D
Boeing
IBM*
Non-Stop Solutions
Perkin-Elmer*
Qualcomm
SuperValu*
Titan Systems
Xerox
FINANCIAL SERVICES
Capital Group
Capital One Financial
CNP Assurances*
Instinet*
JP Morgan
Morgan Stanley Dean Witter*
Nike Securities
Norwest*
TRANSPORTATION & LOGISTICS
Air Canada
Air France
FedEx*
Sabre Group Holdings (American Airlines)
Transquest Information (Delta Airlines)*
OTHER
Caldwell-Spartin
Fermi National Accelerator Laboratory
National Aeronautics and Space Administration
* Denotes customers who have ordered
at least $500,000 in products.
In 1998, sales of products and services to Cisco accounted for 14% of our total
revenues and sales of products and services to Instinet accounted for 17% of our
total revenues.
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The following case studies illustrate how selected customers have used our
products to address their electronic commerce and core business application
needs. These case studies are based on information supplied by these customers,
however we believe the information is accurate in all material respects.
Reuters, the parent of Instinet, and Cisco are both major stockholders in our
company.
REAL-TIME ELECTRONIC TRADING NETWORK
Instinet Corporation. Instinet is the world's largest electronic agency
broker in equity securities. Today, trading in fixed income securities occurs
almost exclusively over the telephone. Instinet plans to revolutionize this
telephone-based fixed income trading with a global electronic broker trading
service for fixed income dealers that can accommodate up to 1,000 transactions
per second. It has designed a system which, while still being tested and not yet
generally available, is expected to use hundreds of replicated PowerTier
application servers operating in concert when fully deployed to meet the
performance and scalability requirements of its electronic fixed income broker
service.
INTRANET SUPPLY CHAIN MANAGEMENT
Federal Express Corporation. The world's largest express transportation
company, FedEx transports more than three million items to over 200 countries
each business day, using a fleet of more than 620 aircraft and 44,000 vehicles.
In its effort to improve on-time deliveries, FedEx has built a global operations
center to monitor and control the movement of shipments worldwide. The global
operations center functions as the nerve center of the FedEx transportation
system, handling daily occurrences including changing flight schedules,
emergency maintenance, inclement weather and excess package volumes. Because the
company's existing mainframe systems lacked the required flexibility and
performance, FedEx turned to us for help in building a high performance intranet
system. By managing complex flight schedule information from multiple data
sources within a PowerTier application server cache, the global operations
center can provide real-time contingency plans, enabling FedEx to provide
consistently high on-time package delivery rates and superior customer service.
FedEx estimates that, using the PowerTier development environment, it has been
able to significantly reduce development time for new system functionality
compared to development in its traditional mainframe environment.
INTERNET SERVICE PROVIDER NETWORK MANAGEMENT
Cisco Systems, Inc. A worldwide leader in networking for the Internet,
Cisco Systems is committed to delivering hardware and software solutions that
enable Service Providers to meet the rapid growth of the Internet. The Cisco
Service Management System, or CSM, gives Service Providers sophisticated tools
to automate time consuming network management tasks. For this system, Cisco
required a highly scalable, standards-based application server platform for
deploying network management applications for managed business services such as
virtual private networks, Internet telephony and electronic commerce. To meet
these requirements, Cisco chose the PowerTier platform. For the Cisco IP Manager
product within the CSM system, PowerTier application server caching enables
real-time simulation of network configuration changes, preventing costly network
outages. The PowerTier development environment also enables Cisco to create a
common component framework that can be reused to reduce development time for
future CSM network services.
APPLICATION OUTSOURCING OVER THE INTERNET
PE Genscope. PE GenScope, recently incorporated into Celera Genomics,
provides gene discovery and characterization services for drug discovery and
development. Celera's
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GeneTag technology is a novel gene expression analysis method that enables
pharmaceutical companies to develop new and potentially life-saving drugs by
discovering and monitoring genes involved in disease. Celera's BioScope software
application allows customers to access their data securely and remotely over the
Internet. To allow clients to quickly analyze and view the GeneTag results,
Celera needed a sophisticated software platform that could process hundreds of
thousands of gene expression comparisons while avoiding data bottlenecks. Celera
selected PowerTier to achieve these goals. The BioScope application utilizes the
PowerTier application server cache for high volume data analysis. With the
PowerTier development environment, Celera has been able to use both the Java and
C++ languages to deliver the BioScope software application in only four months.
SALES AND MARKETING
We sell our products through both a direct sales force and third party
distributors. As of March 31, 1999, we had 32 people in our sales and marketing
organization, of which 26 were in the United States and six were in our London
and Munich offices. To support the complex enterprise nature of our sales, our
direct sales force is organized into two-member teams of one sales
representative and one sales engineer. We intend to increase the size of our
direct sales force and to establish additional sales offices domestically and
internationally.
Our sales cycle is relatively long, generally between three and nine
months. A successful sales cycle typically includes presentations to both
business and technical decision makers, as well as a limited pilot program to
establish technical fit.
We engage in a variety of marketing activities, including advertising,
public relations, seminars, trade shows and web site management. In particular,
we have made substantial marketing investments in education and training for the
EJB and C++ markets. We trained over 2,000 developers in 1998 in the EJB
standard. Our web site allows developers to download a demonstration version of
our products.
Systems integrators represent an important and growing referral channel for
our direct sales effort. Systems integrators frequently have relationships with
our target customers and often incorporate our PowerTier platform as part of a
much larger enterprise-wide system enhancement. Currently we have relationships
with global and regional systems integrators, including:
- Alta Software
- Andersen Consulting
- Cambridge Technology Partners
- Component Systems
- Computer Sciences Corporation
- Electronic Data Systems
- Genesis Development Corporation
- Unisys
In international markets, we plan to expand our sales through indirect
channels, such as distributors and original equipment manufacturers. As of March
31, 1999, we were represented by five international distributors, who sell our
products in Europe, Asia and Latin America.
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COMPETITION
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- quality of support and service;
- security;
- company reputation; and
- price.
Our competitors include both publicly and privately-held enterprises,
including BEA Systems (WebLogic), Gemstone Systems, IBM (WebSphere), Inprise,
Iona Technologies, Oracle (OAS) and Sun Microsystems (NetDynamics). Many
customers may not be willing to purchase our PowerTier platform because they
have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
preexisting customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. Moreover, there are other
very large and established companies, including Microsoft and Netscape, who
offer alternative solutions and are thus indirect competitors. Further, dozens
of companies have announced their intention to support EJB, and may compete
against us in the future. These competitors and potential competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than we can. See also "Risk
Factors -- Because we compete with Sun Microsystems, who controls the EJB
application server standard, we face the risk that they may develop this
standard to favor their own products" and " -- Microsoft has established a
competing application server standard, which could diminish the market potential
for our products if it gains widespread acceptance."
In addition, in the PowerTier for C++ market, many potential customers
build their own custom application servers, so we effectively compete against
our potential customers' internal information technology departments.
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If we are not adequately
protected, our competitors can use the intellectual property that we have
developed to enhance their products and services, which would harm our business.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights, but these legal means afford only limited protection. As
of April 1999, we had three issued United States patents and one
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<PAGE> 49
pending United States patent application with allowable subject matter. Despite
any measures taken to protect our intellectual property, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. In addition, the laws of some foreign countries
may not protect our proprietary rights as fully as do the laws of the United
States. Thus, the measures we are taking to protect our proprietary rights in
the United States and abroad may not be adequate. Finally, our competitors may
independently develop similar technologies.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As the number of
entrants into our market increases, the possibility of an intellectual property
claim against us grows. For example, we may be inadvertently infringing a patent
of which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.
EMPLOYEES
As of March 31, 1999, we had 81 full-time employees, including 35 in
research and development, 32 in sales and marketing, six in professional
services and eight in general and administrative functions. From time to time,
we also employ independent contractors to support our engineering, marketing,
sales and support and administrative organizations.
FACILITIES
We are headquartered in San Mateo, California, where we lease approximately
17,000 square feet of office space under a lease expiring on June 30, 1999. We
are currently negotiating an extension of this lease. We also maintain sales
offices in California, Georgia, Illinois, New York, Texas and the United Kingdom
and Germany. We believe that our existing facilities are adequate to meet our
current and foreseeable requirements or that suitable additional or substitute
space will be available as needed.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the ordinary
course of business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors as of May 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Christopher T. Keene................. 38 Chairman of the Board and Chief Executive
Officer
Laurence R. Hootnick(1).............. 57 President and Director
Alan Cohen........................... 46 Senior Vice President of Sales and
International Operations
Mark Douglas......................... 35 Vice President and Chief Technology Officer
Erik Frieberg........................ 33 Vice President of Corporate Marketing
Barry Goss........................... 52 Vice President of Strategic Marketing
Derek Henninger...................... 36 Vice President of Engineering
Janet McGraw(2)...................... 33 Vice President of Product Management
Christine Russell.................... 49 Chief Financial Officer and Secretary
Gregory Ennis(3)(4).................. 33 Director
Jack L. Hancock(4)................... 68 Director
William J. Harding(3)................ 51 Director
Larry E. Henninger(5)................ 66 Director
Merritt Lutz......................... 56 Director
Joseph P. Roebuck(6)................. 63 Director
Jeffrey T. Webber.................... 46 Director
</TABLE>
- -------------------------
(1) Mr. Hootnick was appointed President and director in April 1999.
(2) Ms. McGraw was appointed Vice President of Product Management in April 1999.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
(5) Mr. Henninger resigned as a director in April 1999.
(6) Mr. Roebuck was appointed director in May 1999.
CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene was a Manager at McKinsey &
Co., a management consulting firm, from July 1987 to June 1991. Mr. Keene holds
a B.S. degree in Mathematical Sciences with honors from Stanford University and
an M.B.A. degree from The Wharton School at the University of Pennsylvania.
LAURENCE R. HOOTNICK joined Persistence as President and director in April
1999. From June 1996 to April 1999, Mr. Hootnick served as President and Chief
Executive Officer of Consilium, Inc., a manufacturer of factory control software
for integrated circuits. From December 1995 to May 1996, Mr. Hootnick served as
Senior Vice President of Power Computing, a manufacturer of personal computers.
From June 1995 to November 1995, he worked as a private investor and consultant.
Previously, Mr. Hootnick was employed as Senior Vice President, Chief Operating
Officer and director of NetManage, Inc., a developer of networking software, and
as President and Chief Executive Officer of Maxtor, a manufacturer of hard disk
drives. Mr. Hootnick holds a B.S. degree in Industrial Management from
Massachusetts Institute of Technology and an M.B.A. degree from the University
of Maryland.
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<PAGE> 51
ALAN COHEN joined Persistence as Vice President of Sales in December 1997
and was promoted to Senior Vice President of Sales and International Operations
in December 1998. From May 1996 to December 1997, Mr. Cohen served as Vice
President of Sales at Cygnus Solutions, a developer of open-source software.
Previously, he was Vice President of Sales and Operations at Information
Handling Services, an information technology company, from May 1994 to May 1996.
From 1990 to 1994, Mr. Cohen was Director of Sales and Marketing at
International Business Machines Corporation. Before working at IBM, he was
Director of Marketing at CADAM, Inc., a Lockheed subsidiary. Mr. Cohen holds
B.S. and M.S. degrees in Biology from the University of Connecticut.
MARK DOUGLAS joined Persistence as Vice President and Chief Technology
Officer in April 1998. From March 1997 to March 1998, Mr. Douglas was an
independent consultant. From August 1993 to February 1997, Mr. Douglas served as
President and Chief Executive Officer of CenterView Software, a developer of
software tools, which was acquired by Informix Software, Inc. in February 1997.
From August 1992 to 1993, Mr. Douglas was a management consultant with Ernst &
Young. Previously, Mr. Douglas worked at Oracle Corporation, a leading
relational database management software company, serving most recently as Senior
Director of the Advanced Technology Division and previously as Director of
Product Line Development and Marketing of the Applications Division.
ERIK FRIEBERG joined Persistence as Director of Marketing in March 1998 and
was promoted to Vice President of Corporate Marketing in October 1998. From
December 1996 to March 1998, Mr. Frieberg was Director of Enterprise Marketing
at KIVA Software, Inc. a manufacturer of application server software, which was
acquired by Netscape Communications Corporation in December 1997. From December
1993 to December 1996, he was Director of Marketing at CenterView Software, a
developer of software tools, which was acquired by Informix Software, Inc. Mr.
Frieberg holds a B.S. degree in Industrial Engineering from Northwestern
University and an M.M.S. degree from the Massachusetts Institute of Technology.
BARRY GOSS joined Persistence in December 1997 as Vice President of
Marketing, an office he held until October 1998, when he was appointed Vice
President of Strategic Marketing. From May 1994 to December 1997, Mr. Goss was
the founder and President of Congruent Concepts, a management consulting firm
serving emerging growth companies. From December 1988 to May 1994, Mr. Goss
served as Director of Marketing for Verity, Inc., a provider of content-based
search engine software. Mr. Goss holds a B.S. degree in Engineering Sciences
from the State University of New York at Stony Brook and an M.S. degree in
Mechanical Engineering and Ph.D. in Applied Mechanics from the University of
Connecticut.
