<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-76263
6,000,000 Shares
[LOGO OF SOFTWARE.COM]
Common Stock
------------
We are selling 5,000,000 shares of common stock and the selling stockholders
are selling 1,000,000 shares of common stock. We will not receive any proceeds
from shares of common stock sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "SWCM."
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions Software.com Stockholders
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per Share................... $15.00 $1.05 $13.95 $13.95
Total....................... $90,000,000 $6,300,000 $69,750,000 $13,950,000
</TABLE>
Delivery of the shares of common stock will be made on or about June 29,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston Merrill Lynch & Co.
BancBoston Robertson Stephens
Prospectus dated June 23, 1999.
<PAGE>
"Software.com is a global leader in providing Internet messaging solutions to
many of the world's largest service providers."
"As of March 31, 1999, Software.com had licensed over 37 million mailboxes
and we estimate that over 28 million of these mailboxes were activated."
Beneath this statement is a graph that shows the increase in the number of
licensed mailboxes and activated mailboxes from 1995 to March 31, 1999.
"A recent Radicati Group study (Feb. 1, 1999), "Messaging Software: Market
and Product Analysis, 1998-2002," revealed that Software.com holds 62% of the
total market for electronic mailboxes licensed by Internet service providers (a
subset of our customer base of service providers), with Netscape in second
place with 19% and Sun Microsystems in third place with 14%."
"International Data Corp. ("IDC") estimates that the number of consumer
mailboxes hosted by service providers in the United States will grow from 18
million in 1996 to 109 million in 2002. IDC also estimates that the number of
business email users will grow from 142 million in 1998 to 281 million
worldwide in 2002."
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 8
Use of Proceeds...................... 18
Dividend Policy...................... 18
Capitalization....................... 19
Dilution............................. 20
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business............................. 40
Management........................... 56
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Certain Transactions................. 67
Principal and Selling Stockholders... 68
Description of Capital Stock......... 72
Shares Eligible for Future Sale...... 75
Underwriting......................... 77
Notice to Canadian Residents......... 79
Where You Can Find More Information.. 80
Legal Matters........................ 80
Experts.............................. 80
Change in Accountants................ 81
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.
Software.com--The Internet Infrastructure Company and InterMail are
registered trademarks of Software.com. Software.com and Post.Office are
trademarks of Software.com. IBM is a registered trademark of International
Business Machines Corporation. All other trademarks or servicemarks appearing
in this prospectus are trademarks or servicemarks of the respective companies
that use them.
Dealer Prospectus Delivery Obligation
Until July 18, 1999, (25 days after the commencement of this offering) 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 dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in this offering. You should read the
entire prospectus carefully.
Software.com, Inc.
Software.com is a leading developer and provider of scalable, high
performance messaging software applications for providers of Internet
communications and services. We have developed a software platform using open
Internet standards that enables our customers to deliver a variety of messaging
services from this single platform. We have multiple messaging applications
based on this platform, including Web browser-based email, desktop client-based
email, outsourced or "managed" business messaging, and Internet-based voicemail
and faxmail messaging. We augment our product offerings with a wide variety of
consulting and support services in order to provide our customers with complete
messaging solutions.
Our service provider customers, including traditional telecommunications
carriers, Internet service providers and wholesalers, cable-based Internet
access providers, competitive local exchange telephone carriers, and Internet
destination sites or portals, use our software solutions to provide advanced
messaging services to their consumer and business users. As of March 31, 1999,
we had licensed over 37 million mailboxes and we estimate that over 28 million
of these mailboxes had been activated. These mailboxes have been licensed to
over 1,000 service providers, including: @Home Network, Ameritech Interactive
Media Services, AT&T Canada, AT&T WorldNet(R) Service, Bell Atlantic Internet
Services, Excite Inc., GTE Internetworking Services, Hongkong Telecom, Pacific
Internet, PSINet, Road Runner, Telecom Italia Net, Telekom Malaysia, Telecom
New Zealand, and TeleDanmark. We have also established strategic relationships
with Cisco Systems, Hewlett-Packard, IBM, and Telcordia Technologies (formerly
Bellcore), in order to further develop, market, and sell our messaging
solutions. AT&T Ventures, Cisco Systems, and Hewlett-Packard have each made
minority equity investments in our company.
Our InterMail family of messaging product packages includes InterMail
Post.Office, for service providers with up to 25,000 users; InterMail Kx, for
service providers with up to 250,000 users; and InterMail Mx, for service
providers with more than 250,000 and up to millions of users. Our messaging
solutions have been proven to work in highly demanding environments, supporting
service providers with user bases ranging from hundreds to millions of
subscribers. Our software technology enables service providers to rapidly add
new subscribers and implement multiple back-up measures designed to ensure that
messages are not lost and access to a mailbox is available. We believe that we
offer service provider customers the ability to:
. easily deliver new services based on our Internet standards-based
messaging platform;
. rapidly increase capacity, or scale, to support more users;
. provide email and other messaging services that are highly reliable;
. increase overall customer satisfaction;
. decrease subscriber turnover; and
. reduce the overall cost of delivering these services.
4
<PAGE>
Our goal is to be the leading provider of scalable, high performance Internet
software designed for service providers. We seek to attain this objective by:
. extending our leadership position in providing Internet email solutions;
. utilizing our core messaging platform to deliver additional Internet
applications;
. providing our solutions exclusively to service providers;
. directly targeting large and well-known service providers; and
. leveraging our professional services expertise to provide complete
messaging solutions.
In April 1999, we completed the acquisition of Silicon Valley-based
Mobility.Net Corporation, the developer of a Java-based, high-performance and
customizable integrated Web mail, address book, and calendar product, called
the Mobility.Net Integrated Web Mail System. The Integrated Web Mail System is
designed to be compatible with all leading email servers, computer operating
systems, Internet browsers, and palm-computing devices. We intend to
incorporate the Mobility.Net technology into our existing messaging platform to
extend our capabilities in offering multiple Web-based applications to service
providers.
In 1992, John MacFarlane, our founder and Chief Executive Officer, registered
the domain name Software.com with the idea to develop an Internet software
distribution business. In January 1993, he founded our company as a partnership
and began developing and marketing Internet standards-based email software.
Software.com, Inc. was incorporated in California in October 1994, and
reincorporated in Delaware in June 1999. Our principal executive offices are
located at 525 Anacapa Street, Santa Barbara, California 93101 and our
telephone number is (805) 882-2470. Our World Wide Web site is
www.software.com. The information in our Web site is not incorporated by
reference into this prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Software.com.. 5,000,000 shares
Common stock offered by selling
stockholders......................... 1,000,000 shares
Common stock to be outstanding after
this offering........................ 40,671,753 shares
Use of proceeds....................... For repayment of indebtedness, working
capital and general corporate purposes.
Nasdaq National Market symbol......... SWCM
</TABLE>
Common stock to be outstanding after this offering is based on shares
outstanding as of June 15, 1999. It excludes:
. 9,099,018 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $4.43 per share, of
which 2,524,136 shares are exercisable, and
. 866,903 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $4.23 per share.
All information in this prospectus is based on the following assumptions:
. the reincorporation of Software.com into Delaware which occurred in June
1999,
. the conversion of all outstanding shares of preferred stock into common
stock upon the closing of this offering,
. no exercise of the underwriters' over-allotment option, and
. the filing of the second amended and restated certificate of
incorporation after the closing of this offering.
6
<PAGE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
July 11, 1994 Three months
(Inception) ended
to Year Ended December 31, March 31,
December 31, --------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------------- ------ ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues........ $ 648 $4,727 $ 7,882 $ 10,666 $25,619 $ 4,898 $ 8,071
Total cost of
revenues............. 2 58 985 3,364 9,019 2,132 2,420
Gross profit.......... 646 4,669 6,897 7,302 16,600 2,766 5,651
Income (loss) from
operations........... (49) 2,043 (3,250) (11,707) (6,521) (2,613) (1,828)
Net income (loss)..... (58) 1,970 (3,163) (11,469) (7,403) (2,704) (2,053)
Net income (loss)
applicable to common
shareholders......... (58) 1,970 (3,343) (12,199) (8,228) (2,914) (2,263)
Basic and diluted net
income (loss) per
share................ $ 0.00 $ 0.10 $ (0.13) $ (0.44) $ (0.29) $ (0.10) $ (0.08)
Weighted-average
shares of common
stock outstanding
used in computing
basic and diluted net
income (loss) per
share................ 15,106 20,080 25,419 27,814 28,228 28,055 28,749
Pro forma basic and
diluted net loss per
share................ $ (0.23) $ (0.06)
Shares used in
computing pro forma
basic and diluted net
income (loss) per
share................ 32,110 33,455
</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...................... $ 5,366 $15,366 $75,913
Working capital (deficiency)................... (1,562) 8,438 76,898
Total assets................................... 17,243 27,243 87,790
Long-term debt................................. 40 40 --
Redeemable convertible preferred stock......... 13,580 -- --
Total shareholders' equity (deficit)........... (11,792) 11,788 80,228
</TABLE>
See Note 1 of Notes to Supplementary Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing per
share data.
The pro forma consolidated balance sheet information gives effect to the sale
of 1,626,016 shares of Series D preferred stock in April 1999, and the
conversion of all outstanding shares of preferred stock into shares of common
stock upon the closing of the offering.
The pro forma as adjusted numbers give effect to the conversion of all
preferred stock, including the Series D preferred stock, as well as the sale of
the 5,000,000 shares of common stock offered hereby by Software.com at the
initial public offering price of $15.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by Software.com and the application of the estimated net proceeds from this
offering. See "Use of Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in our common stock. The trading price of our common stock
could decline due to any of these risks, in which case you could lose all or
part of your investment. In assessing these risks, you should also refer to the
other information in this prospectus, including our financial statements and
the related notes.
Our future revenues are unpredictable and we expect our quarterly operating
results to fluctuate, which could cause our stock price to decline
We cannot accurately forecast our revenues in any given period as a result of
our limited operating history, the emerging nature of the markets in which we
compete and our reliance on a small number of products and large customers. Our
revenues could fall short of our expectations if we experience delays in
signing new customer accounts or cancellation of one or more current or new
customer accounts. A number of factors are likely to cause fluctuations in our
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations."
We plan to significantly increase our operating expenses to expand our
international sales and marketing operations and fund greater levels of
research and development. Our operating expenses, which include sales and
marketing, research and development, and general and administrative expenses,
are based on expectations of future revenues and are relatively fixed in the
short term. If revenues fall below our expectations and we are not able to
quickly reduce our spending in response, our business, financial condition, and
operating results will suffer. Accordingly, period-to-period comparisons of our
operating results are not a good indication of our future performance. It is
possible that our operating results in some quarters will not meet the
expectations of stock market analysts and investors. In that event, our stock
price would probably decline.
Variations in the time it takes to sell, deploy and activate mailboxes using
our InterMail Mx product may cause fluctuations in our operating results, which
could cause our stock price to decline
Variations in the length of our sales and deployment cycles for InterMail Mx
could cause our revenue, and thus our business, financial condition and
operating results, to fluctuate widely from period to period. Our customers
generally take a long time to evaluate our InterMail Mx product, and many
people are involved in the evaluation process. We expend significant resources
educating and providing information to our prospective customers regarding the
use and benefits of InterMail Mx. Even after the purchase, our customers tend
to integrate InterMail Mx into their existing systems slowly and deliberately.