DEREK HENNINGER co-founded Persistence and has served as Vice President of
Engineering since June 1991. Previously, Mr. Henninger worked as a senior
software engineer in the Data Interpretation Division of Metaphor Corporation, a
software and hardware company, from September 1990 to June 1991. Mr. Henninger
holds a B.A. degree in Economics and a B.S. degree in Computer Science and
Mathematics from the University of California at Davis.
JANET MCGRAW has served as Vice President of Product Management since April
1999. Previously, Ms. McGraw served as our Director of Product Strategy and
Product Management from April 1998 to November 1998 and as Senior Director of
Product Strategy and Product Management from November 1998 to April 1999. From
February 1997 to March 1998, Ms. McGraw served as Director of Product
Development for
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<PAGE> 52
Informix Software, Inc., a relational database software company. From April 1994
to January 1997, she served as Director of Product Management for CenterView
Software, a developer of software tools. Previously, Ms. McGraw worked at Oracle
Corporation, serving most recently as Senior Development Manager. Ms. McGraw
holds a B.S. degree in Electrical Engineering and an M.S. degree in Electrical
Engineering from Stanford University.
CHRISTINE RUSSELL joined Persistence in October 1997 and has served as
Chief Financial Officer and Secretary since December 1997. Previously, she
served as Chief Financial Officer for Cygnus Solutions, an open source platform
software company, from October 1995 to October 1997. From April 1992 to October
1995, Ms. Russell served as Chief Financial Officer of Valence Technology, a
developer of lithium polymer batteries. Previously, she served as Chief
Financial Officer at Covalent Technologies, Inc., a vertical software company,
as Vice President of Finance of Stellar Systems, Inc., a security software and
hardware company, and as Corporate Controller of Shugart Corporation, a
subsidiary of Xerox. She holds a B.A. degree in English Literature and an M.B.A.
degree from Santa Clara University.
GREGORY ENNIS has served as a director since November 1996. Since July
1995, Mr. Ennis has been a Director of Thompson Clive Inc., which is the U.S.
subsidiary of a London-based venture capital firm. From 1992 to July 1995, Mr.
Ennis was an Associate of Thompson Clive Inc.. Previously, Mr. Ennis was a
project analyst with Citibank in Frankfurt, Germany. Mr. Ennis holds an A.B.
degree in Economics and Political Science from Stanford University and an M.B.A.
degree from The Anderson School at the University of California at Los Angeles.
JACK L. HANCOCK has served as a director since July 1998. Since December
1993, Mr. Hancock has been a private investor. From 1987 to December 1993, he
held a variety of positions with Pacific Bell, serving most recently as Chief
Information Officer and previously as Executive Vice President of Marketing and
Sales and Executive Vice President of Product and Technical Support. Previously,
Mr. Hancock was Executive Vice President for Information Systems, Strategic
Planning and Human Resources at Wells Fargo & Company. Mr. Hancock currently
serves as a director of Whittaker Corporation, a fluid control and fire safety
systems company, Union Bank of California, a financial institution, and MGC
Communications Corporation, Inc, an integrated communications services provider.
Mr. Hancock holds a B.A. degree from West Virginia University and an M.B.A.
degree from George Washington University.
WILLIAM J. HARDING has served as a director since March 1996. Since October
1994, he has been a General Partner of Morgan Stanley Dean Witter Venture
Partners, a venture capital firm. From 1985 to 1994, Dr. Harding served as
General Partner of several venture capital partnerships affiliated with J.H.
Whitney & Co. From 1976 to 1985, he held a variety of technical and business
development positions at Amdahl Corporation, an enterprise computing company.
Dr. Harding is also a director of ScanSoft, Inc., an image management software
company, and several private companies. Dr. Harding holds a B.S. degree in
Engineering Mathematics and an M.S. degree in Systems Engineering from the
University of Arizona and a Ph.D degree in Engineering from Arizona State
University.
LARRY E. HENNINGER served as a director from February 1994 until April
1999, when he resigned as a member of the board of directors. Since 1981, Mr.
Henninger has served as founder and President of Henninger & Associates, a
consulting firm specializing in international and small business management and
finance. Previously, Mr. Henninger was co-founder, Executive Vice President and
Chief Financial Officer of Baron Data Systems,
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<PAGE> 53
a hardware and software company. Mr. Henninger holds a B.A. degree in Economics
from Stanford University and an M.B.A. degree from Santa Clara University.
MERRITT LUTZ has served as a director since July 1997. Since September
1997, Mr. Lutz has served as a senior advisor to Morgan Stanley Dean Witter &
Co., a major financial services institution, with responsibility for strategic
technology investments. Since 1995 he has served as the Chairman of MS
Technology Holdings, Inc. and MSIT Holdings, Inc., both of which are technology
investment arms of Morgan Stanley. In 1994, Mr. Lutz joined Morgan Stanley as
Managing Director of the Application Products Group. Previously, Mr. Lutz was
the President of Candle Corporation, a software company, for four years. Mr.
Lutz also serves as a board member of SPSS Inc., a software company, and
Interlink Electronics, a hardware manufacturer, as well as several private
companies. Mr. Lutz holds B.A. and M.A. degrees from Michigan State University.
JOSEPH P. ROEBUCK has served as director since May 1999. Since November
1998, Mr. Roebuck has served as Vice President of Strategic Sales for Sun
Microsystems, Inc., a manufacturer of hardware and software systems. From
October 1993 to October 1998, Mr. Roebuck served as Vice President of Worldwide
Sales, Computer Systems Division at Sun Microsystems, Inc. Mr. Roebuck received
an A.B. degree in Liberal Arts from Cornell University.
JEFFREY T. WEBBER has served as a director since March 1995. Since 1991,
Mr. Webber has been a founding partner of R.B. Webber & Company, a management
consulting firm. Since 1997, Mr. Webber has been a General Partner of The
Entrepreneurs' Fund, L.P., an early stage venture capital firm. From 1987 to
January 1991, he was a partner at Edgar, Dunn & Company, a management consulting
firm. He began his career at McKinsey & Company, Inc. Mr. Webber serves as a
director of Sybase, Inc., an enterprise software company, and Sagent Technology,
Inc., a datamart solutions company, as well as several private companies. Mr.
Webber holds a B.A. degree in American Studies from Yale University.
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BOARD COMPOSITION
Our certificate of incorporation and bylaws currently provide for a board
of directors consisting of eight members. Beginning at the first annual meeting
of stockholders after the annual meeting of stockholders at which we have at
least 800 stockholders, the board of directors will be divided into three
classes, each serving staggered three-year terms: Class I, whose term will
expire at the first annual meeting of stockholders after our first annual
meeting of stockholders at which we have 800 stockholders; Class II, whose term
will expire at the second annual meeting of stockholders after our first annual
meeting of stockholders at which we have 800 stockholders; and Class III, whose
term will expire at the third annual meeting of stockholders after our first
annual meeting of stockholders at which we have 800 stockholders. As a result,
only one class of directors will be elected at each annual meeting of
stockholders of Persistence, with the other classes continuing for the remainder
of their respective terms. Gregory Ennis and William Harding were elected to the
board of directors pursuant to a voting agreement between us and our principal
stockholders. This voting agreement will terminate upon completion of this
offering. Our officers are appointed by the board of directors and serve at the
discretion of the board of directors.
BOARD COMPENSATION
Our directors do not currently receive compensation for their services as
members of the board of directors. Employee directors are eligible to
participate in our 1997 stock plan and will be eligible to participate in our
1999 employee stock purchase plan. Nonemployee directors are eligible to
participate in our 1997 stock plan and will be eligible to participate in our
1999 directors' stock option plan. See "Stock Plans."
In April 1998, the board of directors granted Mr. Lutz an option to
purchase 35,000 shares of common stock at $0.50 per share. The option becomes
exercisable at the rate of 1/4th of the total number of shares on January 1,
1999 and 1/48th of the total shares per month thereafter. In July 1998, the
Board granted Mr. Lutz a fully-vested option to purchase 3,572 shares of common
stock at $0.50 per share in consideration of consulting services rendered by Mr.
Lutz to us. In July 1998, the board of directors granted Mr. Hancock an option
to purchase 35,000 shares of common stock at $0.50 per share in connection with
his appointment as a director. The option becomes exercisable at the rate of
1/4th of the total number of shares on July 30, 1999 and 1/48th of the total
shares per month thereafter. All these options were granted under the 1997 stock
plan and have not been exercised.
We engage R.B. Webber & Company, of which Mr. Webber is President, to
perform market and business analyses for us on a project by project basis.
Pursuant to this arrangement, we paid R.B. Webber & Company $18,700 in 1997 and
$20,500 in 1998.
BOARD COMMITTEES
The compensation committee currently consists of Gregory Ennis and Jack
Hancock. The functions of the compensation committee are to:
- review and approve the compensation and benefits for our executive
officers and grant stock options under our stock option plans; and
- make recommendations to the board of directors regarding these matters.
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The audit committee consists of Gregory Ennis and William Harding. The
functions of the audit committee are to:
- make recommendations to the board of directors regarding the selection of
independent auditors;
- review the results and scope of the audit and other services provided by
our independent auditors; and
- review and evaluate our audit and control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee of the board of directors are
currently Gregory Ennis and Jack Hancock, neither of whom has ever been an
officer or employee of Persistence. Before establishing the compensation
committee in July 1998, the board of directors as a whole performed the
functions delegated to the compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to us during the year ended December 31, 1998 by our Chief Executive
Officer and four other most highly compensated executive officers who earned
more than $100,000 during the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- --------------------------- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
Christopher Keene, Chairman of
the Board and Chief Executive
Officer........................ $151,670 $23,630 -- $180
Alan Cohen, Senior Vice President
of Sales and International
Operations..................... 140,000 108,750 -- 180
Barry Goss, Vice President of
Strategic Marketing............ 133,640 62,750 -- 180
Christine Russell, Chief
Financial Officer.............. 140,004 25,980 -- 180
Derek Henninger, Vice President
of Engineering................. 138,337 27,230 -- 180
</TABLE>
- -------------------------
(1) We paid $180 in connection with life insurance premiums for each executive
officer listed in the table during the year ended December 31, 1998.
CHANGE OF CONTROL AGREEMENTS
We have entered into change of control agreements with Alan Cohen, Mark
Douglas, Erik Frieberg, Barry Goss, Christine Russell and Laurence Hootnick,
which provide that
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100% of the stock options or restricted stock held by the officer shall
immediately vest if he or she is terminated without cause or resigns for good
reason within 12 months after a change of control transaction.
OPTION GRANTS
We did not grant any stock options to our Chief Executive Officer or four
other most highly compensated executive officers during the year ended December
31, 1998. In February 1999, we granted Christine Russell and Alan Cohen each an
option to purchase 20,000 shares of common stock at $1.65 per share. Each option
becomes exercisable at the rate of 1/4th of the total number of shares on
February 18, 2000 and 1/48th of the total per month thereafter. Both options
were granted under the 1997 Stock Plan and have not been exercised.
AGGREGATE OPTION EXERCISES AND HOLDINGS
No options were held or exercised during the year ended December 31, 1998
by our Chief Executive Officer or our four other most highly compensated
executive officers. In February 1999, we granted Christine Russell and Alan
Cohen the options described above, none of which have been exercised.
STOCK PLANS
1997 Stock Plan. Our 1997 stock plan provides for the grant of incentive
stock options to employees, including employee directors, and of nonstatutory
stock options and stock purchase rights to employees, directors (including
employee directors) and consultants. The purposes of the 1997 stock plan are to
attract and retain the best available personnel, to provide additional
incentives to our employees and consultants and to promote the success of our
business. The 1997 stock plan was originally adopted by our board of directors
in April 1997 and approved by our stockholders in July 1997. The 1997 stock plan
has been amended a number of times, most recently in April 1999, when the board
of directors reserved an additional 3,000,000 shares of common stock for
issuance under the 1997 stock plan and made other changes. Our stockholders
approved this amendment in June 1999. As of the date of this offering, a total
of 5,609,652 shares of common stock has been reserved for issuance under the
1997 stock plan (not including 38,645 shares that may be returned to our 1994
stock purchase plan, described below, upon our repurchase of such shares from
participants when they terminate employment), plus an automatic annual increase
on the first day of each of our fiscal years beginning in 2001, 2002, 2003, 2004
and 2005 equal to the lesser of 650,000 shares, 3.5% of our outstanding common
stock on the last day of the immediately preceding fiscal year, or a lesser
number of shares as determined by the board of directors. Unless terminated
earlier by the board of directors, the 1997 stock plan will terminate in April
2007.
As of March 31, 1999, options to purchase 1,388,036 shares of common stock
were outstanding under the 1997 stock plan at a weighted average exercise price
of $0.64 per share, 826,583 shares had been issued upon exercise of outstanding
options or pursuant to restricted stock purchase agreements, and 395,033 shares
remained available for future grant.