The timing of the deployment depends upon:
. the efforts of our professional services staff;
. the geographic disbursement of the customer's hardware;
. the complexity of the customer's network and the resulting degree of
hardware configuration necessary to deploy InterMail Mx on their system;
. the internal technical capabilities of the customer;
. the customer's budgetary constraints; and
. the stability and sophistication of the customer's current messaging
system.
8
<PAGE>
Because of the number of factors influencing the sales and deployment
processes, the period between our initial contact with a new customer and the
time when we begin to recognize revenue from that customer varies widely in
length. Our sales cycles for InterMail Mx typically range from six months to a
year, and our software deployment cycles typically range from three to six
months thereafter, although occasionally these cycles can be much longer.
During these cycles, we commit substantial resources in advance of receiving
any revenue.
In addition, the amount of revenue that we are able to recognize in any given
period depends on how quickly our customers activate new mailboxes and report
the activation of those new mailboxes to us. Under our InterMail Mx license
agreements, our customers typically pay us a fee for each new user account, or
"mailbox," they activate using InterMail Mx. We recognize revenue from these
agreements when our customer reports its mailbox activations to us or we
otherwise learn of such activations. Customers typically report activations on
a quarterly basis after they have completed a deployment of InterMail Mx.
Because we charge our customers only for activating "new" mailboxes, a customer
can reassign a lost subscriber's mailbox to a new subscriber without having to
pay us a fee. We cannot control how quickly our customers activate new
mailboxes. The primary factors affecting the timing are the ability of our
customers to retain subscribers and grow their subscriber bases by attracting
end users to their online services, and their willingness to promote InterMail
Mx messaging services with their subscribers. Mailbox activations and the
associated revenue may be concentrated in a particular quarter and, as a
result, our revenue for a particular quarter is not a good indication of our
future revenue. Our revenues may fluctuate widely from period to period
depending on the timing of our customers' activation of new mailboxes, and any
delay in or failure by our customers to activate new mailboxes will harm our
business, financial condition, and operating results.
In addition, we base our quarterly revenue projections, in part, upon our
expectations of how many mailboxes our InterMail Mx customers will activate in
that quarter. Because the timing of mailbox activation is outside of our
control, it is often difficult for us to make accurate forecasts. If our
expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of analysts and investors.
Because we have a limited operating history, it may be difficult for you to
evaluate our business and prospects
We have only a limited operating history, which makes it difficult for
investors to predict our future operating performance. When making your
investment decision, you should consider the risks, expenses, and difficulties
that we may encounter as a young company in a rapidly evolving market. These
risks include our ability to:
. expand our sales and marketing activities;
. expand our customer base;
. develop and introduce new products and services;
. identify and integrate acquisitions; and
. compete effectively.
We cannot be certain that our business strategy will be successful or that we
will successfully address these risks.
9
<PAGE>
We have a history of losses and we expect future losses
We have a history of losses, and we may not achieve or sustain profitability.
We have historically invested heavily in our sales and marketing efforts and in
technology research and development. We expect to continue to spend substantial
resources on developing and introducing new software products and on expanding
our sales and marketing activities, particularly in Europe and Asia. As a
result, we need to generate significant revenues to achieve and maintain
profitability. We expect that our sales and marketing expenses, research and
development expenses, and general and administrative expenses will continue to
increase in absolute dollars and may increase as percentages of revenues.
We incurred net losses of approximately $12.7 million for the period from
July 1994 through December 31, 1997, and $7.4 million for the year ended
December 31, 1998. As of March 31, 1999, we had an accumulated deficit of
approximately $24.1 million. Although our revenues have grown significantly in
recent quarters, we may not be able to sustain these growth rates or obtain
sufficient revenues to achieve profitability. If we do achieve profitability,
we may not be able to sustain or increase profitability in the future. Our
failure to achieve and maintain profitability could adversely affect our stock
price.
We depend on a small number of customers for most of our revenues, and our
business, financial condition, and operating results could be harmed by a
decline or delay in revenue from these customers
We have generated a significant portion of our revenues from a limited number
of customers. We expect that a small number of customers will continue to
account for a significant portion of revenues for the foreseeable future. Our
target market is made up only of service providers, which constitute only a
small portion of all users of messaging solutions. As a result, if we lose a
major customer, or if there is a decline in usage, or if there is a downturn in
the service provider industry, our business, financial condition, and operating
results will suffer. In the year ended December 31, 1997, AT&T WorldNet(R)
Service accounted for approximately 18% of our revenue. In the years ended
December 31, 1997 and 1998, GTE Internetworking Services accounted for
approximately 10% and 12% of our revenue, and our top ten clients accounted for
approximately 53% and 56% of our revenue. We cannot be certain that customers
that have accounted for significant revenues in past periods, individually or
as a group, will continue to generate revenues for us in any future period.
We must overcome significant and increasing competition in order to continue
our growth
The market for Internet standards-based messaging products and services is
intensely competitive, and we expect it to become increasingly so in the
future. Many of our current and future competitors have longer operating
histories, larger installed customer bases, greater brand recognition, and
significantly greater financial, marketing and other resources than we do. We
must respond quickly and effectively to the new products, services, and
enhancements offered by our competitors in order to continue our growth. See
"Business--Competition."
Microsoft possesses many competitive advantages over us that present risks to
the pricing, compatibility, and sales of our products
Microsoft is well-positioned to become increasingly competitive in our core
service provider messaging market. Microsoft has several significant
competitive advantages over us. If we are unable to compete effectively with
Microsoft, our business, financial condition, and operating results will
suffer. See "Business--Competition."
10
<PAGE>
Our new InterMail Kx product may not be accepted by the market, and its
introduction may interfere with sales of our other products
If our target customers do not widely adopt and purchase InterMail Kx, our
business, financial condition, and operating results will suffer. Our software
licenses revenue have been derived primarily from the sale of our InterMail
Post.Office and InterMail Mx products. We introduced our InterMail Kx product
in March 1999, and our future growth depends in part on the commercial success
of this product. Although we have tested InterMail Kx prior to making it
available to customers, we cannot be certain that we have discovered and
corrected all significant performance errors. We are initially targeting
service providers with 25,000 to 250,000 subscribers for our InterMail Kx
product. Several other software vendors, including Microsoft, Netscape and Sun
Microsystems, offer messaging products to service providers of this size. These
service providers may not choose our InterMail Kx product for technical, cost,
support, or other reasons.
Competition from InterMail Kx could have a negative effect on our sales of
InterMail Post.Office or InterMail Mx, or the prices we could charge for these
products. We currently have several licenses for our InterMail Post.Office
product with service providers that have more than 25,000 subscribers and we
have licensed our InterMail Mx product to service providers with fewer than
250,000 subscribers. Accordingly, InterMail Kx may compete to some extent with
our other products. We may also divert sales and marketing resources from
InterMail Post.Office in order to successfully launch and promote InterMail Kx.
This diversion of resources could have a further negative effect on our sales
of InterMail Post.Office. If our revenues from InterMail Kx are not sufficient
to compensate for the effect of any decrease in sales or prices of our other
products, our business, financial condition, and operating results will suffer.
Our expanding international operations are subject to significant uncertainties
in addition to those we face in domestic markets
In 1996, 1997, and 1998, revenues attributable to customers outside of North
America accounted for approximately 12%, 24%, and 37% of our total revenues. If
our revenues from international operations, and particularly from our
operations in the countries and regions on which we have focused our spending,
do not exceed the expense of establishing and maintaining these operations, our
business, financial condition, and operating results will suffer. We recently
began to invest significant financial and managerial resources to expand our
sales and marketing operations in international markets, and we must continue
to do so for the foreseeable future in order to succeed in these markets. In
particular, we are making significant expenditures on expansion in Europe and
Asia, including the localization of our products for use in these regions, and
we expect these expenditures to continue or increase. We are expending the most
resources in the countries and regions that we think will be the most receptive
markets for our products. We have only limited experience in international
operations, and we may not be able to capitalize on our investment in these
markets. In this regard, we face certain risks inherent in conducting business
internationally, including:
. fluctuations in currency exchange rates;
. problems caused by the ongoing conversion of various European currencies
into a single currency, the Euro;
. any imposition of currency exchange controls;
. unexpected changes in regulatory requirements applicable to the Internet
or our business;
. difficulties and costs of staffing and managing international operations;
11
<PAGE>
. differing technology standards;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonal variations in customer buying patterns or electronic messaging
usage;
. political instability or economic downturns;
. potentially adverse tax consequences; and
. reduced protection for intellectual property rights in certain countries.
Any of these factors could harm our international operations and,
consequently, our business, financial condition, and operating results.
The loss of any of our senior management or key personnel could harm our
business, financial condition, and operating results
Our success depends on the skills, experience and performance of our senior
management and certain other key personnel, some of whom have worked together
for only a short period of time. We do not have employment agreements with any
of our senior management or other key personnel, and their employment is at
will. The loss of the services of any of our senior management or other key
personnel, including John MacFarlane, our Chief Executive Officer, and John
Poulack, our Senior Vice President, Operations, could harm our business,
financial condition, and operating results.
If we are unable to attract and retain highly skilled employees, our financial
and operational results may suffer
Our success depends on our ability to recruit, integrate, retain, and
motivate highly skilled sales and marketing, engineering, and quality assurance
personnel. In particular, our ability to attract and retain qualified sales
management personnel is critical to the success of our planned expansion in
Europe and Asia. Competition for these people in the Internet messaging
industry is intense, and we may not be able to successfully recruit, train, or
retain qualified personnel. If we fail to retain and recruit necessary sales
and marketing, engineering, and quality assurance personnel, our ability to
obtain new customers, develop new products and provide acceptable levels of
customer service could suffer, and this could harm our business, financial
condition, and operating results.
We must adapt to rapid changes in technology and customer preferences in order
to remain competitive
The Internet messaging industry is characterized by rapidly changing
technology, changes in customer and end user requirements and preferences, and
evolving industry standards and practices that could render our software
products obsolete. Our success depends on our ability to enhance our existing
messaging platform and products on a timely basis and to develop new products
that address the increasingly sophisticated and varied needs of our customers
and their end users. We must accurately forecast the features and functionality
required by our target customers and end users in order to continually improve
our products. For example, in response to customer and end user demand, we have
recently developed for some of our products a voicemail feature based on
Internet standards that govern data transmission and receipt, known as Internet
Protocol or "IP." The development of proprietary technology and product
enhancements has required, and will continue to require, substantial
expenditures and lead-time, and we may not always be able to keep pace with the
latest technological developments. If we cannot, for technical, legal,
financial, or other reasons, adapt our products to changing customer or end
user requirements or industry standards in a cost-effective and timely fashion,
or if any new product, enhancement, or feature, including InterMail Kx,
12
<PAGE>
IP voicemail, or Web-applications technology acquired in the Mobility.Net
acquisition, is not favorably received and accepted by customers and end users,
our business, financial condition, and operating results will suffer.
Our software products may have unknown defects, which could harm our reputation
or impede market acceptance of our products
Despite testing by us, defects have in the past and may in the future occur
in our software. Complex software like ours is difficult to integrate with
customers' existing systems and often contains errors or defects, particularly
when first introduced or when new versions or enhancements are released.
Although we conduct extensive testing, we may not discover software defects
that affect our current or new products, including our InterMail Kx and IP
voicemail products, or Web-applications technology acquired in the Mobility.Net
acquisition, until after they are sold. We also experience difficulty in
deploying software at our customer's sites due to its complex nature. Any
defect in other software or hardware with which our software interacts could be
mistakenly attributed to our software by our customers or their end users.