The 1997 stock plan may be administered by the board of directors or a
committee of the board, each known as the administrator. The administrator
determines the terms of options and stock purchase rights granted under the 1997
stock plan, including the number of shares subject to the award, the exercise or
purchase price, and the vesting or exercisability of the award and any other
conditions to which the award is subject. In no event, however, may an employee
receive awards for more than 2,000,000 shares under the
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1997 stock plan in any fiscal year. Incentive stock options granted under the
1997 stock plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant. Prior to this offering,
nonstatutory stock options and stock purchase rights granted under the 1997
stock plan were required to have an exercise or purchase price of at least 85%
of the fair market value of the common stock on the date of grant, and grants to
employees who were not officers must vest at least 20% per year. After the date
of this offering, the exercise price of nonstatutory stock options and the
purchase price of stock purchase rights will no longer be subject to these
restrictions, although nonstatutory stock options and stock purchase rights
granted to our Chief Executive Officer and our four other most highly
compensated officers will generally equal at least 100% of the grant date fair
market value. Payment of the exercise or purchase price may be made in cash or
such other consideration as determined by the administrator.
With respect to options granted under the 1997 stock plan, the
administrator determines the term of options, which may not exceed 10 years (or
5 years in the case of an incentive stock option granted to a holder of more
than 10% of the total voting power of all classes of our stock). Generally, an
option granted under the 1997 stock plan is nontransferable other than by will
or the laws of descent and distribution, and may be exercised during the
lifetime of the optionee only by that optionee. However, the administrator may
in its discretion provide for the limited transferability of nonstatutory stock
options granted under the 1997 stock plan under circumstances specified in the
1997 stock plan. Stock issued pursuant to stock purchase rights granted under
the 1997 stock plan is generally subject to a repurchase right exercisable by
Persistence Software upon the termination of the holder's employment or
consulting relationship with us for any reason (including death or disability).
This repurchase right will lapse in accordance with the terms of the stock
purchase right determined by the administrator at the time of grant.
If we are acquired by another corporation, each outstanding option and
stock purchase right may be assumed or an equivalent award substituted by our
acquirer. However, if the acquirer does not agree to this assumption or
substitution, then unvested shares and options terminate. The administrator has
the authority to amend or terminate the 1997 plan, but no action may be taken
that impairs the rights of any holder of an outstanding option or stock purchase
right without the holder's consent. In addition, we must obtain stockholder
approval of amendments to the plan as required by applicable law.
1994 Stock Purchase Plan. The 1994 stock purchase plan was originally
adopted by our board of directors in July 1994 and approved by our stockholders
in July 1994. It provides for the grant of stock purchase rights to employees
and a total of 640,598 shares of common stock have been reserved for issuance
under the 1994 stock purchase plan. As of March 31, 1999, 640,598 shares of
common stock had been issued pursuant to restricted stock purchase agreements
under the 1994 stock purchase plan. No shares remained available for future
grant, and we do not intend to issue any further awards under this plan. Unless
sooner terminated by the board of directors, the 1994 stock purchase plan will
terminate in July 2004.
Stock purchase rights granted under the 1994 stock purchase plan were
required to have a purchase price of at least 85% of the fair market value of
the shares as of the date of the offer. Recipients of stock purchase rights
under the 1994 stock purchase plan execute a restricted stock purchase agreement
granting us an option to repurchase the shares subject to the award at the
recipient's original purchase price upon termination of the recipient's
employment with us prior to vesting. The shares generally vest, and our
repurchase right lapses, over a four year period at the rate of one fourth of
the total shares on the annual
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<PAGE> 58
anniversary of the vesting commencement date and 1/48th of the total shares on
the monthly anniversary of the vesting commencement date thereafter. Payment of
the purchase price is permitted to be made in cash or other consideration as
determined by the plan's administrator. Shares returned to the 1994 plan are
automatically transferred to the 1997 plan.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan
was adopted by the board of directors in April 1999 and was approved by our
stockholders in June 1999. A total of 600,000 shares of common stock has been
reserved for issuance under the 1999 employee stock purchase plan, none of which
have been issued as of the date of this offering. The number of shares reserved
for issuance under the 1999 employee stock purchase plan will be subject to an
automatic annual increase on the first day of each of our fiscal years beginning
in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 250,000 shares, 1% of
our outstanding common stock on the last day of the immediately preceding fiscal
year, or a lesser number of shares as determined by the board of directors. The
1999 employee stock purchase plan becomes effective upon the date of this
offering. Unless terminated earlier by the board of directors, the 1999 employee
stock purchase plan will terminate twenty years following the date of this
offering.
The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will be implemented by a series of
overlapping offering periods of approximately 24 months' duration, with new
offering periods (other than the first offering period) commencing on February 1
and August 1 of each year. Each offering period will generally consist of four
consecutive purchase periods of six months' duration, at the end of which an
automatic purchase will be made for participants. The initial offering period is
expected to commence on the date of this offering and end on July 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on January 31, 2000, with subsequent purchase periods ending on July 31,
2000, January 31, 2001 and July 31, 2001. The 1999 employee stock purchase plan
will be administered by the board of directors or by a committee appointed by
the board. Our employees (including officers and employee directors), or
employees of any majority-owned subsidiary designated by the board, are eligible
to participate in the 1999 employee stock purchase plan if they are employed at
least 20 hours per week and more than five months per year. The 1999 employee
stock purchase plan permits eligible employees to purchase common stock through
payroll deductions, which in any event may not exceed 20% of an employee's base
salary. The price at which stock is purchased under the 1999 employee stock
purchase plan is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period. Employees may end their participation in the 1999 employee
stock purchase plan at any time during an offering period, and participation
ends automatically on termination of employment. The board may implement
provisions of the 1999 employee stock purchase plan that permit stock purchases
through cash or stock contributions.
An employee cannot be granted an option under the 1999 employee stock
purchase plan if immediately after the grant that employee would own stock or
hold outstanding options to purchase stock equaling 5% or more of the total
voting power or value of all classes of our stock or stock of our subsidiaries,
or if the option would give an employee rights to purchase stock under the 1999
employee stock purchase plan at a rate that exceeds $25,000 of fair market value
of the stock for each calendar year in which the option is outstanding. In
addition, no employee may purchase more than 2,500 shares of common stock under
the 1999 employee stock purchase plan in any one purchase period. If the fair
market value of the common stock on a purchase date is less than the fair
55
<PAGE> 59
market value at the beginning of the offering period, each participant in that
offering period shall automatically be withdrawn from the offering period as of
the end of the purchase date and re-enrolled in the new twenty-four month
offering period beginning on the first business day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
employee stock purchase plan will be assumed or an equivalent right substituted
by the successor corporation unless our acquiror does not agree to assume or
substitute outstanding rights, in which case the offering period then in
progress will be shortened so that employees' rights to purchase stock under the
1999 employee stock purchase plan are exercised prior to the transaction. The
board of directors has the power to amend or terminate the 1999 employee stock
purchase plan and to change or terminate offering periods as long as this action
does not adversely affect any outstanding rights to purchase stock thereunder.
However, the board of directors may amend or terminate the 1999 purchase plan or
an offering period even if it would adversely affect outstanding options in
order to avoid our incurring adverse accounting charges. In addition, the
purchase price may be adjusted during an offering period in order to avoid our
incurring adverse accounting charges.
1999 Directors' Stock Option Plan. The 1999 directors' stock option was
adopted by the board of directors in April 1999 and was approved by our
stockholders in June 1999. It will become effective upon the date of this
offering. A total of 500,000 shares of common stock has been reserved for
issuance under the 1999 directors' plan, all of which remain available for
future grants. The 1999 directors' plan provides for the grant of nonstatutory
stock options to our nonemployee directors. The 1999 directors' plan is designed
to work automatically without administration. To the extent administration is
necessary, it will be performed by the board of directors. To the extent
conflicts of interest arise, it is expected that they will be addressed by
abstention of any interested director from both deliberations and voting
regarding matters in which that director has a personal interest. Unless
terminated earlier, the 1999 directors' plan will terminate ten years from the
date of this offering in April 2009.
The 1999 directors' plan provides that each person who becomes a
nonemployee director after the completion of this offering will be granted: (1)
a nonstatutory stock option to purchase 20,000 shares of common stock on the
date on which he or she first becomes a member of our board of directors, (2) an
additional nonstatutory stock option to purchase 20,000 shares on the one year
anniversary of his or her election as a director and (3) an additional
nonstatutory stock option to purchase 4,000 shares on the first day of each
fiscal year beginning at least two years after his or her election as a
director. Each nonemployee director who was a member of the board of directors
before the completion of the offering will be granted an option to purchase
4,000 shares of common stock on the first day of each fiscal year beginning on
January 1, 2000.
All options granted under the 1999 directors' plan will have a term of ten
years and an exercise price equal to the fair market value of our common stock
on the date of grant and will be nontransferable. All options granted under the
1999 directors' plan shall vest in full immediately upon grant. If a nonemployee
director ceases to serve as a director for any reason other than death or
disability, he or she may, but only within 90 days after the date he or she
ceases to be a director, exercise options granted under the directors' plan. If
he or she does not exercise the option within this 90-day period, the option
shall terminate. If a director's service terminates as a result of his or her
disability or death, or if a director dies within three months following
termination for any reason, the director or his or her
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<PAGE> 60
estate will have 12 months after the date of termination or death, as
applicable, to exercise options that were vested as of the date of termination.
If we are acquired by another corporation, each option outstanding under
the directors' plan will be assumed or equivalent options substituted by our
acquirer, unless our acquirer does not agree to this assumption or substitution,
in which case the options will terminate upon consummation of the transaction to
the extent not previously exercised. Our board of directors may amend or
terminate the 1999 directors' plan as long as that action does not adversely
affect any outstanding option and we obtain stockholder approval for any
amendment to the extent required by applicable law.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
or her actions in that capacity, regardless of whether the bylaws would permit
indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by a director
or executive officer in any action or proceeding arising out of his or her
services as a director or executive officer of Persistence, any subsidiary of
Persistence or any other entity to which he or she provides services at our
request. In addition, we maintain directors' and officers' insurance. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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CERTAIN TRANSACTIONS
In April 1997, we issued Derek Henninger, one of our executive officers,
1,700 shares of common stock at $0.23 per share under the 1994 stock purchase
plan. In December 1997, we issued each of Barry Goss, Alan Cohen and Christine
Russell, each of whom is an executive officer, 260,000 shares of common stock at
$0.23 per share under the 1997 stock plan. All these shares are subject to a
right of repurchase at cost in our favor which lapses at the rate of 1/4th of
the total number of shares on the first anniversary of the vesting commencement
date and 1/48th of the total number of shares per month thereafter.
In April 1998, we granted Mark Douglas and Janet McGraw, each an executive
officer, options to purchase 130,000 and 75,000 shares of common stock,
respectively, at $0.50 per share. In July 1998, we granted Jack L. Hancock, one
of our directors, an option to purchase 35,000 shares of common stock at $0.50
per share in connection with his appointment as a director. In July 1998, we
granted Mark Douglas an option to purchase 65,000 shares of common stock at
$0.50 per share and we granted Janet McGraw an option to purchase 35,000 shares
of common stock at $0.50 per share. In October 1998, we granted Erik Frieberg,
an executive officer, an option to purchase 55,000 shares of common stock at
$0.60 per share. In February 1999, we granted Christine Russell and Alan Cohen
each an option to purchase 20,000 shares of common stock at $1.65 per share. In
April 1999, we granted Janet McGraw and Mark Douglas each an option to purchase
20,000 shares of common stock at $10.00 per share. All these options become
exercisable at the rate of 1/4th of the total number of shares on the first
anniversary of the vesting commencement date and 1/48th of the total number of
shares per month thereafter. All these options were granted under the 1997 stock
plan and have not been exercised.
In April 1998, we granted Erik Frieberg an option under the 1997 stock plan
to purchase 75,000 shares of common stock at $0.50 per share. The option becomes
exercisable at the rate of 1/4th of the total number of shares on the first
anniversary of the vesting commencement date and 1/48th of the total number of
shares per month thereafter. In April 1999, Mr. Frieberg exercised the option to
purchase 18,750 of these shares.
In April 1999, we granted Gregory Ennis, Jack Hancock, Larry Henninger,
William Harding, Merritt Lutz and Jeffrey Webber, who serve as our directors,
each an option under the 1997 stock plan to purchase 10,000 shares of common
stock at $10.00 per share. In April 1999, we also granted Joseph Roebuck, who
serves as our director, an option under the 1997 stock plan to purchase 20,000
shares of common stock at $10.00 per share. These options are fully-vested and
have not been exercised.
In April 1999, we granted Laurence Hootnick, our President and a director,
an option to purchase 850,000 shares of common stock at $10.00 per share. The
option is immediately exercisable. However, if the option is exercised, the
underlying shares are subject to a right of repurchase at $10.00 per share in
our favor in the event Mr. Hootnick ceases employment with us. Our repurchase
option lapses at the rate of 1/4th of the total number of shares on the first
anniversary of the vesting commencement date and 1/48th of the total number of
shares per month thereafter. In April 1999, we also granted Mr. Hootnick an
option to purchase 340,000 shares of common stock at $10.00 per share. The
option vests upon the earlier of five years or the attainment of specified
revenue milestones within 36 months of Mr. Hootnick's first date of employment.
In April 1998, we granted Merritt Lutz, one of our directors, an option to
purchase 35,000 shares of common stock at $0.50 per share. The option becomes
exercisable at the rate of 1/48th of the total number of shares on January 1,
1999 and 1/48th of the total shares per month thereafter. In connection with
consulting services tendered to us, we
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<PAGE> 62
granted Mr. Lutz a fully-vested option to purchase 3,572 shares of common stock
at $0.50 per share in July 1998, a fully-vested option to purchase 6,288 shares
of common stock at $1.65 per share in February 1999, and a fully-vested option
to purchase 393 shares of common stock at $10.00 per share in April 1999. All of
these options were granted under the 1997 stock plan and have not been
exercised.
We engage R.B. Webber & Company to perform market and business analysis for
us on a project by project basis. Jeffrey Webber, one of our directors, is
President of R.B. Webber. In connection with these services, we paid R.B. Webber
& Company $18,700 in 1997 and $20,500 in 1998. In addition, we have issued Mr.
Webber common stock in connection with consulting services rendered to us by Mr.
Webber. In April 1996, we issued Mr. Webber 29,060 shares of common stock at
$0.23 per share. In November 1996, we issued Mr. Webber 3,300 shares of common
stock at $0.23 per share. All these shares were issued under the 1994 stock
purchase plan.
Larry E. Henninger, who served on our board of directors from February 1994
to April 1999, is the father of Derek P. Henninger, our Vice President of
Engineering. We have an unwritten consulting arrangement with Larry Henninger,
pursuant to which we paid Mr. Henninger $18,000 per year during each of 1996,
1997 and 1998. In April 1997, in connection with these consulting services, we
sold Mr. Henninger 7,000 shares of common stock at $0.23 per share. We currently
intend to continue to pay Mr. Henninger $1,500 per month as a retainer for
consulting services.
We entered into change of control agreements with Christine Russell on
February 18, 1997, with Alan Cohen on December 31, 1997, with Barry Goss on
January 1, 1998, with Erik Frieberg on March 23, 1998, with Mark Douglas on
April 1, 1998 and with Laurence Hootnick on April 29, 1999. These change of
control agreements provide that restricted stock or stock options granted to
these officers under the 1997 stock plan will immediately vest if they are
terminated without cause or resign for good reason within 12 months after our
change of control. This offering will not constitute a change of control.
The following executive officers have issued full recourse promissory notes
in our favor in order to purchase shares of common stock pursuant to stock
purchase rights granted under the 1997 stock plan:
<TABLE>
<CAPTION>
NAME DATE OF NOTE PRINCIPAL AMOUNT DATE DUE INTEREST RATE
- ---- ------------ ---------------- -------- -------------
<S> <C> <C> <C> <C>
Alan Cohen.............. 12/30/97 $53,820 12/30/01 5.93%
Barry Goss.............. 12/27/97 $53,820 12/27/01 5.93%
Christine Russell....... 12/27/97 $53,820 12/27/01 5.93%
</TABLE>
We have entered into indemnification agreements with our officers and
directors containing provisions that may require us to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as officers or directors, other than liabilities arising from willful
misconduct of a culpable nature, and to advance their expenses incurred as a
result of any proceeding against them.
In November 1996, we entered into a technology development and license
agreement with Morgan Stanley Dean Witter & Co., pursuant to which Morgan
Stanley Dean Witter paid us a purchase advance of $50,000 and granted us a
source code license to incorporate specific technology into products to be
developed for Morgan Stanley Dean Witter and other commercial use. If we default
under the agreement, Morgan Stanley Dean Witter is entitled to use portions of
our source code specified in the agreement to develop products for internal use
and to use object code versions of specified products we have developed under
the agreement. We recognized revenue of $300,000 from Morgan Stanley Dean Witter
in 1997 and revenue of $168,000 from Morgan Stanley Dean Witter in 1998. At
December 31, 1998,
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<PAGE> 63
we had $30,000 of deferred revenue and $101,000 of accounts receivable with
Morgan Stanley Dean Witter. MSIT Holdings, Inc. and Morgan Stanley & Co.'s
wholly-owned subsidiaries, Morgan Stanley Venture Capital Fund II, L.P., Morgan
Stanley Venture Investors, L.P. and Morgan Stanley Venture Capital Fund II,
C.V., own shares of our Series B and Series C preferred stock. MSIT Holdings,
Inc. and the managing general partner of the general partner of the Morgan
Stanley Dean Witter Venture Partner entities are wholly-owned subsidiaries of
Morgan Stanley Dean Witter & Co. Merritt Lutz, who is affiliated with MSIT
Holdings, Inc., and William Harding, who is affiliated with the Morgan Stanley
Dean Witter Venture Partner entities, serve as our directors.
The following table summarizes the shares of preferred stock purchased by
our directors and 5% stockholders and persons and entities associated with them
in private placement transactions. The shares of Series A preferred stock were
sold at $0.59662 per share, the shares of Series B preferred stock were sold at
$2.29 per share, the shares of Series C preferred stock were sold at $4.63 per
share, and the shares of Series D preferred stock were sold at $5.35 per share.
<TABLE>
<CAPTION>
SERIES SERIES
SERIES A SERIES B C D
ENTITIES AFFILIATED WITH DIRECTORS PREFERRED PREFERRED PREFERRED PREFERRED
- ---------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Entities affiliated with Thompson
Clive Investments plc
(Gregory Ennis)...................... 2,084,715 218,341 10,799 --
Entities affiliated with Morgan Stanley
Dean Witter Venture Partners
(William J. Harding)................. -- 1,528,384 21,598 --
MSIT Holdings, Inc. (Merritt Lutz)..... -- 1,484,716 -- --
The Entrepreneurs' Fund, L.P.
(Jeffrey T. Webber).................. 50,000 -- 53,996 28,037
</TABLE>
- -------------------------
This table includes:
- - shares held by Thompson Clive Investments plc. Mr. Ennis is a director of
Thompson Clive Inc., a wholly-owned U.S. subsidiary of Thompson Clive &
Partners Limited, the manager of Thompson Clive Investments plc. Mr. Ennis is
a director of Persistence. He disclaims beneficial ownership of the shares
held by the entity except to the extent of his proportionate interest therein.
- - shares held by Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley
Venture Investors, L.P. and Morgan Stanley Venture Capital Fund II, C.V. Dr.
Harding is a general partner of Morgan Stanley Venture Partners II, L.P.,
which is the general partner of Morgan Stanley Venture Capital Fund II, L.P.,
Morgan Stanley Venture Investors, L.P. and Morgan Stanley Venture Capital Fund
II, C.V., and a director of Persistence. He disclaims beneficial ownership of
the shares held by these entities except to the extent of his proportionate
interest therein.
- - shares held by MSIT Holdings, Inc. Mr. Lutz is the Chairman of MSIT Holdings,
Inc. and a director of Persistence. He disclaims beneficial ownership of the
shares held by this entity except to the extent of his proportionate interest
therein.
- - shares held by Lighthouse Nineteen Ninety-Nine Fund, LDC and The
Entrepreneurs' Fund, L.P. Mr. Webber is a beneficiary of a trust which
indirectly owns Lighthouse Nineteen Ninety-Nine Fund, LDC, a general partner
of The Entrepreneurs' Fund, L.P., and a director of Persistence. He disclaims
beneficial ownership of the shares held by the entities except to the extent
of his proportionate interest therein.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of May 31, 1999, as adjusted to
reflect the sale of common stock offered in this offering, by:
- each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock,
- each director,
- our Chief Executive Officer and four other most highly compensated
executive officers, and
- all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
--------------------
NUMBER OF BEFORE AFTER
SHARES OFFERING OFFERING
---------- -------- --------
<S> <C> <C> <C>
Christopher T. Keene........................... 2,790,000 18.06% 15.12%
Gregory Ennis(1)............................... 2,428,095 15.71 13.15
Thompson Clive Investments plc(2).............. 2,418,095 15.65 13.11
3000 Sand Hill Road
Building 1, Suite 185
Menlo Park, CA 94025
William J. Harding(3).......................... 1,559,982 10.09 8.45
Entities affiliated with Morgan Stanley Dean
Witter Venture Partners(4)................... 1,549,982 10.03 8.40
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Merritt Lutz(5)................................ 1,518,094 9.81 8.21
MSIT Holdings, Inc............................. 1,484,716 9.61 8.05
1585 Broadway
New York, NY 10036
Derek Henninger(6)............................. 1,301,700 8.43 7.06
Laurence R. Hootnick(7)........................ 850,000 5.22 4.40
Jeffrey T. Webber(8)........................... 269,393 1.74 1.46
Alan Cohen(9).................................. 260,000 1.68 1.41
Barry Goss..................................... 260,000 1.68 1.41
Christine Russell.............................. 260,000 1.68 1.41
Joseph P. Roebuck(10).......................... 20,000 * *
Jack L. Hancock(11)............................ 18,750 * *
All directors and executive officers as a group
(14 persons)................................. 11,650,076 70.55% 58.41%
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 10,000 shares issuable upon exercise of an option that will be
exercisable within 60 days of May 31, 1999, 2,313,855 shares held by
Thompson Clive Investments plc, 52,120 shares held by Thompson Clive Inc.
401(k) fbo Greg Ennis and 52,120 shares held by Thompson Clive Inc. 401(k)
fbo Peter H. Ziebelman. Mr. Ennis is a director of Thompson Clive Inc., a
wholly-owned U.S. subsidiary of Thompson Clive & Partners Limited, the
manager of Thompson Clive
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<PAGE> 65
Investments plc. Mr. Ennis disclaims beneficial ownership of the shares
held by the entities except to the extent of his proportionate interest
therein.
(2) Includes 52,120 shares held by Thompson Clive Inc. 401(k) fbo Greg Ennis
and 52,120 shares held by Thompson Clive Inc. 401(k) fbo Peter H.
Ziebelman.
(3) Includes 10,000 shares issuable upon exercise of an option that will be
exercisable within 60 days of May 31, 1999, 1,027,381 shares held by
Morgan Stanley Venture Capital Fund II, L.P., 266,642 shares held by
Morgan Stanley Venture Investors, L.P. and 255,959 shares held by Morgan
Stanley Venture Capital Fund II, C.V. Dr. Harding is a general partner of
Morgan Stanley Venture Partners II, L.P., which is the managing general
partner of the general partner of Morgan Stanley Venture Capital Fund II,
L.P., Morgan Stanley Venture Investors, L.P. and Morgan Stanley Venture
Capital Fund II, C.V. He disclaims beneficial ownership of the shares held
by the entities except to the extent of his proportionate interest
therein.
(4) Includes 1,027,381 shares held by Morgan Stanley Venture Capital Fund II,
L.P., 266,642 shares held by Morgan Stanley Venture Investors, L.P. and
255,959 shares held by Morgan Stanley Venture Capital Fund II, C.V.
(5) Includes 33,378 shares issuable upon exercise of options which will be
exercisable within 60 days of May 31, 1999 and 1,484,716 shares held by
MSIT Holdings, Inc. Mr. Lutz is the Chairman of MSIT Holdings, Inc. He
disclaims beneficial ownership of the shares held by the entity except to
the extent of his proportionate interest therein.
(6) Includes 1,301,700 shares held by The Henninger Family Trust. Mr.
Henninger is a trustee of this entity.
(7) Includes 850,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of May 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Hootnick ceases
employment with us.
(8) Includes 10,000 shares issuable upon exercise of an option that will be
exercisable within 60 days of May 31, 1999, 130,000 shares held by
Lighthouse Nineteen Ninety-Nine Fund, LDC, 82,033 shares held by The
Entrepreneurs' Fund, L.P. and 45,000 shares held by Healdsburg Consulting
Group. Mr. Webber is a beneficiary of a trust that indirectly owns
Lighthouse Nineteen Ninety-Nine Fund, LDC, as well as a general partner of
The Entrepreneurs' Fund, L.P. and President of Healdsburg Consulting
Group. He disclaims beneficial ownership of the shares held by the
entities except to the extent of his proportionate interest therein.
(9) Includes 260,000 shares held by Alan B. Cohen and Vivian L. Cohen,
Trustees of the Alan and Vivian Cohen Trust of 12/2/98. Mr. Cohen is a
trustee of this entity. He disclaims beneficial ownership of the shares
except to the extent of his proportionate interest therein.
(10) Includes 20,000 shares issuable upon exercise of an option that will be
exercisable within 60 days of May 31, 1999.
(11) Includes 18,750 shares issuable upon exercise of an option that will be
exercisable within 60 days of May 31, 1999.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned by a
person includes shares of common stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of May 31, 1999.
The shares issuable pursuant to these options are deemed outstanding for
computing the percentage ownership of the person holding these options but are
not deemed outstanding for the purposes of computing the percentage ownership of
each other person. The number of shares listed in the table above for all
directors and executive officers as a group includes 18,750 outstanding shares
and options to purchase 95,312 shares that are currently exercisable within 60
days of May 31, 1999 held by executive officers not named in the table. The
table excludes 252,000 shares held as of May 31, 1999 by Larry Henninger, who
resigned as a director in April 1999.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of our
capital stock is intended to be a summary and does not describe all provisions
of our certificate of incorporation or bylaws or Delaware law applicable to
Persistence. For a more thorough understanding of the terms of our capital
stock, you should refer to our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
is a part.
COMMON STOCK
As of March 31, 1999, there were 15,447,941 shares of common stock
outstanding, held of record by approximately 108 stockholders, which reflects
the conversion of all outstanding shares of preferred stock into common stock.