These defects or perceptions of defects could cause our customers and their end
users to experience service interruptions. Because our customers depend on our
software to provide critical services to their end users, any service
interruptions could damage our reputation or increase our product development
costs, divert our product development resources, cause us to lose revenue, or
delay market acceptance of our products, any of which could harm our business,
financial condition, and operating results.
The rapid growth of our operations could strain our resources and harm our
business, financial condition, and operating results
Our recent growth has placed and will continue to place a significant strain
on our management systems, infrastructure, and resources. We are increasing the
scope of our operations and our customer base domestically and internationally,
and we have recently increased our headcount substantially. From December 31,
1997 to December 31, 1998, our total number of employees increased from 144 to
187. We expect that we will need to continue to improve our financial and
managerial controls and reporting systems and procedures, and will need to
continue to expand, train, and manage our workforce worldwide. We expect that
we will be required to manage an increasing number of relationships with
various customers and other third parties. Our ability to successfully offer
products and services and implement our business plan in a rapidly evolving
market requires an effective planning and management process. Any failure to
expand any of the foregoing areas efficiently and effectively could harm our
business, financial condition and operating results. In addition, there can be
no assurance that our business will continue to grow at historical rates.
Our acquisition strategy could cause financial or operational problems
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands, and
competitive pressures. To this end, we may acquire new and complementary
businesses, products, or technologies, instead of developing them ourselves. We
do not know if we will be able to complete any acquisitions or that we will be
able to successfully integrate any acquired business, operate them profitably,
or retain their key employees. For example, we completed the acquisition of
Mobility.Net Corporation in April 1999. Integrating Mobility.Net or any other
newly acquired business, product or technology could be expensive and time-
consuming, could disrupt our ongoing business, and could distract our
management. We may face competition for acquisition targets from larger and
more established companies with greater financial resources. In addition, in
order to finance any acquisitions, we might
13
<PAGE>
need to raise additional funds through public or private financings. In that
event, we could be forced to obtain equity or debt financing on terms that are
not favorable to us and, in the case of equity financing, that results in
dilution to our stockholders. If we are unable to integrate Mobility.Net or any
other newly acquired entities or technologies effectively, our business,
financial condition, and operating results would suffer. In addition, any
amortization of goodwill or other assets, or other charges resulting from the
costs of acquisitions could harm our business, financial condition, and
operating results.
Our business depends on continued growth in use and improvement of the Internet
The infrastructure, products, and services necessary to maintain and expand
the Internet may not be developed, and the Internet may not continue to be a
viable medium for secure and reliable personal and business communication, in
which case our business, financial condition, and operating results would be
harmed. Because we are in the business of providing electronic messaging
software, our future success depends on the continued expansion of, and
reliance of consumers and businesses on, the Internet for communications. The
Internet may not be able to support an increased number of users or an increase
in the volume of data transmitted over it. As a result, the performance or
reliability of the Internet in response to increased demands will require
timely improvement of the high speed modems and other communications equipment
that form the Internet's infrastructure. The Internet has already experienced
temporary outages and delays as a result of damage to portions of its
infrastructure. The effectiveness of the Internet may also decline due to
delays in the development or adoption of new technical standards and protocols
designed to support increased levels of activity and due to the transmission of
computer viruses.
Future sales of our common stock may depress our stock price
If our stockholders sell a substantial number of our shares in the public
market during a short period of time, our stock price could decline
significantly. After this offering, a total of 40,671,753 shares of our common
stock will be outstanding. All the shares sold in this offering will be freely
tradable. As a result of contractual lock-up restrictions, the remaining
34,671,753 shares of our common stock outstanding after this offering will
become available for public sale as follows:
<TABLE>
<CAPTION>
Percentage of
Number Shares Outstanding
Date of Availability for Sale of Shares After Offering
----------------------------- ---------- ------------------
<S> <C> <C>
After the date of this prospectus............. 35,650 less than 1%
At various times after 180 days from the date
of this offering subject, in some cases, to
volume limitations........................... 34,636,103 85.2%
</TABLE>
Shares acquired upon the exercise of options can generally be publicly sold
immediately, subject to contractual restrictions that expire 180 days after
this offering. As of June 15, 1999, 2,524,136 shares of our common stock were
subject to vested stock options, 6,574,882 were subject to unvested stock
options, and 789,084 remained available for grant under our stock plans. If a
large number of these shares are sold as they become tradeable our stock price
could decline. See "Shares Eligible for Future Sales."
Problems related to the Year 2000 could harm our products or our reputation, or
cause our customers to decrease spending on our products and services
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the
14
<PAGE>
calendar year may not be able to distinguish whether "00" means 1900 or 2000.
This may result in software failures or errors that could harm our business.
We are in the process of assessing our Year 2000 readiness and are
investigating and performing testing to determine whether our software products
are Year 2000 compliant. Our software products operate in complex network
environments, including the Internet, and directly and indirectly interact with
a number of other hardware and software systems. Despite preliminary
investigation and testing by us and our customers and partners, our software
products and the underlying systems and protocols running our products may
contain errors or defects associated with Year 2000 date functions. We are
unable to predict to what extent our business may be affected if our software
or the systems that operate in conjunction with our software, including the
Internet, experience a Year 2000 failure. Known or unknown errors or defects
that affect the operation of our software could result in delays or losses of
revenue, interruptions of email service, cancellations of contracts by our
customers, diversions of our development resources, damage to our reputation,
increased service and warranty costs, and litigation costs, any of which could
harm our business, financial condition, and operating results.
If the performance of our software is adversely affected by Year 2000
problems in our customers' hardware or software programs with which our
software interacts, our customers or their end users may mistakenly believe
that these problems were caused by our software. These customers and end users
could react by demanding extensive technical support from us or by filing suit
against us, either of which would cause a significant diversion of our
management and financial resources. Regardless of whether we experience Year
2000 problems, service providers and enterprises may reduce their spending on
software, systems, and related services during the latter part of 1999 and the
beginning of 2000 in connection with actual or anticipated Year 2000-related
problems. Any reduction in software, systems and related services spending
could impede our ability to attract new customers and harm our business,
financial condition, and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Readiness
Disclosure."
Our intellectual property or proprietary rights could be misappropriated, which
could force us to become involved in expensive and time-consuming litigation
We regard our copyrights, service marks, trademarks, trade secrets, and
similar intellectual property as critical to our success. Any misappropriation
of our proprietary information by third parties could harm our business,
financial condition, and operating results. If our proprietary information were
misappropriated, we might have to engage in litigation to protect it. We might
not succeed in protecting our proprietary information by initiating
intellectual property litigation, and that kind of litigation is expensive and
time-consuming, and could divert our management's attention away from running
our business. See "Business--Intellectual Property and Proprietary Rights."
If others claim that our products infringe their intellectual property rights,
we may be forced to seek expensive licenses, reengineer our products, engage in
expensive and time-consuming litigation, or stop marketing our products
We cannot be certain that our products do not infringe issued patents or
other intellectual property rights of others. If we were to discover that our
products violated the intellectual property rights of others, we would have to
obtain licenses from these parties in order to continue marketing our products
without substantial reengineering. We could also become involved in expensive
and
15
<PAGE>
time-consuming litigation with these parties. We might not be able to obtain
the necessary licenses on acceptable terms or at all, and if we could not, we
might not be able to reengineer our products successfully or in a timely
fashion. See "Business--Intellectual Property and Proprietary Rights."
The geographic dispersement of our senior management could impede their ability
to communicate effectively
Our senior management and key personnel are based in several different
offices, which makes coordination of projects more difficult. For example, John
MacFarlane, our Chief Executive Officer, and John Ingalls, our Chief Financial
Officer, are based at our headquarters in Santa Barbara, California, while
Valdur Koha, our President, and John Poulack, our Senior Vice President,
Operations, are based at our office in Lexington, Massachusetts. In addition,
we intend to open an additional office in Silicon Valley where we will work on
integrating Mobility.Net's technology with ours. The geographic dispersement of
our senior management team and key personnel could impede their ability to
communicate effectively or work together efficiently, either of which could
harm our business, financial condition, and operating results.
The security provided by our messaging products could be breached, in which
case our reputation, business, financial condition, and operating results could
suffer
The occurrence or perception of security breaches could harm our business,
financial condition, and operating results. A fundamental requirement for
online communications is the secure transmission of confidential information
over the Internet. Third parties may attempt to breach the security provided by
our messaging products, or the security of our customers' internal systems. If
they are successful, they could obtain confidential information about our
customers' end users, including their passwords, financial account information,
credit card numbers, or other personal information. Our customers or their end
users may file suits against us for any breach in security. Even if we are not
held liable, a security breach could harm our reputation, and even the
perception of security risks, whether or not valid, could inhibit market
acceptance of our products. Despite our implementation of security measures,
our software is vulnerable to computer viruses, electronic break-ins and
similar disruptions, which could lead to interruptions, delays, or loss of
data. We may be required to expend significant capital and other resources to
license encryption or other technologies to protect against security breaches
or to alleviate problems caused by these breaches. In addition, our customers
might decide to stop using our software if their end users experience security
breaches.
Future governmental regulation of the Internet could limit our ability to
conduct our business
Although there are currently few laws and regulations directly applicable to
the Internet and commercial messaging, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust, and characteristics and quality
of products and services. Further, the growth and development of the market for
online messaging may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies, including us, that
conduct business online. The adoption of any additional laws or regulations may
impair the growth of the Internet or commercial online services, which would
decrease the demand for our services and could increase our cost of doing
business or otherwise harm our business, financial condition, and operating
results. Moreover, the applicability of existing laws governing property
ownership, sales and other taxes, libel, and personal privacy to the Internet
is uncertain and may take years to resolve.
16
<PAGE>
Our stock price may be volatile, exposing us to expensive and time-consuming
securities class action litigation
The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which
has often been unrelated to the operating performance of any particular company
or companies. There has been no prior market for our stock, and if market or
industry-based fluctuations continue, our stock price could decline below our
initial public offering price regardless of our actual operating performance.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in their stock prices. We may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert our management's time and resources, which
could harm our business, financial condition, and operating results. In
addition, an active market for our stock may not develop after this offering.
Provisions of our corporate documents and Delaware law could deter takeovers
and prevent you from receiving a premium for your shares
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. For example, our certificate of
incorporation to be filed upon the closing of this offering will provide that
our board may issue up to 5,000,000 shares of preferred stock without
stockholder approval. See "Description of Capital Stock" for a more complete
discussion of these matters.
Our management may not use the proceeds of this offering effectively
Our management has broad discretion over the use of a substantial portion of
the proceeds of this offering. Accordingly, it is possible that our management
may allocate the proceeds differently than investors in this offering would
have preferred, or that we will fail to maximize our return on the proceeds.
Investors will incur immediate dilution because the initial public offering
price of a share of our stock will exceed its book value
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock
immediately after the offering. If you purchase common stock in this offering,
you will incur immediate dilution of approximately $13.00 in the book value per
share of the common stock from the price you pay. See "Dilution."
Forward-looking statements in this prospectus may not accurately predict our
future operating results
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words like "anticipates," "believes," "plans," "expects,"
"future," "intends" and similar expressions to identify such forward-looking
statements. This prospectus also contains forward-looking statements attributed
to certain third parties relating to their estimates regarding the growth of
the use of the Internet, the number of mailboxes, email usage, and related
service markets and spending. Forward-looking statements appearing in this
prospectus apply only as of the date of this prospectus. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere
in this prospectus.
17
<PAGE>
This offering will provide substantial benefits to our current stockholders,
including stockholders who are selling stock in the offering
This offering will provide significant benefits to our current stockholders,
including the stockholders who are selling stock in the offering. These selling
stockholders will receive substantial proceeds from selling their shares of
common stock in this offering, and we will pay their offering expenses other
than the underwriting discount. Based on our initial public offering price of
$15.00 per share, the selling stockholders will receive net proceeds of
approximately $14.0 million.
In addition, before the offering, it was difficult for our stockholders to
sell their shares because there was no public market for our stock. The
offering will make it possible for these stockholders to trade their shares
freely in the public markets, subject to securities law restrictions and when
their lock-up agreements or other contractual restrictions expire.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 5,000,000 shares
of common stock offered by us will be approximately $68.5 million, at the
initial public offering price of $15.00 per share, and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us. We will not receive any proceeds from the sale of the common stock by
the selling stockholders, including any proceeds from the exercise of the
underwriters' over-allotment option.
We currently intend to use approximately $11.0 million of the net proceeds
from this offering to expand our international sales and marketing
organizations and approximately $4.5 million to develop Mobility.Net
technology. We also plan to repay the outstanding balance on our line of credit
with Coast Business Credit. As of March 31, 1999, we had borrowed approximately
$7.9 million under this facility which bears interest at rates ranging from
prime rate plus 1.5% to prime rate plus 1.75% and matures in August 2000. We
will use the remaining net proceeds from this offering for working capital and
other general corporate purposes. We may also use a portion of the net proceeds
to acquire complementary products, technologies, or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest-
bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future. In addition our existing bank line of credit
prohibits the payment of dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. the actual capitalization of Software.com as of March 31, 1999,
. the pro forma capitalization of Software.com after giving effect to the
sale of 1,626,016 shares of Series D preferred stock in April 1999, and
the conversion of all outstanding shares of preferred stock into
6,332,378 shares of common stock upon the closing of this offering,
. the pro forma as adjusted capitalization after giving effect to the
conversion of all preferred stock, including the Series D preferred
stock, as well as
. the sale of the 5,000,000 shares of common stock that Software.com is
offering hereby at the initial public offering price of $15.00 per share
less underwriting discounts and commissions and estimated offering
expenses we expect to pay in connection with this offering and the
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except
share data)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 5,366 $15,366 $75,913
======== ======== =======
Note payable to bank and current portion of
long term debt.............................. 7,913 7,913 --
Long-term debt............................... 40 40 --
Redeemable convertible preferred stock....... 13,580 -- --
Shareholders' equity (deficit):
Convertible preferred stock: no par value;
1,329,781 shares authorized, issued and
outstanding................................. 6,848 -- --
Common stock: no par value; authorized:
50,000,000, actual; 60,000,000 pro forma;
issued and outstanding: 28,908,795, actual;
35,241,173, pro forma and 40,241,173 pro
forma as adjusted........................... 6,824 37,252 105,752
Deferred compensation........................ (1,343) (1,343) (1,343)
Accumulated deficit.......................... (24,121) (24,121) (24,121)
-------- -------- -------
Total shareholders' equity (deficit)......... (11,792) 11,788 80,288
-------- -------- -------
Total capitalization......................... $ 9,741 $ 19,741 $80,288
======== ======== =======
</TABLE>
This table excludes the following shares:
. 8,582,000 shares issuable upon exercise of outstanding options as of
March 31, 1999, and
. 866,903 shares of common stock issuable upon exercise of outstanding
warrants.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 4 and 7 of Notes to Supplementary Consolidated Financial Statements.
19
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering. The pro forma net tangible book value of our common
stock as of March 31, 1999, after giving effect to the conversion of all
outstanding shares of preferred stock, including the preferred stock issued in
April 1999, was $11.8 million or approximately $0.33 per share. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the pro forma number of shares of
common stock outstanding. Dilution in pro forma 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 pro forma net tangible
book value per share of our common stock immediately after the completion of
this offering. After giving effect to the sale of the 5,000,000 shares of
common stock offered by us hereby at the initial public offering price of
$15.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us and the application of the
estimated net proceeds from the offering, our pro forma as adjusted net
tangible book value as of March 31, 1999 would have been $80.3 million, or
approximately $2.00 per share. This represents an immediate increase in pro
forma net tangible book value of $1.67 per share to existing stockholders and
an immediate dilution of $13.00 per share to new investors of common stock in
this offering. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Pro forma net tangible book value per share as of March 31,
1999............................................................ 0.33
Increase in pro forma net tangible book value attributable to
this offering................................................... 1.67
----
Pro forma net tangible book value per share after the offering..... 2.00
------
Dilution per share to new investors................................ $13.00
======
</TABLE>
The following table sets forth, as of March 31, 1999, the total number of
shares of common stock purchased from us, the total consideration paid and the
average price per share paid by existing holders of common stock and by the new
investors in this offering, before deducting the underwriting discounts and
commissions, and estimated offering expenses payable by us, at the initial
public offering price of $15.00 per share and includes the effects of the
conversion of all outstanding shares of preferred stock, including the
preferred stock issued in April 1999.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ----------------------- Price Per
Number Percentage Amount Percentage Share
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 35,241,173 87.6% $ 32,947,000 30.5% $ 0.15
New investors.......... 5,000,000 12.4 75,000,000 69.5 15.00
---------- ------- ------------ ------- ------
Total................ 40,241,173 100.0% $107,947,000 100.0% $ 2.68
========== ======= ============ ======= ======
</TABLE>
The sale of common stock by the selling stockholders in this offering will
reduce the number of shares of common stock held by existing stockholders to
34,241,173, or approximately 85.1% of the total shares of common stock
outstanding after this offering, and will increase the number of shares of
common stock held by new investors to 6,000,000, or 14.9% of the total number
of shares of common stock outstanding immediately after this offering. See
"Principal and Selling Stockholders."
20
<PAGE>
The foregoing discussion and table assume no exercise of any stock options or
warrants outstanding as of March 31, 1999. As of March 31, 1999 there were
options outstanding to purchase 8,582,000 shares of common stock at a weighted
average exercise price of $3.54 per share and there were warrants outstanding
to purchase 866,903 shares of common stock at a weighted average purchase price
of $4.23 per share. To the extent any of these options or warrants are
exercised, there will be further dilution to investors. See "Capitalization,"
"Management--Employee Benefit Plans," "Description of Capital Stock," and Notes
4 and 7 of Notes to Supplementary Consolidated Financial Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
In reading the selected consolidated financial data set forth on the opposite
page, you should refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Supplementary Consolidated
Financial Statements and the Notes included elsewhere in this prospectus.
The statement of operations data for the years ended December 31, 1996, 1997,
and 1998 and the balance sheet data at December 31, 1997 and 1998 are derived
from our consolidated financial statements, which have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this prospectus.
The selected financial data for the three months ended March 31, 1998 and 1999
and the balance sheet data as of March 31, 1999 are unaudited but have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. The statement of operations data for the period
from July 11, 1994 (inception) to December 31, 1994 and the year ended December
31, 1995 and the balance sheet data as of December 31, 1994 and 1995 are
derived from unaudited consolidated financial statements not included in this
prospectus.
Our historical results are not necessarily indicative of the results we will
achieve in any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
July 11, 1994 Three Months
(Inception) to Year Ended December 31, Ended March 31,
December 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:
Software licenses..... $ 612 $3,185 $ 6,555 $ 7,859 $17,462 $ 3,098 $ 5,058
Services.............. 36 1,542 1,327 2,807 8,157 1,800 3,013
------ ------ ------- -------- ------- ------- -------
Total revenues...... 648 4,727 7,882 10,666 25,619 4,898 8,071
Cost of revenues:
Software licenses..... 2 58 218 689 1,568 485 376
Services.............. -- -- 767 2,675 7,451 1,647 2,044
------ ------ ------- -------- ------- ------- -------
Total cost of
revenues........... 2 58 985 3,364 9,019 2,132 2,420
------ ------ ------- -------- ------- ------- -------
Gross profit........ 646 4,669 6,897 7,302 16,600 2,766 5,651
Operating expenses:
Sales and marketing... 83 552 4,554 8,607 10,769 2,284 3,560
Research and
development.......... 373 1,263 3,457 6,309 8,716 2,135 2,741
General and
administrative....... 239 811 2,136 3,093 4,036 960 1,178
Legal matter.......... -- -- -- 1,000 (400) -- --
------ ------ ------- -------- ------- ------- -------
Total operating
expenses........... 695 2,626 10,147 19,009 23,121 5,379 7,479
------ ------ ------- -------- ------- ------- -------
Income (loss) from
operations............. (49) 2,043 (3,250) (11,707) (6,521) (2,613) (1,828)
Other income (expense):
Interest income....... -- -- 87 298 293 79 60
Interest expense...... -- -- -- (59) (645) (130) (205)
Other................. (2) (4) -- -- (84) (39) (12)
------ ------ ------- -------- ------- ------- -------
Total other income
(expense)............ (2) (4) 87 239 (436) (90) (157)
------ ------ ------- -------- ------- ------- -------
Income (loss) before
income taxes........... (51) 2,039 (3,163) (11,468) (6,957) (2,703) (1,985)
Provision for income
taxes.................. 7 69 -- 1 446 1 68
------ ------ ------- -------- ------- ------- -------
Net income (loss)....... (58) 1,970 (3,163) (11,469) (7,403) (2,704) (2,053)
Accretion on redeemable
convertible preferred
stock.................. -- -- (180) (730) (825) (210) (210)
------ ------ ------- -------- ------- ------- -------
Net income (loss)
applicable to common
shareholders........... $ (58) $1,970 $(3,343) $(12,199) $(8,228) $(2,914) $(2,263)
====== ====== ======= ======== ======= ======= =======
Basic and diluted net
income (loss) per
share.................. $ 0.00 $ 0.10 $ (0.13) $ (0.44) $ (0.29) $ (0.10) $ (0.08)
====== ====== ======= ======== ======= ======= =======
Weighted average shares
outstanding used in
computing per share
amounts................ 15,106 20,080 25,419 27,814 28,228 28,055 28,749
====== ====== ======= ======== ======= ======= =======
Basic and diluted net
income (loss) per
share--historical
basis.................. 0.00 0.10 (0.13) (.46) (.31) (.11) (.08)
====== ====== ======= ======== ======= ======= =======
Weighted average shares
outstanding used in
computing historical
per share amounts...... 15,106 20,080 25,419 26,235 26,649 26,476 27,170
====== ====== ======= ======== ======= ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (0.23) $ (0.06)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 32,110 33,455
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------------- ---------
1994 1995 1996 1997 1998 1999
---- ------ ------ ------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.... $143 $2,182 $3,163 $ 6,083 $ 5,447 $ 5,366
Working capital
(deficiency)................ (178) 2,271 4,446 (531) (115) (1,562)
Total assets................. 315 3,742 7,692 13,944 19,059 17,243
Long-term debt .............. -- -- -- 340 100 40
Redeemable convertible
preferred stock............. -- -- 4,710 12,838 13,370 13,580
Total stockholders' equity
(deficit)................... (9) 2,551 1,975 (9,912) (10,061) (11,792)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements the accuracy of which
involves risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future" and "intends" and similar expressions
to identify forward-looking statements. These forward-looking statements apply
only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks we face described in "Risk Factors" and elsewhere
in this prospectus.