In addition, as of March 31, 1999, there were 1,388,036 shares of common stock
subject to outstanding options and 80,556 shares of common stock subject to
outstanding warrants. Upon completion of this offering, there will be 18,447,941
shares of common stock outstanding, assuming no exercise of the underwriters'
overallotment option or additional exercise of outstanding options under our
stock option plan and warrants.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably dividends as may be declared by the board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding preferred stock. The common stock has
no preemptive or conversion rights, other subscription rights, or redemption or
sinking fund provisions. All outstanding shares of common stock are fully paid
and non-assessable, and the shares of common stock to be issued upon completion
of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 7,697,885 shares of common stock and automatically
retired. Thereafter, the board of directors will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to designate the rights, preferences, privileges
and restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 1999 there were warrants outstanding to purchase a total of
55,556 shares of common stock at a price of $0.90 per share, which expire on
December 31, 2001. In addition, there were warrants outstanding to purchase a
total of 25,000 shares of common stock at $0.90 per share, which expire on
February 6, 2001.
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REGISTRATION RIGHTS
The holders of 7,726,434 shares of common stock and warrants to purchase
80,556 shares of common stock (the "registrable securities") are entitled to
have their shares registered by us under the Securities Act under the terms of
an agreement between us and the holders of the registrable securities. Subject
to limitations specified in the agreement, these registration rights include the
following:
- The holders registrable securities may require, on two occasions
beginning six months after the date of this prospectus, that we use our
best efforts to register the registrable securities for public resale,
provided that the aggregate offering price for these registrable
securities is at least $5,000,000. This right is subject to the ability
of the underwriters to limit the number of shares included in the
offering in view of market conditions.
- If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in that
registration. This right is subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions.
- The holders of at least 1% of the then outstanding registrable securities
may require us to register all or a portion of their registrable
securities on Form S-3 when use of this form becomes available to us,
provided that the proposed aggregate offering price is at least
$1,000,000. The holders of registrable securities may not exercise this
right within six months immediately following the effective date of a
Form S-3 registration previously demanded by the holders of registrable
securities or more than once in any twelve-month period.
We will bear all registration expenses other than underwriting discounts
and commissions, except in the case of registrations on Form S-3 demanded after
one such registration on Form S-3 has already been declared effective. All
registration rights terminate on the date five years following the closing of
this offering, or, with respect to each holder of registrable securities, at the
time when the holder owns less than 2% of the voting stock and is entitled to
sell all of its shares in any three month period under Rule 144 of the
Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult for a third party to acquire us or to remove our
incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of Persistence to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging these proposals
because, among other things, negotiation could result in an improvement of their
terms.
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a business combination with
an interested stockholder for a
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<PAGE> 68
period of three years following the date the person became an interested
stockholder, unless:
- the board of directors approved the transaction in which the person
became an interested stockholder prior to the date the interested
stockholder attained this status;
- upon consummation of the transaction that resulted in the person's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. Our certificate of
incorporation provides for the board of directors to be divided into three
classes, with staggered three-year terms, commencing at our first annual meeting
of stockholders following the date on which we have at least 800 stockholders.
As a result, only one class of directors will be elected at each annual meeting
of stockholders. Each of the two other classes of directors will continue to
serve for the remainder of its respective three-year term. These provisions,
which require the vote of stockholders holding at least two thirds of the
outstanding common stock to amend, may have the effect of deterring hostile
takeovers or delaying changes in our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation. The transfer agent's address and telephone number is 1745
Gardena Avenue, Glendale, CA, 91204, (818)502-1404.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and impair our ability to raise
equity capital in the future.
Upon completion of the offering, we will have 18,447,941 outstanding shares
of common stock. Of these shares, the 3,000,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' overallotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
stockholders.
The remaining 15,447,941 shares outstanding are restricted securities
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of restricted securities in the public market, or the
availability of these shares for sale, could adversely affect the market price
of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 90 or 180 days after the
date of this prospectus without the prior written consent of BancBoston
Robertson Stephens. Notwithstanding possible earlier eligibility for sale under
the provisions of Rules 144, 144(k)and 701, shares subject to lock-up agreements
will not be salable until these agreements expire or are waived by BancBoston
Robertson Stephens. Taking into account the lock-up agreements, and assuming
BancBoston Robertson Stephens does not release stockholders from these
agreements, the following shares will be eligible for sale in the public market
at the following times:
- Beginning on the effective date of this prospectus, only the 3,000,000
shares sold in the offering will be immediately available for sale in the
public market.
- Beginning 90 days after the effective date, approximately 147,790 shares
will be eligible for sale, none of which will be subject to volume,
manner of sale and other limitations under Rule 144. None of these shares
are held by affiliates.
- Beginning 180 days after the effective date, approximately 14,434,150
shares will be eligible for sale, 7,014,673 of which will be subject to
volume, manner of sale and other limitations under Rule 144. All but
3,636,301 of the total 14,434,150 shares are held by affiliates.
- The remaining 866,001 shares will be eligible for sale pursuant to Rule
144 upon the expiration of various one-year holding periods during the
six months following 180 days after the effective date. All but 837,964
of these shares are held by affiliates.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year
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would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding
which will equal approximately 184,479 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
anytime during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell his
or her shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell their shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1994 stock purchase plan, the 1997 stock plan, the
1999 employee stock purchase plan, the 1999 directors' stock option plan or any
other benefit plan after the effectiveness of the registration statements will
also be freely tradable in the public market. However, such shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of March 31, 1999 there were outstanding options
for the purchase of 1,388,036 shares of common stock, of which options to
purchase 271,235 shares were exercisable.
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UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and
SoundView Technology Group, Inc., have entered into an underwriting agreement
with us to purchase the number of shares of common stock set forth opposite
their names below. The underwriters are committed to purchase and pay for all of
the shares listed below if any shares are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BancBoston Robertson Stephens Inc. .................. 1,100,000
U.S. Bancorp Piper Jaffray Inc. ..................... 605,000
SoundView Technology Group, Inc. .................... 495,000
Deutsche Bank Securities Inc. ....................... 125,000
Donaldson, Lufkin & Jenrette Securities.............. 125,000
Hambrecht & Quist LLC................................ 125,000
Lehman Brothers Inc. ................................ 125,000
Dain Rauscher Wessels................................ 100,000
First Albany Corporation............................. 100,000
Needham & Company, Inc. ............................. 100,000
---------
Total...................................... 3,000,000
=========
</TABLE>
Shares sold by the underwriters will initially be offered to the public at
the initial public offering price set forth on the cover page of this
prospectus. Any shares sold by the underwriters to securities dealers may be
sold at a discount of up to $0.46 per share from the initial public offering
price. These securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to $0.10 per share
from the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering price
and the other selling terms.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 450,000 additional shares of common stock at the same price per
share as we will receive for the 3,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 3,000,000 shares in this offering. If purchased, these
additional shares will be sold by the underwriters on the same terms as those on
which the 3,000,000 shares are being sold.
Qualified Independent Underwriter. The offering is being conducted in
accordance with Rule 2720 of the National Association of Securities Dealers,
Inc. which provides that, among other things, when an NASD member firm
participates in the offering of equity securities of a company with whom such
member has a "conflict of interest," the initial public offering price can be no
higher than that recommended by a "qualified independent underwriter." Morgan
Stanley Dean Witter & Co. is deemed to have a conflict of interest due to the
fact that certain entities affiliated with Morgan Stanley Dean Witter & Co. own
more than 10% of our
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capital stock. BancBoston Robertson Stephens is serving as the qualified
independent underwriter in the offering and will recommend a price in compliance
with the requirements of Rule 2720. BancBoston Robertson Stephens has performed
due diligence investigations and reviewed and participated in the preparation of
the prospectus and the registration statement of which this prospectus forms a
part. BancBoston Robertson Stephens will receive no additional compensation in
its capacity as the qualified independent underwriter.
Indemnification. The underwriting agreement contains covenants of
indemnity among the underwriters and us against specified civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
Lock-up Agreement. Each of our officers, directors and securityholders
agreed with the representatives or us for a period of 180 days, and in the case
of some securityholders 90 days, after the effective date of this prospectus,
not to dispose of or hedge any shares of common stock, or securities convertible
into or exchangeable for shares of common stock, now owned or later acquired by
them without the prior written consent of BancBoston Robertson Stephens Inc.
However, BancBoston Robertson Stephens Inc. may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. All of the shares of common stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject to holding period, volume limitations and other
conditions of Rule 144.
Future Sales. In addition, we have agreed that during the 180 days
following the effective date of this prospectus, we will not, without the prior
written consent of BancBoston Robertson Stephens Inc., subject to limited
exceptions (including in connection with acquisitions), dispose of or hedge any
shares of common stock, or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than (i) our sales of shares in
this offering, (ii) the issuance of common stock upon the exercise of
outstanding options or warrants or (iii) our issuance of options or shares under
the 1994 stock purchase plan, 1997 stock plan, 1999 employee stock purchase plan
and 1999 directors' stock option plan.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Determination of Offering Price. Prior to this offering, there has been no
public market for our common stock. Consequently, the initial public offering
price for the common stock in this offering has been determined through
negotiations among us and the representatives of the underwriters. The factors
considered in these negotiations included prevailing market conditions, our
financial information, the market valuation of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the business potential of the industry in which we compete, an
assessment of our management, our past and present operation, the prospects for
our future revenues and other factors deemed relevant.
Share Ownership by Underwriters. An entity affiliated with U.S. Bancorp
Piper Jaffray Inc. purchased an aggregate of 53,996 shares of our Series C
preferred stock from us in August 1998. This affiliate is subject to the 180-day
lock-up that applies to other securityholders as described above. U.S. Bancorp
Piper Jaffray Inc. and its affiliates (other than the holder described above)
will be permitted to engage in stabilization, brokerage and ordinary course of
business transactions. See "Shares Eligible for Future Sale."
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Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids that may have the effect
of stabilizing or maintaining the market price of the common stock at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of the common stock on behalf of the underwriters
for the purpose of fixing or maintaining the price of the common stock. A
"syndicate covering transaction" is the bid for the purchase of the common stock
on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Reserved Shares. The underwriters have reserved for sale at the initial
public offering price up to 5% of the common stock in this offering for
individuals designated by us who have expressed an interest in purchasing shares
of common stock in this offering. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the reserved
shares. The underwriters will offer any reserved shares not so purchased to the
general public on the same basis as other shares in this offering described
above.
Under an agreement among us and our principal stockholders, affiliates of
Amerindo Investment Advisors L.P. have the right to purchase up to 3% of the
shares offered in this offering. To exercise this right, these entities must
state the number of shares they intend to purchase and commit to purchase such
number within five business days after we provide them notice of this offering.
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UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and
SoundView Technology Group, Inc., have entered into an underwriting agreement
with us to purchase the number of shares of common stock set forth opposite
their names below. The underwriters are committed to purchase and pay for all of
the shares listed below if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
---------
<S> <C>
UNDERWRITER
BancBoston Robertson Stephens Inc. and BancBoston
Robertson Stephens International Limited ............... 1,100,000
U.S. Bancorp Piper Jaffray Inc. .......................... 605,000
SoundView Technology Group, Inc. ......................... 495,000
Deutsche Bank Securities Inc. ............................ 125,000
Donaldson, Lufkin & Jenrette Securities................... 125,000
Hambrecht & Quist LLC..................................... 125,000
Lehman Brothers Inc. ..................................... 125,000
Dain Rauscher Wessels..................................... 100,000
First Albany Corporation.................................. 100,000
Needham & Company, Inc. .................................. 100,000
---------
Total........................................... 3,000,000
=========
</TABLE>
Shares sold by the underwriters will initially be offered to the public at
the initial public offering price set forth on the cover page of this
prospectus. Any shares sold by the underwriters to securities dealers may be
sold at a discount of up to $0.46 per share from the initial public offering
price. These securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to $0.10 per share
from the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering price
and the other selling terms.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 450,000 additional shares of common stock at the same price per
share as we will receive for the 3,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 3,000,000 shares in this offering. If purchased, these
additional shares will be sold by the underwriters on the same terms as those on
which the 3,000,000 shares are being sold.
Qualified Independent Underwriter. The offering is being conducted in
accordance with Rule 2720 of the National Association of Securities Dealers,
Inc. which provides that, among other things, when an NASD member firm
participates in the offering of equity securities of a company with whom such
member has a "conflict of interest," the initial public offering price can be no
higher than that recommended by a "qualified independent underwriter." Morgan
Stanley Dean Witter & Co. is deemed to have a conflict of interest due to the
fact that certain
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entities affiliated with Morgan Stanley Dean Witter & Co. own more than 10% of
our capital stock. BancBoston Robertson Stephens is serving as the qualified
independent underwriter in the offering and will recommend a price in compliance
with the requirements of Rule 2720. BancBoston Robertson Stephens has performed
due diligence investigations and reviewed and participated in the preparation of
the prospectus and the registration statement of which this prospectus forms a
part. BancBoston Robertson Stephens will receive no additional compensation in
its capacity as the qualified independent underwriter.
Indemnification. The underwriting agreement contains covenants of
indemnity among the underwriters and us against specified civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
Lock-up Agreement. Each of our officers, directors and securityholders
agreed with the representatives or us for a period of 180 days, and in the case
of some securityholders 90 days, after the effective date of this prospectus,
not to dispose of or hedge any shares of common stock, or securities convertible
into or exchangeable for shares of common stock, now owned or later acquired by
them without the prior written consent of BancBoston Robertson Stephens Inc.
However, BancBoston Robertson Stephens Inc. may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. All of the shares of common stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject to holding period, volume limitations and other
conditions of Rule 144.
Future Sales. In addition, we have agreed that during the 180 days
following the effective date of this prospectus, we will not, without the prior
written consent of BancBoston Robertson Stephens Inc., subject to limited
exceptions (including in connection with acquisitions), dispose of or hedge any
shares of common stock, or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than (i) our sales of shares in
this offering, (ii) the issuance of common stock upon the exercise of
outstanding options or warrants or (iii) our issuance of options or shares under
the 1994 stock purchase plan, 1997 stock plan, 1999 employee stock purchase plan
and 1999 directors' stock option plan.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Determination of Offering Price. Prior to this offering, there has been no
public market for our common stock. Consequently, the initial public offering
price for the common stock in this offering has been determined through
negotiations among us and the representatives of the underwriters. The factors
considered in these negotiations included prevailing market conditions, our
financial information, the market valuation of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the business potential of the industry in which we compete, an
assessment of our management, our past and present operation, the prospects for
our future revenues and other factors deemed relevant.
Share Ownership by Underwriters. An entity affiliated with U.S. Bancorp
Piper Jaffray Inc. purchased an aggregate of 53,996 shares of our Series C
preferred stock from us in August 1998. This affiliate is subject to the 180-day
lock-up that applies to other securityholders as described above. U.S. Bancorp
Piper Jaffray Inc. and its affiliates (other
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than the holder described above) will be permitted to engage in stabilization,
brokerage and ordinary course of business transactions. See "Shares Eligible for
Future Sale."
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids that may have the effect
of stabilizing or maintaining the market price of the common stock at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of the common stock on behalf of the underwriters
for the purpose of fixing or maintaining the price of the common stock. A
"syndicate covering transaction" is the bid for the purchase of the common stock
on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Reserved Shares. The underwriters have reserved for sale at the initial
public offering price up to 5% of the common stock in this offering for
individuals designated by us who have expressed an interest in purchasing shares
of common stock in this offering. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the reserved
shares. The underwriters will offer any reserved shares not so purchased to the
general public on the same basis as other shares in this offering described
above.
Under an agreement among us and our principal stockholders, affiliates of
Amerindo Investment Advisors L.P. have the right to purchase up to 3% of the
shares offered in this offering. To exercise this right, these entities must
state the number of shares they intend to purchase and commit to purchase such
number within five business days after we provide them notice of this offering.
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LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for
Persistence by Venture Law Group, A Professional Corporation, 2800 Sand Hill
Road, Menlo Park, California 94025. Mark Medearis, a Director of Venture Law
Group, is the Assistant Secretary of Persistence. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo
Alto, California 94303. As of the date of this prospectus, attorneys of Venture
Law Group and an investment partnership controlled by Venture Law Group
beneficially own an aggregate of 6,551 shares of Persistence's common stock.
EXPERTS
The consolidated financial statements of Persistence as of December 31,
1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 included
in the prospectus and the related financial statement schedule included
elsewhere in the Registration Statement, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports thereon appearing herein
and elsewhere in the Registration Statement and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and its exhibits and schedule. For further
information with respect to us and our common stock being offered, see the
registration statement and its exhibits and schedule. A copy of the registration
statement and its exhibits and schedule may be inspected without charge at the
public reference facilities maintained by the SEC located at Room 1024, 450
Fifth Street, Washington, D.C. 20549 and at the SEC's regional offices located
at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of all or any part of the registration statement may be obtained
from these offices upon the payment of the fees prescribed by the SEC.
Information on the operation of the public reference room may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
71
<PAGE> 78
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets at December 31, 1997, 1998,
March 31, 1999 (unaudited) and Pro forma at March 31,
1999 (unaudited)....................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and three-months ended
March 31, 1998 and 1999 (unaudited).................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998 and three
months ended March 31, 1999 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and three months ended
March 31, 1998 and 1999 (unaudited).................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the accompanying consolidated balance sheets of Persistence
Software, Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Persistence Software, Inc. and
subsidiary at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
March 2, 1999
(April 21, 1999 as to Note 11)
F-2
<PAGE> 80
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999
------- -------- ----------- -----------
(NOTE 1)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,610 $ 4,938 $ 7,386
Accounts receivable, net of allowances of $75, $47 and
$47.................................................... 1,876 1,759 2,198
Prepaid expenses and other current assets................. 89 155 164
------- -------- --------
Total current assets................................... 4,575 6,852 9,748
Property and equipment, net................................. 837 723 676
Deposits.................................................... 35 29 31
------- -------- --------
Total assets........................................... $ 5,447 $ 7,604 $ 10,455
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 801 $ 596 $ 519
Accrued compensation and related benefits................. 528 512 513
Other accrued liabilities................................. 64 154 516
Deferred revenues......................................... 1,385 1,798 1,545
Current portion of long-term obligations.................. 193 408 370
------- -------- --------
Total current liabilities.............................. 2,971 3,468 3,463
------- -------- --------
Long-term obligations....................................... 259 650 643
Deferred rent............................................... 160 64 40
Commitments (Note 4)........................................
Stockholders' equity:
Series A convertible preferred stock $0.001 par value;
designated and outstanding -- 2,134,715 shares; pro
forma -- none (liquidation preference of $1,274)....... 1,250 1,250 1,250 --
Series B convertible preferred stock $0.001 par value;
designated and outstanding -- 3,243,192 shares; pro
forma -- none (liquidation preference of $7,427)....... 7,387 7,387 7,387 --
Series C convertible preferred stock $0.001 par value;
designated -- 1,544,277 shares; outstanding -- 1997,
431,965 shares; 1998 and 1999, 1,544,277 shares; pro
forma -- none (liquidation preference of $10,725)...... 1,973 7,080 7,080 --
Series D convertible preferred stock $0.001 par value;
designated -- 775,701 shares; outstanding -- 1997 and
1998, none; 1999, 775,701 shares; pro forma -- none
(liquidation preference of $4,150)..................... -- -- 4,142 --
Common stock, $0.001 par value; authorized -- 41,100,000
shares; outstanding -- 1997, 7,652,741 shares; 1998,
7,634,414 shares; 1999, 7,750,056 shares; pro
forma -- 15,447,941 shares............................. 592 2,854 3,997 23,856
Deferred stock compensation............................... (287) (2,222) (2,705) (2,705)
Notes receivable from stockholders........................ (181) (161) (161) (161)
Accumulated deficit....................................... (8,677) (12,766) (14,681) (14,681)
------- -------- -------- --------
Total stockholders' equity............................. 2,057 3,422 6,309 $ 6,309
------- -------- -------- ========
Total liabilities and stockholders' equity............. $ 5,447 $ 7,604 $ 10,455
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 81
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License........................... $ 2,603 $ 3,546 $ 7,478 $ 1,004 $ 2,116
Service........................... 1,171 1,867 2,682 706 747
------- ------- ------- ------- -------
Total revenues................. 3,774 5,413 10,160 1,710 2,863
------- ------- ------- ------- -------
Cost of revenues:
License........................... 139 342 239 56 42
Service........................... 221 729 1,372 326 580
------- ------- ------- ------- -------
Total cost of revenues......... 360 1,071 1,611 382 622
------- ------- ------- ------- -------
Gross profit........................ 3,414 4,342 8,549 1,328 2,241
Operating expenses:
Sales and marketing............... 3,798 4,712 7,168 1,687 2,015
Research and development.......... 1,976 2,954 4,234 1,038 1,806
General and administrative........ 985 1,362 1,237 311 383
------- ------- ------- ------- -------
Total operating expenses....... 6,759 9,028 12,639 3,036 4,204
------- ------- ------- ------- -------
Loss from operations................ (3,345) (4,686) (4,090) (1,708) (1,963)
Interest income (expense):
Interest income................... 72 85 116 16 63
Interest expense.................. (38) (73) (115) (12) (15)
------- ------- ------- ------- -------
Total interest income
(expense).................... 34 12 1 4 48
------- ------- ------- ------- -------
Net loss............................ $(3,311) $(4,674) $(4,089) $(1,704) $(1,915)
======= ======= ======= ======= =======
Basic and diluted net loss per
share............................. $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27)
======= ======= ======= ======= =======
Shares used in calculating basic and
diluted net loss per share........ 6,135 6,366 6,879 6,733 7,044
======= ======= ======= ======= =======
Pro forma basic and diluted net loss
per share (Note 1)................ $ (0.31) $ (0.13)
======= =======
Shares used in calculating pro forma
basic and diluted net loss per
share (Note 1).................... 13,183 14,320
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 82
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFERRED COMMON STOCK NOTES
PREFERRED STOCK COMMON STOCK STOCK SUBSCRIBED RECEIVABLE
------------------- ------------------ COMPEN- ---------------- FROM
SHARES AMOUNT SHARES AMOUNT SATION SHARES AMOUNT STOCKHOLDERS
--------- ------- --------- ------ -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996........ 2,134,715 $ 1,250 6,747,240 $ 48 $ (15)
Sale of Series B preferred
stock.......................... 3,237,992 7,375
Issuance of common stock......... 304,325 59 (23)
Common stock subscribed.......... 32,359 $ 7
Repurchase of common stock....... (281,250) (17) 15
Net loss.........................
--------- ------- --------- ------ ------- --- -----
Balances, December 31, 1996...... 5,372,707 8,625 6,770,315 90 32,359 7 (23)
Sale of Series B preferred
stock.......................... 5,200 12
Sale of Series C preferred
stock.......................... 431,965 1,973
Issuance of common stock......... 1,119,482 257 (32,359) (7) (181)
Repurchase of common stock....... (237,056) (42) 23
Compensatory stock
arrangements................... 287 $ (287)
Net loss.........................
--------- ------- --------- ------ ------- ------- --- -----
Balances, December 31, 1997...... 5,809,872 10,610 7,652,741 592 (287) -- -- (181)
Sale of Series C preferred
stock.......................... 1,112,312 5,107
Issuance of common stock......... 4,754 1
Repurchase of common stock....... (23,081) (5)
Repayment of notes receivable
from stockholders.............. 20
Compensatory stock
arrangements................... 2,266 (2,266)
Amortization of deferred stock
compensation................... 331
Net loss.........................
--------- ------- --------- ------ ------- ------- --- -----
Balances, December 31, 1998...... 6,922,184 15,717 7,634,414 2,854 (2,222) -- -- (161)
Sale of Series D preferred
stock*......................... 775,701 4,142
Issuance of common stock*........ 115,642 156
Compensatory stock
arrangements*.................. 987 (987)
Amortization of deferred stock
compensation*.................. 504
Net loss*........................