Overview
Software.com is a leading developer and provider of scalable, high
performance messaging software applications for providers of Internet
communications and services. We develop, market, sell, and support a variety of
Internet standards-based messaging software to service providers worldwide,
including traditional telecommunications carriers, Internet service providers
and wholesalers, cable-based Internet access providers, competitive local
exchange telephone carriers, and Internet destination sites or portals. We have
developed three product packages: InterMail Post.Office, InterMail Kx, and
InterMail Mx, based on our software platform. These products allow our
customers to provide a variety of advanced messaging services to their
Internet-based consumer and business users.
We were incorporated in California in October 1994. Our operating activities
during 1994 and the first half of 1995 related primarily to research and
development of our messaging software platform. In November 1995, we licensed
the source code of an early version of our single server messaging product,
Post.Office, to Netscape for payments totaling $5.0 million. Of this amount,
Netscape paid $3.5 million for software licenses and $1.5 million for training
and testing services. Revenue from this agreement was recognized over a two
year period as software was delivered and services were performed. This license
to Netscape provided the funding for us to begin building our sales,
development, and administration organizations.
In May 1996, we merged with Accordance Corporation, a Massachusetts
corporation incorporated in July 1994, with Software.com as the surviving
company. Accordance had a multiple server messaging product called InterMail.
During the second half of 1996, we focused on integrating our two product lines
and building sales and marketing channels to target the service provider
market. We also worked extensively with AT&T WorldNet(R) Service during 1996 as
it rapidly grew its Internet services. In October 1996, we completed a
financing with AT&T Ventures.
In March 1997, we began building our professional services organization and
offering systems architecture and deployment consulting services to our
customers. The initial professional services group consisted of five
consultants and grew to 14 by the end of 1997 and to 24 by the end of 1998 as
the number of customers requesting our services increased. During 1997, we also
continued to build our development and quality assurance teams using proceeds
from the sale of preferred stock to Cisco Systems in February 1997. Cisco
Systems increased its equity investment in August 1998, which we used to begin
our overseas expansion in Europe and Asia, as well as to grow our global direct
sales force and service organizations.
In March 1999, we introduced InterMail Kx, a product designed for fast-
growing, medium-sized service providers. In March 1999, we entered into a
marketing relationship with Hewlett-Packard
24
<PAGE>
and, in connection with this agreement, Hewlett-Packard made an investment in
Software.com. In April 1999, we completed the acquisition of Mobility.Net
Corporation, a California company incorporated in July 1996. Mobility.Net has
developed an integrated Web mail system using a Java-based technology platform
that complements our product offerings. The acquisition was accounted for as a
pooling-of-interests. Accordingly, the financial information presented in the
Consolidated Financial Statements reflects the combined financial position and
operations of Software.com and Mobility.Net for all dates and periods
presented.
We recognize revenue from sales of software upon delivery of a license key to
the customer, provided that persuasive evidence of an arrangement exists, the
license fee is fixed and determinable, and collection of the fee is considered
probable. If the license agreement has a multi-year term, as is typical with an
InterMail Mx contract, or the license fees are calculated based on variable
measures, such as the number of mailboxes in use, we recognize revenue as the
customer activates mailboxes on their system. When we enter into license
agreements under which our revenues are based on a percentage of our customer's
revenues, we recognize revenue as earned and reported by the customer. Revenues
from sales to resellers are not recognized until the product is sold through to
the end user and the license key is issued.
Service revenue is composed of revenue from support and maintenance contracts
as well as professional services and training. Revenues from support and
maintenance contracts are recognized ratably over the term of the support and
maintenance period. Substantially all of our InterMail Mx and InterMail Kx
customers purchase support and maintenance, which is paid on a quarterly basis.
Although the majority of our InterMail Post.Office customers initially purchase
an annual support and maintenance contract, a relatively small percentage of
these customers renew the contracts after the first year. Consulting services
revenues are primarily related to deployment services performed on a time-and-
materials basis under separate service arrangements. We recognize revenues from
consulting and training services using the percentage of completion method.
When software and services are billed prior to the time the related revenue is
recognized, deferred revenue is recorded.
In a typical customer relationship, we receive software license revenue,
support and maintenance revenue, and, in some cases, also receive professional
services revenue. We recognize these three types of revenue at different stages
of our customer relationship. Substantially all of our professional services
are performed prior to the activation of mailboxes by the customer. As a
result, we generally recognize revenue from professional services in advance of
revenue from software license fees. If a customer has a large number of
existing users, we typically see a large revenue contribution at the time the
customer transfers existing user mailboxes to our software platform. After this
transfer, the software license revenue primarily reflects the growth in the
number of mailboxes. Support and maintenance revenue begins after installation
of our software and also primarily reflects the growth in the number of
mailboxes.
In 1996, 1997, and 1998, revenues attributable to customers outside of North
America accounted for approximately 12%, 24%, and 37% of our total revenues. We
are making significant expenditures on expansion in Europe and Asia, including
the localization of our products for use in these regions, and we expect these
expenditures to increase. If our revenues from international operations do not
exceed the expense of establishing and maintaining these operations, our
business, financial condition and operating results will suffer.
We believe our success depends on our ability to execute on our global sales
strategy and continue to develop carrier-class products and services which
address the unique requirements of
25
<PAGE>
service providers. Accordingly, we intend to continue to invest heavily in
sales, support, and research and development. Furthermore, we expect to
continue to incur substantial operating losses for the next several quarters,
and our expected increase in operating expenses will require further increases
in revenues before we become profitable.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our sequential
quarterly revenue growth during 1998, we do not believe that historical growth
rates are necessarily sustainable or indicative of future growth.
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of revenues.
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Software licenses......................... 83 % 74 % 68 % 63 % 63 %
Services.................................. 17 26 32 37 37
---- ---- ---- ---- ----
Total revenues.......................... 100 100 100 100 100
Gross margins:
Gross margin on software licenses......... 97 91 91 84 93
Gross margin on services.................. 42 5 9 9 32
---- ---- ---- ---- ----
Gross profit............................ 88 68 65 57 70
Operating expenses:
Sales and marketing....................... 58 81 42 47 44
Research and development.................. 44 59 34 43 34
General and administrative................ 27 29 16 20 15
Legal matter.............................. -- 9 (2) -- --
---- ---- ---- ---- ----
Total operating expenses................ 129 178 90 110 93
---- ---- ---- ---- ----
Loss from operations........................ (41) (110) (25) (53) (23)
Other income (expense):
Interest income........................... 1 3 1 1 1
Interest expense.......................... -- (1) (3) (3) (3)
Other..................................... -- -- -- -- --
---- ---- ---- ---- ----
Total other income (expense)................ 1 2 (2) (2) (2)
---- ---- ---- ---- ----
Loss before income taxes.................... (40) (108) (27) (55) (25)
Provision for income taxes.................. -- -- 2 -- 1
---- ---- ---- ---- ----
Net loss.................................... (40)% (108)% (29)% (55)% (26)%
==== ==== ==== ==== ====
</TABLE>
26
<PAGE>
Comparison of Three Months Ended March 31, 1998 and 1999
Software Licenses. Software license revenue increased $2.0 million, or 63%,
from $3.1 million for the three months ended March 31, 1998 to $5.1 million in
the same period in 1999. The increase in software license revenue was due
primarily to greater revenue from sales of our InterMail Mx product offerings
which grew 88% from the first quarter of 1998 to the first quarter of 1999. In
March 1999, we recognized revenue from sales of the recently introduced
InterMail Kx product offerings, which overlap to some extent with InterMail
Post.Office. Both products are targeted at small and medium size service
providers worldwide. Combined sales of InterMail Kx and Post.Office in the
first quarter of 1999 were 90% higher than sales of Post.Office in the first
quarter of 1998. During the first quarter of 1998, we received $290,000 of
software license revenue from the resale of a third party database to one of
our InterMail Mx customers. In the first quarter of 1999, we did not receive
revenue from the resale of third-party software.
Services. Services revenue is primarily derived from consulting services,
maintenance and support contracts, and training. Services revenue increased
$1.2 million, or 67%, from $1.8 million for the three months ended March 31,
1998 to $3.0 million in the same period in 1999. The increase in services
revenue was due to a $624,000 increase in professional services revenue as our
number of consulting projects increased, and a $660,000 increase in support and
maintenance revenue as our customer base grew. As a percentage of total
revenues, services revenue remained constant at 37% in the first quarter of
1998 and 1999.
Cost of Software License Revenue. Cost of software license revenue consists
primarily of the salaries and related costs for our documentation department,
the production of documentation for our InterMail products, and the cost of
third party products integrated into our products or resold by us. Cost of
software license revenue decreased $109,000, or 22%, from $485,000 for the
three months ended March 31, 1998 to $376,000 in the same period in 1999. The
decrease was due to the fact that in the first quarter of 1998, we resold a
third party database to one of our InterMail Mx customers, and the cost of that
software was included in cost of software license revenue in that quarter. In
the first quarter of 1999, we did not resell any third-party software, and did
not have the associated costs.
Cost of Services Revenue. Cost of services revenue includes salaries and
related costs of our consulting services and customer support organizations,
cost of third parties contracted to provide consulting services to our
customers, and an allocation of our facilities and depreciation expenses. Cost
of services increased $397,000, or 24%, from $1.6 million for the three months
ending March 31, 1998 to $2.0 million in the same period in 1999. The increase
in cost of services was primarily due to an increase in our consulting and
support organizations from 26 employees at March 31, 1998 to 43 employees at
March 31, 1999 to support our larger customer base. The improvement in gross
margin from 9% to 32% on services revenue was substantially attributable to
improved margins on consulting projects.
Sales and Marketing. Sales and marketing expense consists primarily of
salaries and benefits of our sales, marketing, product management and business
development organizations, sales commissions, marketing programs, and an
allocation of our facilities and depreciation expenses. Sales and marketing
expense increased by $1.3 million, or 56%, from $2.3 million for the three
months ended March 31, 1998 to $3.6 million in the same period in 1999. The
increase in sales and marketing expense was due to growth in our global sales
and product management organizations. The total number of employees in the
sales and marketing organization increased from 40 at March 31, 1998 to 53 at
March 31, 1999.
27
<PAGE>
Research and Development. Research and development expense consists primarily
of salaries and benefits of our engineering and quality assurance
organizations, and an allocation of our facilities and depreciation expenses.
Research and development expense increased by $606,000, or 28%, from $2.1
million for the three months ended March 31, 1998 to $2.7 million in the same
period in 1999. The increase in research and development expense was primarily
due to an increase in our development organization from 58 employees at March
31, 1998 to 69 employees at March 31, 1999. As a percentage of total revenues,
research and development expense decreased from 43% for the three months ended
March 31, 1998 to 34% in the same period in 1999, primarily due to the benefit
of spreading the cost of research and development over greater total revenues.
General and Administrative. General and administrative expense consists
primarily of salaries and benefits of our finance, human resources and legal
services organizations, third party legal, accounting, and other professional
services fees, and an allocation of our facilities and depreciation expenses.
General and administrative expense increased by $218,000, or 23%, from $960,000
for the three months ended March 31, 1998 to $1.2 million in the same period in
1999. The increase in general and administrative expense was primarily due to
increased fees for accounting and legal services and one-time relocation costs
for a key executive hired in February 1999.
Other (Income) Expense. Other (income) expense consists primarily of interest
expense associated with our credit facility and interest income. Total other
(income) expense increased $67,000, or 74%, from $90,000 for the three months
ended March 31, 1998 to $157,000 in the same period in 1999. The increase was
primarily related to an increase in interest expense associated with an
increase in the amount borrowed under our credit facility.