--------- ------- --------- ------ ------- ------- --- -----
Balances, March 31, 1999*........ 7,697,885 $19,859 7,750,056 $3,997 $(2,705) -- $-- $(161)
========= ======= ========= ====== ======= ======= === =====
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -------
<S> <C> <C>
Balances, January 1, 1996........ $ (692) $ 591
Sale of Series B preferred
stock.......................... 7,375
Issuance of common stock......... 36
Common stock subscribed.......... 7
Repurchase of common stock....... (2)
Net loss......................... (3,311) (3,311)
-------- -------
Balances, December 31, 1996...... (4,003) 4,696
Sale of Series B preferred
stock.......................... 12
Sale of Series C preferred
stock.......................... 1,973
Issuance of common stock......... 69
Repurchase of common stock....... (19)
Compensatory stock
arrangements................... --
Net loss......................... (4,674) (4,674)
-------- -------
Balances, December 31, 1997...... (8,677) 2,057
Sale of Series C preferred
stock.......................... 5,107
Issuance of common stock......... 1
Repurchase of common stock....... (5)
Repayment of notes receivable
from stockholders.............. 20
Compensatory stock
arrangements................... --
Amortization of deferred stock
compensation................... 331
Net loss......................... (4,089) (4,089)
-------- -------
Balances, December 31, 1998...... (12,766) 3,422
Sale of Series D preferred
stock*......................... 4,142
Issuance of common stock*........ 156
Compensatory stock
arrangements*.................. --
Amortization of deferred stock
compensation*.................. 504
Net loss*........................ (1,915) (1,915)
-------- -------
Balances, March 31, 1999*........ $(14,681) $ 6,309
======== =======
</TABLE>
- -------------------------
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE> 83
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,311) $(4,674) $(4,089) $(1,704) $(1,915)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 324 505 556 127 141
Amortization of deferred stock compensation............. -- -- 331 25 504
Stock issued in lieu of rent............................ 7 19 -- -- --
Loss on sale of fixed assets............................ 2 -- -- -- --
Gain on forgiveness of capital lease obligations........ (37) -- -- -- --
Changes in assets and liabilities:
Accounts receivable................................... (576) (775) 117 467 (439)
Prepaid expenses and other current assets............. 28 (37) (66) (38) (9)
Accounts payable...................................... (7) 641 (205) (113) (77)
Accrued compensation and related benefits............. 243 104 (16) 530 1
Other accrued liabilities............................. (40) 29 90 (486) 362
Deferred revenues..................................... 217 959 413 26 (253)
Deferred rent......................................... 61 99 (96) (24) (24)
------- ------- ------- ------- -------
Net cash used in operating activities.............. (3,089) (3,130) (2,965) (1,190) (1,709)
------- ------- ------- ------- -------
Cash flows from investing activities:
Property and equipment additions.......................... (53) (555) (442) (152) (94)
Deposits.................................................. -- (34) 6 (1) (2)
Proceeds from sale of fixed assets........................ 44 -- -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities.............. (9) (589) (436) (153) (96)
------- ------- ------- ------- -------
Cash flows from financing activities:
Sale of convertible preferred stock, net.................. 7,375 1,985 5,107 -- 4,142
Sale of common stock...................................... 36 50 1 -- 156
Repurchase of common stock................................ (2) (19) (5) (1) --
Repayment of notes receivable from stockholders........... -- -- 20 19 --
Repayment of capital lease obligations.................... (146) (222) (194) (47) (45)
Borrowing under loan agreement............................ -- -- 800 556 --
------- ------- ------- ------- -------
Net cash provided by financing activities.......... 7,263 1,794 5,729 527 4,253
------- ------- ------- ------- -------
Net increase (decrease) in cash and equivalents............. 4,165 (1,925) 2,328 (816) 2,448
Cash and cash equivalents -- beginning of period............ 370 4,535 2,610 2,610 4,938
------- ------- ------- ------- -------
Cash and cash equivalents -- end of period.................. $ 4,535 $ 2,610 $ 4,938 $ 1,794 $ 7,386
======= ======= ======= ======= =======
Noncash investing and financing activities:
Common stock issued for notes receivable.................. $ 23 $ 181 $ -- $ -- $ --
======= ======= ======= ======= =======
Cancellation of note receivable........................... $ -- $ 23 $ -- $ -- $ --
======= ======= ======= ======= =======
Property and equipment acquired under capital leases...... $ 658 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information -- cash
paid during the period for:
Interest.................................................. $ 35 $ 72 $ 115 $ 12 $ 15
======= ======= ======= ======= =======
Income taxes.............................................. $ 1 $ 1 $ 1 $ 1 $ --
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 84
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business -- Persistence Software, Inc. and subsidiary (the Company),
incorporated in California in June 1991, develops and markets transactional
application server software products that comprise the Internet software
infrastructure for high-volume, high-performance electronic commerce
applications.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All
intercompany transactions and balances have been eliminated in consolidation.
Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to be
cash equivalents.
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over estimated useful lives of three
years. Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed
Of -- The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Computer Software To Be Sold,
Leased or Otherwise Marketed. Because the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
Notes Receivable from Stockholders -- The notes receivable from
stockholders were issued in exchange for common stock, bear interest at 5.93%
per annum, and are due in December 2001.
Revenue Recognition -- Revenue consists primarily of fees for licenses of
the Company's software products, maintenance and customer support.
License Revenue -- Revenue from software licenses is recognized upon
shipment of the software if collection of the resulting receivable is
probable, an executed agreement has been signed, the fee is fixed or
determinable and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement.
Such undelivered elements in these arrangements
F-7
<PAGE> 85
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
typically consist of services. For sales made through distributors, revenue
is recognized upon shipment. Distributors have no right of return.
Service Revenue -- Revenue from customer training, support and
consulting services is recognized as the services are performed. Support
revenue is recognized ratably over the term of the support contract. If
support or professional services are included in an arrangement that
includes a license agreement, amounts related to support or professional
services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not
sold separately, the price established by management having the relevant
authority. Arrangements which require significant modification or
customization of software are recognized under the percentage of completion
method.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, Software Revenue Recognition. This
statement provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions and superseded SOP 91-1,
Software Revenue Recognition. SOP 97-2 was effective for transactions entered
into in 1998. The adoption of this standard did not have a material effect on
the Company's financial position or results of operations.
Income Taxes -- Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
Foreign Currency Transactions -- The functional currency of the Company's
foreign subsidiary is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are translated at average exchange rates in effect during the
period. Transaction gains and losses, which are included in other income
(expense) in the accompanying consolidated statements of operations, have not
been significant.
Stock Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, no accounting recognition is given to employee stock options
granted at fair market value until they are exercised. Upon exercise, the net
proceeds are credited to stockholders' equity.
Net Loss per Common Share -- Basic net loss per common share excludes
dilution and is computed by dividing net loss by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase). Diluted net loss per common share was the same as basic net loss
per common share for all periods presented since the effect of any potentially
dilutive securities is excluded as they are anti-dilutive because of the
Company's net losses.
Pro Forma Net Loss per Common Share -- Pro forma basic and diluted net loss
per common share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period (excluding shares subject to
repurchase) and
F-8
<PAGE> 86
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the weighted average number of common shares resulting from the conversion of
outstanding shares of convertible preferred stock, which will occur upon the
closing of the planned initial public offering.
Unaudited Pro Forma Information -- Upon the closing of the planned initial
public offering, each of the outstanding shares of convertible preferred stock
will convert into one share of common stock. The pro forma balance sheet
presents the Company's balance sheet as if this had occurred at March 31, 1999.
Unaudited Interim Financial Information -- The interim financial
information as of March 31, 1999 and for the three months ended March 31, 1998
and 1999 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited financial
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of trade
receivables. The Company primarily sells its products to companies in the United
States and Europe. The Company does not require collateral or other security to
support accounts receivable. To reduce credit risk, management performs ongoing
credit evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
Financial Instruments -- The Company's financial instruments include cash
and equivalents, notes receivable from stockholders and long-term debt. At
December 31, 1997 and 1998, the fair value of these financial instruments
approximated their financial statement carrying amounts.
Significant Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets, and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Certain Significant Risks and Uncertainties -- The Company operates in the
software industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a significant negative effect on the Company in terms of its
future financial position, results of operations and cash flows: ability to
obtain additional financing; regulatory changes; fundamental changes in the
technology underlying software products; market acceptance of the Company's
products under development; development of sales channels; loss of significant
customers; adverse changes in international market conditions; year 2000
compliance issues; litigation or other claims against the Company; the hiring,
training and retention of key employees; successful and timely completion of
product development efforts; and new product introductions by competitors.
Recently Issued Accounting Standards -- In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income, which requires an enterprise to report,
by
F-9
<PAGE> 87
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
major components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company had no comprehensive income items, other than net loss, to report
for any of the periods presented. The Company currently operates in one
reportable segment under SFAS No. 131.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This standard requires companies to capitalize
qualifying computer software costs, which are incurred during the application
development stage and amortize them over the software's estimated useful life.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The
Company is currently evaluating the impact of SOP 98-1 on its financial
statements and related disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
fiscal year ending December 31, 2000. The Company is currently evaluating the
impact of SFAS No. 133 on its financial statements and related disclosures.
Reclassifications -- Certain reclassifications have been made to the 1996
and 1997 financial statement presentations to conform to the 1998 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment............................... $ 1,427 $ 1,718 $ 1,772
Software................................ 424 575 615
Leasehold improvements.................. 60 60 60
------- ------- -------
1,911 2,353 2,447
Accumulated depreciation and
amortization.......................... (1,074) (1,630) (1,771)
------- ------- -------
$ 837 $ 723 $ 676
======= ======= =======
</TABLE>
F-10
<PAGE> 88
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1997 1998 1999
----- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment term loan....................... $ -- $ 800 $ 800
Capital lease obligations (see Note 4).... 452 258 213
----- ------ ------
452 1,058 1,013
Less current portion...................... (193) (408) (370)
----- ------ ------
$ 259 $ 650 $ 643
===== ====== ======
</TABLE>
In February 1998, the Company entered into a $2,000,000 line of credit with
a bank. Borrowings under the line bear interest at the bank's base rate (7.75%
at December 31, 1998) and are limited to a percentage of eligible accounts
receivable, as defined. At December 31, 1998, there were no borrowings under the
line.
At December 31, 1998, the Company had outstanding borrowings of $800,000
under a bank promissory note, which bears interest at 7.75%. The Company is
required to make principal payments of $22,222 per month plus interest on the
unpaid principal balance, payable in 36 monthly installments commencing April 1,
1999.
The line of credit requires the Company, among other things, to maintain a
minimum tangible net worth of $500,000 and a quick ratio greater than 1.3 to
1.0. At December 31, 1998, the Company was in compliance with the financial
covenant requirements. Both agreements are collateralized by substantially all
of the Company's assets.
Annual maturities under the term loan are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
------------------ --------------
<S> <C>
1999........................................... $200
2000........................................... 267
2001........................................... 267
2002........................................... 66
----
Total.................................. $800
====
</TABLE>
4. LEASE COMMITMENTS
Equipment with a net book value of $301,000 and $89,000 at December 31,
1997 and 1998, respectively, (net of accumulated amortization of $391,000 and
$603,000) has been leased under capital leases.
The Company leases its principal facility under a noncancelable operating
lease expiring in June 1999. Rent expense was approximately $150,000, $330,000
and $337,000 in 1996, 1997 and 1998, respectively.
F-11
<PAGE> 89
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under the Company's leases at December 31, 1998
are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999................................................ $ 193 $218
2000................................................ 66 --
2001................................................ 21 --
----- ----
Total.......................................... 280 $218
====
Amount representing interest........................ (22)
-----
Present value....................................... 258
Current portion..................................... (208)
-----
Long-term portion................................... $ 50
=====
</TABLE>
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Terms of the convertible preferred stock are as follows:
- Each share of Series A, Series B and Series C preferred stock is
convertible into one share of common stock (subject to adjustment for
events of dilution). Each share will automatically convert into common
stock upon the completion of a public offering with aggregate proceeds
greater than $12,000,000 and at a price per share of not less than $7.00.
- Each share of Series A, Series B and Series C preferred stock has voting
rights equivalent to the number of shares of common stock into which it
is convertible.
- When declared by the Board of Directors, the holders of Series A
preferred stock are entitled to receive cumulative dividends of
$0.035797, and the holders of Series B and Series C preferred stock are
entitled to receive noncumulative dividends of $0.1374 and $0.2778 per
share, respectively, per annum prior to the payment of any dividends on
common stock. At December 31, 1998, dividends in arrears for Series A
preferred stock were approximately $373,000. However, as of December 31,
1998, no dividends have been declared by the Board of Directors.
- In the event of liquidation, dissolution or winding up of the Company,
Series A, Series B and Series C preferred stockholders shall receive
$0.59662, $2.29, and $6.945 per share, respectively (aggregating
approximately $1,274,000, $7,427,000 and $10,725,000 at December 31,
1998, respectively), plus all accrued but unpaid dividends; any remaining
assets shall be distributed to the common stockholders.
- The preferred stockholders have certain registration rights.
F-12
<PAGE> 90
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
In 1996, the Company entered into an agreement with the lessor of its
principal facility to issue 110,000 shares of the Company's common stock valued
at $0.23 per share in lieu of rent payments for the twelve-month period
beginning September 1996. At December 31, 1996, 32,359 shares were subscribed
under this agreement. All 110,000 shares were issued in 1997. An expense of
$7,000 and $19,000 has been recorded in 1996 and 1997, respectively, related to
the issuance of such shares. Rent expense has been recorded on a straight-line
basis.
During 1996 and 1997, the Company issued common stock to directors in their
capacity as consultants (see Note 8).
In February 1999, the Company entered into an agreement with a customer and
Series D preferred stockholder, whereby such customer was to perform development
work to achieve certain performance improvements related to the Company's
PowerTier product. In connection with this agreement, the Company allowed such
customer to purchase 90,300 shares of common stock at $1.65 per share in
February 1999, which was less than the deemed fair value for accounting
purposes. The Company has recorded a research and development expense of
$303,000 in the three months ended March 31, 1999 for the difference between the
deemed fair value and the stock price of $1.65 per share.
DEFERRED STOCK COMPENSATION
In connection with grants of certain stock options and issuance of common
stock in 1997, 1998 and in the three months ended March 31, 1999, the Company
recorded $287,000, $2,266,000 and $987,000, respectively, for the difference
between the estimated fair value and the stock price as determined by the Board
of Directors on the date of grant/issuance. This amount has been presented as a
reduction of stockholders' equity and is being amortized to expense over the
vesting period of the related stock/stock options (generally four years).
Amortization of deferred stock compensation for the year ended December 31, 1998
and three-month period ended March 31, 1999 was $331,000 and $504,000,
respectively.
1994 STOCK PURCHASE PLAN
Under the 1994 Stock Purchase Plan (the Plan), the Company may sell common
stock to employees of the Company at the fair market value as determined by the
Board of Directors. Sales are to be made pursuant to restricted stock purchase
agreements containing provisions established by the Board. During 1996 and 1997,
the Company issued 304,325 and 212,995 shares of common stock, respectively,
under the Plan. No shares were issued under the Plan in 1998. In 1996, the
shares were issued at prices ranging from $0.06 to $0.23 per share, and in 1997
the shares were issued at $0.23 per share. The Company has the right to
repurchase these shares at the original issuance price upon termination of
employment; this right expires ratably over four years. During 1996, 1997 and
1998, the Company repurchased 281,250, 237,056 and 23,081 shares, respectively,
at prices ranging from $0.06 to $0.23 per share. At December 31, 1998, 55,697
shares were subject to repurchase and no shares were available for future grant.