Provision for Income Taxes. For the three months ended March 31, 1999, we had
a tax provision of $68,000 related to foreign withholding taxes.
Historical Net Loss Per Share. Historical net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, without giving effect to the acquisition of
Mobility.Net. Historical net loss per share decreased by $0.03, or 27%, from
$(0.11) in the three months ended March 31, 1998 to $(0.08) in the same period
in 1999. The decrease in historical net loss per share was primarily due to the
operating factors discussed above.
Comparison of Years Ended December 31, 1997 and 1998
Software Licenses. Software licenses revenue increased $9.6 million, or 122%,
from $7.9 million in 1997 to $17.5 million in 1998. The increase in software
license revenue was primarily due to an increase in the number of service
providers worldwide using InterMail Mx for their consumer email offering.
Software license revenue from InterMail Mx increased 291% from 1997 to 1998. In
addition, software license revenue from InterMail Post.Office increased 36%
from 1997 to 1998 as we continued to expand sales of InterMail Post.Office into
the small to medium size service provider market. During 1998, we received
$619,000 of software license revenue from the resale of a third party database
to our InterMail Mx customers as compared to $94,000 during 1997.
Services. Services revenue is primarily derived from consulting services,
maintenance, and support contracts, and training. Services revenue increased
$5.4 million, or 191%, from $2.8 million in 1997 to $8.2 million in 1998. As a
percentage of total revenues, services revenue increased from 26% in 1997 to
32% in 1998. The increase in services revenue was due to a 303% increase in
professional services revenue from 1997 to 1998 as the number of consulting
projects increased, including a large InterMail Mx installation for which we
recognized $2.4 million in services revenue.
28
<PAGE>
In addition, support and maintenance revenue increased 116% from 1997 to 1998
as our customer base grew. The increase in services revenue as a percentage of
total revenues was primarily due to the recognition of services revenue from
this large InterMail Mx installation.
Cost of Software License Revenue. Cost of software license revenue consists
primarily of the salaries and related costs for our documentation department,
the cost of third party products integrated into our products or resold by us
and production of documentation for our InterMail products. Cost of software
license revenue increased by $879,000, or 128%, from $689,000 in 1997 to $1.6
million in 1998. This increase was primarily due to a $433,000 increase
resulting from the resale of third party software used in conjunction with our
InterMail Mx product and, to a lesser extent, a $317,000 increase due to growth
in the number of employees in our documentation department.
Cost of Services Revenue. Cost of services revenue includes salaries and
related costs of our consulting services and customer support organizations,
cost of third parties contracted to provide consulting services to our
customers, and an allocation of our facilities and depreciation expenses. Cost
of services revenue increased by $4.8 million, or 179%, from $2.7 million in
1997 to $7.5 million in 1998. Cost of services during this period increased
commensurate with the increase in the number of professional services
deployments. We expect cost of services to increase in absolute dollars in
future periods primarily due to anticipated growth in the professional services
group.
Sales and Marketing. Sales and marketing expense consists primarily of
salaries and benefits of our sales, marketing, product management and business
development organizations, sales commissions, marketing programs, and an
allocation of our facilities and depreciation expenses. Sales and marketing
expense increased by $2.2 million, or 25%, from $8.6 million in 1997 to
$10.8 million in 1998. Substantially all of this increase was due to
significant expansion in our global direct sales organization, primarily in
North America. The total number of employees in the sales and marketing
organization increased from 37 at the end of 1997 to 53 at the end of 1998. The
decrease in sales and marketing expense as a percentage of total revenues from
81% in 1997 to 42% in 1998 was primarily due to the recognition of InterMail Mx
software licenses revenue from contracts signed in 1997. We expect sales and
marketing expenses to increase in absolute dollars in future periods, primarily
due to the planned expansion of our international sales and marketing
operations.
Research and Development. Research and development expense consists primarily
of salaries and benefits of our engineering and quality assurance organization,
and an allocation of our facilities and depreciation expenses. Research and
development expense increased by $2.4 million, or 38%, from $6.3 million in
1997 to $8.7 million in 1998. The increase in research and development expense
was primarily due to costs associated with the development and testing of our
new InterMail Kx product package, which was introduced in March 1999, and, to a
lesser extent, the cost of porting our InterMail messaging technology to the
Hewlett-Packard and IBM Unix platforms. The decrease in research and
development as a percentage of total revenues from 59% in 1997 to 34% in 1998
was primarily due to an increase in software licenses revenue from products
developed in previous periods. We believe that continued investment in research
and development is critical to attaining our strategic objectives and, as a
result, expect our research and development expenses to increase in absolute
dollars in future periods.
General and Administrative. General and administrative expense consists
primarily of salaries and benefits of our finance, human resources and legal
services organizations, third party legal, accounting, and other professional
services fees, and an allocation of our facilities and depreciation expenses.
General and administrative expense increased by $943,000, or 30%, from $3.1
million in
29
<PAGE>
1997 to $4.0 million in 1998. The increase in general and administrative
expense was due in significant part to a $431,000 increase in the provision for
doubtful accounts. The decrease in general and administrative costs as a
percentage of total revenues was primarily due to our increase in software
license revenue. We expect general and administrative expenses to increase in
absolute dollars in future periods as we continue to build our infrastructure
and due to the costs of being a public company.
Legal Matter. We accrued in 1997 for an asserted claim related to a minimum
royalty obligation of $1 million purportedly owed by us under a licensing
agreement with a third party technology partner. In February 1999, we and the
third party entered into an agreement to settle all outstanding claims. Under
the settlement agreement, we agreed to pay the third party a minimum of
$400,000, with a contingent obligation to pay an additional $200,000 if we do
not take certain actions prior to December 31, 1999.
Other Income (Expense). Other income (expense) consists primarily of interest
expense associated with our credit facility and interest income on short-term
investments. Interest expense increased $586,000, or 993%, from $59,000 in 1997
to $645,000 in 1998. The increase in interest expense was primarily related to
an increase in interest paid for our credit facility. The credit facility was
opened in November 1997, resulting in only two months of interest expense for
1997.
Provision for Income Taxes. For the year ended December 31, 1998, we had a
tax provision of $446,000 related to foreign withholding taxes.
As of December 31, 1998, we had federal and state net operating loss
carryforwards of approximately $15.9 million and $5.8 million, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2010 through 2018 for federal and 2001 to 2003 for state, if not
utilized. On December 31, 1998, we also had federal and state research and
development tax credit carryforwards of approximately $462,000 and $150,000,
expiring in 2011 to 2013. We also have a foreign tax credit of approximately
$382,000, which will expire in 2003. As a result of changes in our equity
ownership resulting from our convertible preferred stock financings and this
offering, utilization of the net operating losses and tax credits may be
subject to substantial annual limitations. This is due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and tax credits before utilization. See Note 5 of Notes to
Supplementary Consolidated Financial Statements.
Stock-based Compensation. We recorded deferred compensation of approximately
$1.5 million in 1998, representing the difference between the exercise prices
of options granted to employees during 1998 and the deemed fair value for
accounting purposes of our common stock on the grant dates. We amortized
deferred compensation expense of $48,000 during 1998. This compensation expense
relates to options awarded to individuals in all operating expense categories.
Total deferred compensation at December 31, 1998 of $1.45 million is being
amortized over the vesting periods of the options. The amortization of deferred
compensation recorded will approximate $416,000, $409,000, $331,000, and
$290,000 for the years 1999, 2000, 2001, and 2002.
Historical Net Loss Per Share. Historical net loss per share decreased $0.15,
or 33%, from $(0.46) in the year ended December 31, 1997 to $(0.31) in the same
period in 1998. The decrease in historical net loss per share was primarily due
to the operating factors discussed above.
30
<PAGE>
Comparison of Years Ended December 31, 1996 and 1997
Software Licenses. Software license revenue increased by $1.3 million, or
20%, from $6.6 million in 1996 to $7.9 million in 1997. The license of
InterMail Post.Office source code to Netscape accounted for $1.4 million of the
total $6.6 million of software license revenue in 1996. The increase in
software license revenue from 1996 to 1997 was primarily due to an increase in
sales of InterMail Post.Office into the market for smaller service providers.
Software license revenue from InterMail Post.Office increased 28% from 1996 to
1997.
Services. Services revenue increased by $1.5 million, or 112%, from $1.3
million in 1996 to $2.8 million in 1997. The Netscape agreement accounted for
$500,000 of the $1.5 million in services revenue in 1996. As a percentage of
total revenues, services revenue increased from 17% in 1996 to 26% in 1997. The
increase in services revenue was primarily due to a 170% increase in revenue
from consulting services provided by our professional services organization
formed in 1997, and, to a lesser extent, a 76% increase in support and
maintenance revenue.
Cost of Software Licenses. Cost of software license increased by $471,000, or
216%, from $218,000 in 1996 to $689,000 in 1997. The increase from 1996 to 1997
was primarily due to an increase in the number of employees in our
documentation organization supporting our expanded product line.
Cost of Services. Cost of services increased by $1.9 million, or 249%, from
$767,000 in 1996 to $2.7 million in 1997. The increase in cost of services was
primarily due to an expansion of the consulting services provided by our
professional services organization. The decrease in gross margins from 42% to
5% was primarily due to the initial growth and expense associated with the
formation of our professional services organization.
Sales and Marketing. Sales and marketing expense increased by $4.0 million,
or 89%, from $4.6 million in 1996 to $8.6 million in 1997. Sales and marketing
as a percentage of total revenues increased from 58% in 1996 to 81% in 1997.
The increase in sales and marketing expense in absolute dollars and as a
percentage of total revenues was primarily due to an increase in spending on
marketing events, and, to a lesser extent, growth in the sales and product
management organizations.
Research and Development. Research and development expense increased by $2.9
million or 82% from $3.5 million in 1996 to $6.3 million in 1997. Research and
development as a percentage of total revenues increased from 44% in 1996 to 59%
in 1998. The increase in absolute dollars and as a percentage of total revenues
was primarily due to expansion of the research and development organization to
further focus on the products and platform requirements of the service provider
market.
General and Administrative. General and administrative expense increased by
$1.0 million, or 45%, from $2.1 million in 1996 to $3.1 million in 1997. The
increase in general and administrative expense was primarily due to growth in
the executive, finance, and human resources organizations.
Legal Matter. In 1997, we expensed $1.0 million for royalties claimed by a
third party in this matter. The parties entered into a settlement agreement in
February 1999 with respect to this claim.
Other Income (Expense). Interest income increased by $211,000, or 243%, from
$87,000 in 1996 to $298,000 in 1997. The increase in interest income was
primarily due to an increase in
31
<PAGE>
interest derived from investment of the proceeds of two equity financings in
October 1996 and February 1997.
Provision for Income Taxes. No provision for federal or state income taxes
was recorded because we experienced cumulative net losses from inception
through 1997.
Historical Net Loss Per Share. Historical net loss per share increased $0.33,
or 254%, from $(0.13) in the year ended December 31, 1996 to $(0.46) in the
same period in 1997. The increase in historical net loss per share was
primarily due to the operating factors discussed above.
32
<PAGE>
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for the five quarters ended March 31, 1999. You should read the following table
in conjunction with our Supplementary Consolidated Financial Statements and the
Notes included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited Supplementary Consolidated
Financial Statements. This table includes all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for the quarters
presented. You should not draw any conclusions about our future results from
the results of operations for any quarter.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1998 1999
--------- -------- ------------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Software licenses..... $ 3,098 $ 4,325 $ 4,557 $ 5,482 $ 5,058
Services.............. 1,800 1,815 2,320 2,222 3,013
------- ------- ------- ------- -------
Total revenues...... 4,898 6,140 6,877 7,704 8,071
Cost of revenues:
Software licenses..... 485 273 294 516 376
Services.............. 1,647 1,586 2,004 2,214 2,044
------- ------- ------- ------- -------
Total cost of
revenues........... 2,132 1,859 2,298 2,730 2,420
------- ------- ------- ------- -------
Gross profit............ 2,766 4,281 4,579 4,974 5,651
Operating expenses:
Sales and marketing... 2,284 2,345 2,779 3,361 3,560
Research and
development.......... 2,135 2,072 2,189 2,320 2,741
General and
administrative....... 960 973 938 1,165 1,178
Legal matter.......... -- -- -- (400) --
------- ------- ------- ------- -------
Total operating
expenses........... 5,379 5,390 5,906 6,446 7,479
------- ------- ------- ------- -------
Loss from operations.... (2,613) (1,109) (1,327) (1,472) (1,828)
Other income (expense):
Interest income
(expense) net........ (51) (90) (141) (119) (145)
Other................. (39) 30 (9) (17) (12)
------- ------- ------- ------- -------
Total other income
(expense).......... (90) (60) (150) (136) (157)
------- ------- ------- ------- -------
Loss before income
taxes.................. (2,703) (1,169) (1,477) (1,608) (1,985)
Provision for income
tax.................... 1 -- -- 445 68
------- ------- ------- ------- -------
Net loss................ $(2,704) $(1,169) $(1,477) $(2,053) $(2,053)
======= ======= ======= ======= =======
</TABLE>
33
<PAGE>
Total revenues increased in each of the five quarters ended March 31, 1999 as
the number of customers using our products and services increased. Commensurate
with total revenue growth, total cost of revenues and total operating expenses
have generally increased from quarter to quarter. Software license revenue
declined slightly from the fourth quarter of 1998 to the first quarter of 1999,
as a result of three primary factors. First, several large InterMail Mx
deployments during the fourth quarter of 1998 were completed before year-end,
which otherwise would have carried over into the new year. Second, the release
of InterMail Mx on the HP-UX platform was not available until March 1999,
impacting the completion of InterMail Mx deployments for customers on that
platform. Third, the release of InterMail Kx in March 1999, and the resulting
product transition issues associated with introducing a new product, had an
impact on sales during the first quarter of 1999 to customers who did not have
enough time to make a decision whether to purchase the new product before the
end of the quarter. The decrease in services revenue from the quarter ended
September 30, 1998 to the quarter ended December 31, 1998 was due to a decrease
in the number of professional services projects in the fourth quarter.
The increase in cost of software licenses in the quarter ended March 31, 1998
and in the quarter ended December 31, 1998 was primarily due to the cost of
reselling third party software to our customers. The increase in cost of
services revenue in the quarter ended December 31, 1998 was due to the recorded
costs associated with a large professional services project which were deferred
from previous quarters.
Our operating results may fluctuate substantially in the future as a result
of a variety of factors, many of which are outside our control. These factors
include:
. the volume and timing of mailbox activation by our InterMail Mx
service provider customers;
. the length of our sales and product deployment cycles for our
InterMail products;
. our ability to attract and retain customers in new markets, including
Europe and Asia;
. our continuing dependence on the InterMail line of products and
related services for all of our revenues;
. our dependence on a small number of large customers;
. our dependence on continued growth of the service provider market;
. any delays in our introduction of new products or enhancements;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. the announcement or introduction of new or enhanced products or
services by our competitors;
. adverse customer reaction to technical difficulties or "bugs" in our
software;
. the growth rate and performance of the Internet in general and of
Internet messaging in particular;
. the volume of sales by our distribution partners and resellers;
. any slowdown in software and systems spending or in general business
expansion by service providers in the latter part of 1999 and the
beginning of 2000 in connection with Year 2000 issues; and
. our pricing policies and those of our competitors.
34
<PAGE>
Due to the foregoing factors, our quarterly operating results have fluctuated
significantly and we expect that future operating results will be subject to
similar fluctuations. Our revenue from large-scale installations of our
software depends heavily on the customers' timing of deployment of our
software, the migration of their installed base of users to our software
platform, and the rate of growth of their customer base. Accordingly, a delay
in a deployment past the end of a particular quarter could negatively impact
our results of operations for that quarter. It is possible that in future
quarters our operating results could fall below the expectations of public
market analysts or investors. In this event, the price of our common stock may
fall.
Liquidity and Capital Resources
We have funded our operations primarily through the private placement of
equity securities, which have raised net proceeds of approximately $30.0
million to date, and through a bank line of credit. At March 31, 1999, our
principal sources of liquidity included approximately $5.4 million of cash and
cash equivalents, and a bank credit facility. This credit facility provides for
a total line of credit not to exceed the lesser of $15.0 million (of which we
may draw down up to $2.5 million as an equipment acquisition loan), or an
amount based on certain receivables collection criteria. As of March 31, 1999,
we had borrowed $7.9 million and an additional $8.3 million was available under
this credit facility. Borrowings under this line of credit bear interest at
prime rate plus 1.5% and borrowings under the equipment acquisition loan bear
interest at prime rate plus 1.75% and all borrowings are secured by
substantially all of our assets. The credit facility includes financial and
reporting covenants and expires on August 31, 2000. We intend to repay this
credit facility using a portion of the net proceeds from this offering.
Net cash used in operations for the year ended December 31, 1998 and the
three months ended March 31, 1999 was $10.1 million and $883,000. Cash used in
operating activities for the year ended December 31, 1998 was primarily due to
our net loss of $7.4 million and an increase in accounts receivable of $7.1
million, partially offset by increases in depreciation and amortization and
accrued payroll and related liabilities of $1.7 million and $759,000. Cash used
in operating activities for the three months ended March 31, 1999 was primarily
due to our net loss of $2.1 million, partially offset by decreases in accounts
receivable and increases in accounts payable of $926,000 and $581,000.
Net cash used in investing activities decreased by $2.7 million from $3.6
million for the year ended December 31, 1997 to $912,000 in the same period in
1998. The decrease from 1997 to 1998 was primarily due to a $1.2 million
decrease in capital expenditures, from $2.6 million in 1997 to $1.4 million in
1998. The expenditures in 1997 were primarily attributable to leasehold
improvements and furniture for one of our Santa Barbara, California facilities
and our Lexington, Massachusetts facility. Cash provided by investing
activities for the three months ended March 31, 1999 was primarily related to
$496,000 in maturities of short-term investments offset by $307,000 in
acquisitions of property and equipment.
Net cash provided by financing activities decreased $2.3 million from $12.7
million for the year ended December 31, 1997 to $10.4 million in 1998. Net cash
from financing activities for the years ended December 31, 1997 and 1998
resulted primarily from proceeds from the sale of preferred stock of $7.4
million and $6.8 million, and borrowings under the credit facility of $4.4
million and $3.0 million. Cash provided by financing activities for the three
months ended March 31, 1999 was primarily related to the exercise of stock
options and proceeds from our note payable to a bank in the amounts of $416,000
and $279,000. In April 1999, we issued preferred stock to Hewlett-Packard for
aggregate proceeds of approximately $10.0 million.
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We currently anticipate that the net proceeds from the issuance of Series D
Preferred Stock on April 5, 1999, and the net proceeds from this offering,
together with our current cash, cash equivalents, short-term investments and
credit facility, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, we may need to raise additional funds in future periods through public
or private financings, or other arrangements. Any additional financings, if
needed, might not be available on reasonable terms or at all. Failure to raise
capital when needed could harm our business, financial condition and results of
operations. If additional funds are raised through the issuance of equity
securities, additional dilution could result. In addition, any equity
securities issued might have rights, preferences or privileges senior to our
common stock.
Year 2000 Readiness Disclosure
Background
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
ready could result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
State of Readiness
We have instituted a Year 2000 Program Plan to address Year 2000 consequences
that may materially affect us. Our Program Plan consists of six, sometimes
concurrent, phases: (1) inventory, (2) prioritization, (3) assessment, (4)
contingency planning, (5) remediation, and (6) monitoring and status reporting.
We began taking preliminary inventory prioritization, and assessment steps in
the first quarter of 1998. To date, we have substantially completed our
inventory, prioritization and assessment phases. We have identified and
inventoried core business functions and their components, including our own
products and integrated third-party software, hardware, software, embedded
systems, critical business partnerships and external infrastructure services.
We defined and assigned preliminary criticality ratings to each of the
inventoried components and we currently are in the process of validating and
refining our inventory and prioritization processes. We expect to complete
these phases by the end of the second quarter of 1999, although no assurances
can be made that the inventory or prioritization process will not be redefined
at a later date as we continue to monitor and refine our plans and goals.
Assessment of the various inventoried items has included documentation and
review of the Year 2000 compliance status of third-party vendors and suppliers
of our hardware, software and embedded systems, business partners, and external
infrastructure services. We have received assurances from most of our key
hardware and software suppliers and partners that their products and services
are Year 2000 compliant or that they are also progressing through Year 2000
compliance programs of their own. We will either test products and services
that are not yet compliant or work with the suppliers to gain assurances that
we can rely upon their products and services. For the components of our
operations that are deemed most critical, we are validating these assessments
and accordingly may reevaluate our scheduling and resource allocations as
needed.
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Currently, our own quality assurance personnel are testing our products that
are used by a substantial majority of our customers. Additionally, we have
enlisted outside consultants to review and advise upon our testing methods, but
we have not secured outside, independent testing services. Our products
interoperate with and depend upon other software, hardware and firmware for
data, including date-related data. Based on our testing to date, we believe
that our products, when interoperating with Year 2000 compliant software,
hardware and firmware, are able to manage and manipulate date-related data in a
Year 2000 compliant manner.
We are a comparatively new enterprise, and, accordingly, the majority of the
software and hardware we use to manage our business was purchased or developed
by us within the last 24 months. While this fact pattern does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology we use to manage our business is not
based upon legacy hardware and software systems. Legacy systems are hardware
and software systems that were developed in previous decades when there was
less awareness of Year 2000 issues. Generally, hardware and software design
within the current decade and the past several years in particular has given
greater consideration to Year 2000 issues. However, we have determined that our
financial reporting system requires an update to be Year 2000 compliant and we
intend to make the system compliant through an upgrade to be completed by the
end of the third quarter of 1999. Until completion of the assessment phase, we
will not be able to completely evaluate whether contingency plans are warranted
or what other components of our systems need to be remediated through
replacement or revision. We expect to complete assessment and any necessary
remediation by the third quarter of 1999.
We have also applied program management practices by monitoring and status
reporting on the progress of our Year 2000 Program. There is a program manager
assigned to monitor and remind various staff of deadlines and status report due
dates, as well as to keep all staff synchronized. Monitoring and status
reporting is an ongoing phase throughout the life of the program.
Costs
To date, we have not incurred significant incremental costs in order to
comply with Year 2000 requirements for our products or internal systems. We
have incurred costs of approximately $30,000 for Year 2000 consulting provided
by an independent third party. We do not believe that we will incur significant
incremental costs in the foreseeable future except for costs associated with
the remediation and independent testing of various components of our systems,
which we do not currently believe will exceed an additional $70,000. However,
we cannot be sure that Year 2000 issues will not be discovered in our products
or internal software systems and, if any issues are discovered, we cannot be
sure that the costs of making such products and systems Year 2000 ready will
not harm our business, operating results, and financial condition.