F-13
<PAGE> 91
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 STOCK PLAN
The Company has reserved 2,609,652 shares of common stock for issuance, at
the discretion of the Board of Directors, to officers, directors, employees and
consultants pursuant to its 1997 Stock Plan. At December 31, 1998, 796,487
shares have been issued at $0.23 per share pursuant to restricted stock purchase
agreements, 1,238,072 shares are reserved for exercise of issued and outstanding
options, and 570,339 shares are available for future grant. The Company has a
right to repurchase these shares at original issuance price upon termination of
employment; this right expires ratably over four years. At December 31, 1998,
574,167 shares were subject to repurchase. No shares were repurchased in 1997 or
1998.
Options granted under the 1997 Stock Plan generally vest over four years
and expire ten years from the date of grant. Certain options were issued to a
director in his capacity as a consultant in 1998 (See Note 8).
Additional information with respect to options under the 1997 Stock Plan is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
--------- ------------
<S> <C> <C>
Outstanding, January 1, 1997................... -- $ --
Granted (weighted average fair value of
$0.08).................................... 424,250 0.23
Canceled..................................... (12,000) 0.23
--------- -----
Outstanding, December 31, 1997 (none
exercisable)................................. 412,250 0.23
Granted (weighted average fair value of
$2.49).................................... 943,572 0.51
Exercised.................................... (4,754) 0.23
Canceled..................................... (112,996) 0.23
--------- -----
Outstanding, December 31, 1998................. 1,238,072 0.46
Granted...................................... 204,288 1.65
Exercised.................................... (25,342) 0.23
Canceled..................................... (28,982) 0.45
--------- -----
Outstanding, March 31, 1999.................... 1,388,036 $0.64
========= =====
</TABLE>
F-14
<PAGE> 92
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding options outstanding as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING WEIGHTED AVERAGE
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- -------- ----------- ---------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.23................ 300,500 8.7 $0.23 114,016 $0.23
0.50................ 790,072 9.5 0.50 3,572 0.50
0.60................ 98,500 9.8 0.60 -- --
1.00................ 49,000 10.0 1.00 -- --
- --------------------- --------- ---- ----- ------- -----
$0.23-$1.00 1,238,072 9.2 $0.46 117,588 $0.24
===================== ========= ==== ===== ======= =====
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net loss had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the minimum value option pricing model with the
following weighted average assumptions: expected life, 24 months following
vesting in 1997 and 1998; risk free interest rate, 6.0% in 1997 and 5.5% in
1998; and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the 1997 and 1998 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
(net of amortization of deferred compensation expense already recorded for the
year ended December 31, 1998, as discussed above) would have been approximately
$4.7 million ($0.73 per basic and diluted share) in 1997 and $4.4 million ($0.63
per basic and diluted share) in 1998.
WARRANTS
In December 1995, in conjunction with a capital lease agreement (see Note
3), the Company issued a warrant to purchase up to 55,556 shares of common stock
at $0.90 per share. The warrant expires in December 2001. In February 1996, in
connection with a line of credit agreement with a bank, a warrant was issued to
the bank to purchase up to 25,000 shares of common stock at $0.90 per share. The
warrant expires in February 2001. The line of credit expired in April 1997. The
aggregate fair value of such warrants was insignificant.
F-15
<PAGE> 93
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK RESERVED
At December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock....................... 6,922,184
Issuances available under 1997 Stock Plan........... 570,339
Exercise of options................................. 1,238,072
Exercise of warrants................................ 80,556
---------
Total.......................................... 8,811,151
=========
</TABLE>
6. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss (numerator), basic and
diluted....................... $(3,311) $(4,674) $(4,089) $(1,704) $(1,915)
======= ======= ======= ======= =======
Shares (denominator):
Weighted average common shares
outstanding................ 6,818 6,869 7,644 7,651 7,688
Weighted average common shares
outstanding subject to
repurchase................. (683) (503) (765) (918) (644)
------- ------- ------- ------- -------
Shares used in computation,
basic and diluted.......... 6,135 6,366 6,879 6,733 7,044
======= ======= ======= ======= =======
Net loss per share, basic and
diluted....................... $ (0.54) $ (0.73) $ (0.59) $ (0.25) $ (0.27)
======= ======= ======= ======= =======
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the
F-16
<PAGE> 94
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computation of diluted net loss per share in the periods presented, as their
effect would have been antidilutive. Such outstanding securities consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock................ 5,372,707 5,809,872 6,992,184 5,809,872 7,697,885
Shares of common stock
subject to
repurchase........... 544,914 946,790 629,864 889,438 657,496
Outstanding options.... -- 412,250 1,238,072 412,250 1,388,036
Warrants............... 80,556 80,556 80,556 80,556 80,556
---------- ---------- ---------- ---------- ----------
Total............. 5,998,117 7,249,468 8,940,676 7,192,116 9,823,973
========== ========== ========== ========== ==========
Weighted average
exercise price of
options.............. $ -- $ 0.23 $ 0.46 $ 0.23 $ 0.64
========== ========== ========== ========== ==========
Weighted average
exercise price of
warrants............. $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
========== ========== ========== ========== ==========
</TABLE>
7. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards................. $ 2,759 $ 4,113
Accruals deductible in different periods......... 324 941
General business credits......................... 382 890
Depreciation and amortization.................... 39 119
------- -------
3,504 6,063
Valuation allowance.............................. (3,504) (6,063)
------- -------
Total......................................... $ -- $ --
======= =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax attributes in future tax
returns, as of December 31, 1997 and 1998, the Company has fully reserved its
net deferred tax assets of approximately $3,504,000 and $6,063,000,
respectively.
F-17
<PAGE> 95
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate..................... (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit............ (6.0) (6.0) (6.0)
Stock compensation expense..................... -- -- 2.8
Other.......................................... 0.3 0.1 0.3
Valuation allowance............................ 40.7 40.9 37.9
----- ----- -----
Effective tax rate........................... --% --% --%
===== ===== =====
</TABLE>
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 1998, the Company has net operating loss (NOL)
carryforwards of approximately $10,840,000 and $3,606,000 for federal and state
income tax purposes, respectively. The federal NOL carryforwards expire through
2018, while the state NOL carryforwards expire through 2003. The net operating
loss carryforwards available for state tax purposes are substantially less than
for federal tax purposes, primarily because only 50% of state net operating
losses can be utilized to offset future state taxable income.
At December 31, 1998, the Company also has research and development credit
carryforwards of approximately $570,000 and $320,000 available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2018, while the state credit carryforward has no expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
8. RELATED PARTY TRANSACTIONS
During 1996, the Company recognized revenue of $24,000 from a stockholder.
Also during 1996, the Company entered into a technology development and license
agreement with a stockholder. Such stockholder paid the Company a purchase
advance of $50,000 and granted the Company a source code license to incorporate
specific technology into products developed for such stockholder and other
commercial uses.
During 1997, the Company recognized revenue of $300,000 and $250,000 from a
Series B and a Series C preferred stockholder, respectively. At December 31,
1997, the Company had deferred revenue of $750,000 from the same Series C
preferred stockholder.
During 1998, the Company recognized revenue of $168,000 and $1,450,000 from
a Series B and a Series C preferred stockholder, respectively. At December 31,
1998, the Company had deferred revenue of $30,000 and $642,000 with the same
Series B and Series C preferred stockholders, respectively. At December 31,
1998, the Company had accounts receivable of $101,000 from the Series B
preferred stockholder.
F-18
<PAGE> 96
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, 1997 and 1998, the Company paid $18,000 to a director for
consulting services and in 1997 and 1998 paid $18,700 and $20,500, respectively,
to another director for consulting services. During 1996 and 1997, the Company
sold 29,060 and 10,300 shares of common stock, respectively, at a purchase price
of $0.23 per share to these two directors in connection with consulting services
rendered. No compensation expense was recorded for the sale of this common stock
as the purchase price was equal to the fair market value of the common stock on
the date of sale. In July 1998, the Company granted a fully vested option to
purchase up to 3,572 shares of common stock at $0.50 per share to a director in
connection with consulting services rendered. Compensation expense of $9,000 was
recorded for the difference between the exercise price and the deemed fair
market value of the common stock on the date of grant.
9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company is engaged in the development and marketing of transactional
application server software products and operates in one reportable segment
under SFAS 131.
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
-------- --------------------- --------------------- -------- ---------------------
REVENUES REVENUES LONG-LIVED REVENUES LONG-LIVED REVENUES REVENUES LONG-LIVED
(IN THOUSANDS) (1) (1) ASSETS (1) ASSETS (1) (1) ASSETS
- -------------- -------- -------- ---------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States.............. $3,208 $4,774 $832 $ 7,223 $673 $1,320 $2,237 $626
Europe..................... 528 511 5 2,866 50 379 603 50
Rest of the world.......... 38 128 -- 71 -- 11 23 --
------ ------ ---- ------- ---- ------ ------ ----
$3,774 $5,413 $837 $10,160 $723 $1,710 $2,863 $676
====== ====== ==== ======= ==== ====== ====== ====
</TABLE>
- -------------------------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
SIGNIFICANT CUSTOMERS
During 1996, three unrelated customers accounted for 11%, 11% and 10% of
the Company's total revenues, respectively. During 1997, an unrelated customer
accounted for 11% of total revenues. During 1998, one customer (a Series C
preferred stockholder) accounted for 14% of total revenues. Additionally, an
unrelated customer accounted for 17% of total revenues. Subsequent to 1998, an
entity affiliated with this customer purchased Series D preferred stock -- See
Note 11.
At December 31, 1997, two unrelated customers accounted for 25% and 17% of
accounts receivable, respectively. At December 31, 1998, three unrelated
customers each account for 14% of accounts receivable.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 1% to 20% up to the maximum allowed under IRS rules). Company contributions
are discretionary; no such Company contributions have been made since inception
of this plan.
F-19
<PAGE> 97
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
In February and March 1999, the Company received net proceeds of
approximately $4,142,000 from the sale of 775,701 shares of Series D preferred
stock at $5.35 per share. Also, in February 1999, the Company sold 90,300 shares
of common stock to a customer and Series D preferred stockholder at $1.65 per
share. The Series D preferred stockholders are entitled to receive noncumulative
dividends of $0.321 per share per annum when declared by the Board of Directors
prior to the payment of any dividends on common stock. In the event of
liquidation, dissolution or winding up of the Company, Series D preferred
stockholders will receive a liquidation preference of $5.35 per share
(aggregating approximately $4,150,000) plus all accrued and unpaid dividends.
Other significant terms of the Series D preferred stock regarding conversion to
common stock, voting rights and registration rights are similar to those
described in the Note 5.
In April 1999, the Board of Directors approved, subject to stockholder
approval, the following:
- Reincorporation of the Company in the state of Delaware.
- An amendment to the 1997 Stock Plan to increase the number of
authorized shares reserved for issuance by 3,000,000 and to provide
for an automatic annual increase on the first day of each fiscal year
beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of
650,000 shares, 3.5% of the outstanding common stock on the last day
of the immediately preceding fiscal year, or such lesser number as
determined by the Board of Directors. The amendment is effective upon
the closing of the Company's initial public offering.
- The Company's 1999 Employee Stock Purchase Plan (the "ESPP") and the
1999 Directors' Stock Option Plan (the "Directors' Plan"). The Plans
become effective upon the closing of the Company's initial public
offering. Under the ESPP, eligible employees may purchase common stock
through payroll deductions, which may not exceed 20% of any employee's
compensation, nor more than 2,500 shares in any one purchase period. A
total of 600,000 shares of common stock will be reserved for issuance
under the ESPP plus an automatic annual increase on the first day of
each of the fiscal years beginning in 2000, 2001, 2002, 2003 and 2004
equal to the lessor of 250,000 shares or 1% of outstanding common
stock on the last day of the immediately preceding fiscal year. Under
the Directors' Plan, a total of 500,000 shares of common stock has
been reserved for the grant of nonstatutory stock options to
nonemployee directors of the Company. Options granted under the
Director's Plan shall be immediately vested and expire in five years
from the date of grant.
- An increase of authorized shares of common stock to 75,000,000 shares
and creation of newly undesignated preferred stock totaling 5,000,000
shares, contingent upon the approval of the reincorporation of the
Company in Delaware and the closing of the Company's initial public
offering.
* * * * *
F-20
<PAGE> 98
GATEFOLD COVER:
[Graphic: Company logo together with "The Engine for E-Commerce"]
Inside Gatefold cover:
[Graphic: Depiction of first generation application server, labeled "Traffic
Cop," which can only manage access to centralized corporate resources]
Inside front cover:
[Graphic: Depiction of next generation transactional application servers,
labeled "Digital Emissary," which allows companies to integrate processing
across organizational boundaries]
p. 39:
[GRAPHIC: Depiction of PowerTier for EJB with two businesses communicating to
each other through the firewall by using the PowerSync feature]
Back Inside cover:
[Graphic: brief descriptions of four case studies, describing customers' use of
PowerTier]
<PAGE> 99
Persistence Logo
UNTIL JULY 19, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