Risks
Our customers and we rely heavily upon information technology systems and the
Internet to conduct our businesses and internal operations. Our customers'
success in maintaining Year 2000 compliance is significant to our ability to
generate revenues and execute our business plan. We cannot be sure that any
other software application, database software or computer hardware of our
customers which interfaces with our products (and which may be necessary in
order to use our products) is Year 2000 ready. We also cannot be sure that
implementations of our products on our customers' systems are, or will be, Year
2000 ready. Interruptions in our customers' services and on-
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line activities caused by Year 2000 problems could harm our revenues to the
extent that any interruptions limit or delay our customers' ability to provide
messaging services to end users. Year 2000 complications may disrupt the
operations, viability, or commercial acceptance of the Internet generally,
which also could harm our business, operating results and financial condition.
A significant percentage of our customers are located overseas and we believe
that the level of Year 2000 readiness may be lower in these areas. Accordingly,
our overseas customers may have greater risks of Year 2000 problems.
If we, our customers, our providers of hardware and software, or external
infrastructure providers fail to remedy any Year 2000 issues, our business and
internal operations could be interrupted and our reputation, business,
operating results, and financial condition could suffer. We would consider an
interruption of our business and internal operations to be the most reasonably
likely unfavorable result of any failure by us, or failure by the third parties
upon which we rely, to achieve Year 2000 compliance.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of lawsuits regarding Year 2000 compliance
issues against other software vendors. Because we are in the business of
selling software products, our risk of being subjected to lawsuits relating to
Year 2000 issues with our software products is likely to be greater than that
of companies in other industries. Because computer systems may involve
hardware, firmware and software components from different manufacturers, it may
be difficult to determine which component in a computer system may cause a Year
2000 issue. As a result, we may be subjected to Year 2000 related lawsuits
independent of whether our products and services are Year 2000 ready. Any Year
2000 related lawsuits, whether or not determined in our favor or settled by us,
may be costly and may divert the efforts and attention of our management from
normal business operations. The impact of any Year 2000 related lawsuits cannot
be determined at this time.
Contingency Plans
Presently, we believe we are unable to reasonably estimate the duration and
extent of any disruptions that may be due to Year 2000 issues, or quantify the
effect that it may have on our future revenues. We have yet to develop a
comprehensive contingency plan to address the issues that could result from any
disruption due to Year 2000 issues. We are prepared to develop a comprehensive
contingency plan if our ongoing assessment leads us to conclude we have
significant exposure based upon the likelihood of a disruption due to Year 2000
issues. Responses received from all third-party vendors and service providers
will be taken into account in determining the need for and nature and extent of
any contingency plans. We intend to develop any required contingency plan by
the end of the third quarter of 1999.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Software for Internal Use" (SOP 98-1), which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not
expected to have a material impact on our financial condition or results of
operations. To date, we have not incurred significant costs developing
internal-use software which would be capitalizable.
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). We are required to adopt FAS 133 for the
fiscal year ending December 31, 2000. FAS 133 established methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. To date, we have not entered
into any derivative financial instruments or hedging activities.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4 and
SOP 98-9, "Software Revenue Recognition." These statements provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. This guidance is effective for our transactions entered
into subsequent to January 1, 1998. The application of certain provisions were
deferred until fiscal years beginning on or after March 15, 1999. Final
adoption of these provisions is not expected to have a material impact on our
financial condition or results of operation.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and sell in North America, Asia and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As all sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Our interest expense is sensitive to changes in the
prime rate. Due to the nature of our short-term investments and debt, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
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BUSINESS
Company Overview
Software.com is a leading provider of email and other Internet messaging
applications for providers of Internet communications and services. These high
performance applications are built to run on our Internet standards-based
messaging platform that can increase capacity, or scale, to support millions of
consumer and business users. Using our software, our service provider customers
are able to deliver a variety of messaging services, including Web browser-
based email, desktop client-based email, outsourced or "managed" business
messaging, and Internet-based integrated faxmail and voicemail. In order to
deliver complete messaging solutions, we also offer our customers a broad range
of consulting and customer support services that complement our product
offerings.
Industry Background
People and businesses are increasingly relying on the Internet to access and
share information. International Data Corporation, or "IDC," estimates that
there were approximately 159 million users of the Internet at the end of 1998
and that the number of users will grow to approximately 410 million by the end
of 2002. A rapidly growing number of businesses utilize the Internet to market
and sell their products and streamline business operations. The Internet's
explosive growth creates tremendous market opportunities for the companies that
connect people and businesses to the Internet, provide applications for these
users or distribute content over the Internet. These companies, which we refer
to as service providers, include traditional telecommunications carriers,
Internet service providers and wholesalers, cable-based Internet access
providers, competitive local exchange carriers, and Internet destination sites
or portals. Many of these service providers have experienced rapid growth as
businesses and consumers increasingly rely on the Internet as a communications
and transactional medium.
Competition in the Service Provider Market
The rapid increase in demand for Internet access has led to intense
competition among service providers to attract and retain subscribers. Service
providers developing large, capital-intensive communications networks require
large subscriber bases in order to leverage their network investments. Other
service providers, such as Internet portals are seeking to attract as many
users as possible in order to establish mass Internet communities for the
purpose of disseminating services and third party advertisements. In addition,
many consumers and businesses are beginning to utilize the Internet, as opposed
to traditional voice networks, for voice and fax transmissions, leading to
further growth in Internet traffic, and increased competition for users among
service providers.
As a result of these trends, service providers are becoming increasingly
focused on providing applications and services that help attract and retain
customers. Internet electronic mail, or Internet email, has proven to be one of
the most popular applications on the Internet and a compelling application for
attracting subscribers. IDC estimates that the number of consumer mailboxes
hosted by service providers in the United States will grow from 18 million in
1996 to 109 million in 2002. Internet email is also a key application for
retaining subscribers, because once a user gives out his or her unique Internet
email address to friends and colleagues, changing to a new service provider
means switching addresses and accounts and reconnecting with these people.
The growth in the use of Internet email has also attracted businesses, as
email becomes a routine method of communicating between employees and with
customers, vendors, and partners. IDC
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estimates that the number of business email users will grow from 142 million in
1998 to 281 million worldwide in 2002. Historically, businesses have deployed
on-premise software applications for their email systems, meaning that the
businesses have bought both the email software and hardware necessary to
support their email system, and have operated the system themselves. As a cost-
effective alternative to deploying and running an on-premise solution, many
businesses are increasingly evaluating outsourced, or "managed," messaging in
which a service provider operates the email system for a business. As service
providers seek to differentiate offerings to attract more business users,
service providers are expanding basic email service to create new and
innovative Internet messaging services, including "fail-safe" email and new
types of integrated messaging services such as faxmail and voicemail. Once a
business selects an email provider, the costs of switching are high due to the
difficulty of moving the data stored on the service provider's system.
Challenges Facing Today's Service Providers
To take advantage of opportunities in both consumer and business messaging,
service providers must deploy messaging services capable of meeting the
evolving needs of these groups with assurances that users can always reach
their mailboxes and that their messages will not be lost. Service outages or
the loss of messages can lead to adverse publicity for service providers, and
can result in the loss of substantial numbers of subscribers. In order to
leverage infrastructure investments, service providers must provide systems
that can grow to accommodate hundreds of thousands, or even millions, of users
and the rapidly increasing number of messages being sent by their larger user
bases. IDC estimates that the number of email messages sent in the United
States has grown from an average of 683 million per day in 1996 to 2.1 billion
per day in 1998, and projects that the number will grow to 7.9 billion per day
in 2002.
Most service providers, however, have neither the products and services in
place nor the existing internal technical capabilities to address this enormous
growth. To date, most service providers have built their own basic email
services by making proprietary modifications to a free, public domain email
program called Sendmail. There are limitations, however, to Sendmail's ultimate
capabilities. Sendmail was originally designed to provide email for small
networks and does not readily scale to the levels needed by a service provider
seeking to leverage costs across a broad user base. Further, Sendmail provides
only basic email functions and lacks the essential attributes needed for highly
reliable and available operations, and the feature sets required to provide
business messaging, faxmail, and voicemail applications.
As an alternative to Sendmail, some service providers have deployed messaging
products designed for the individual business, or enterprise, such as Microsoft
Exchange or Lotus Notes. Enterprise products, while providing rich feature
sets, are costly and face scaling limitations similar to those of Sendmail,
typically supporting a maximum of 2,000 users on a single server. Another
alternative for a service provider is to contract with an email service
wholesaler to run its email service, while the service provider resells email
to its individual and business customers. While this approach helps to address
the service providers' lack of internal technical capabilities in the short
term, it represents a loss in control for the service provider over the quality
of the service. This approach also distances the service provider from the user
base it is trying to retain, as the service provider is forced to rely on the
wholesaler for access to and key information about its subscribers. The issues
of scalability, reliability, availability, and lack of a core competency in
offering basic email service are only exacerbated when a service provider looks
to provide enhanced services, such as managed messaging, or more advanced
features, such as faxmail and voicemail integration and sophisticated Web-based
interfaces.
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The Software.com Solution
Software.com is a leading developer and provider of scalable, high-
performance Internet messaging applications. Our service provider customers
deploy these applications to deliver advanced messaging services to their
consumer and business subscribers. Our products have been proven to deliver
messaging services in some of the most demanding service provider environments,
including those of @Home Network, AT&T WorldNet(R) Service, Excite Inc., GTE
Internetworking Services, and Telecom Italia Net. As of March 31, 1999, we had
licensed over 37 million mailboxes and we estimate that over 28 million of
these mailboxes had been activated. We combine our software products and
services to create an advanced messaging solution that provides the following
benefits to service providers:
High Scalability
Our products are designed to easily scale and enable a service provider to
offer an increasing array of messaging services to a rapidly-growing number of
subscribers. Our entry-level products support up to several hundred thousand
mailboxes, and we currently support more than 10 million mailboxes on our
InterMail Mx product. We believe by spreading its operating costs across a
growing user base, a service provider not only expands its audience and thus
its revenue opportunities, but also realizes economies of scale. Regardless of
the size of the subscriber base, we allow service providers to easily manage
their user bases and messaging services. Our unique architecture enables us to
build messaging applications based on flexible and interchangeable components.
As a service provider grows in terms of number of users, type of users and
volume of messaging traffic, our InterMail Kx and InterMail Mx architecture
enables the service provider to add or upgrade individual components as
necessary without changing the other components or adversely impacting the
availability of the services.
High System Availability and Reliability
We design our products to be highly available, meaning that a user can always
access the messaging service, as well as highly reliable, meaning that the user
will not lose messages that are sent or received. As people and businesses
become more demanding with respect to Internet messaging, service providers
must continually meet increasing standards of availability and reliability. Our
component-based architecture is fault-tolerant, meaning that a service provider
can institute multiple, independent back-up procedures to protect against the
failure of individual system components. We believe that by using our products
to offer highly available and reliable messaging services, service providers
increase customer satisfaction and reduce subscriber turnover.
Single Platform with Multiple Messaging Applications
Our technology enables service providers to create, manage, and host multiple
offerings on the same messaging platform. A service provider can therefore
easily tailor feature sets to meet the different and evolving needs of
individual segments of its subscriber base. For instance, our messaging
platform allows a service provider to simultaneously host mass-market consumer
messaging services, its own branded premium consumer messaging services, and
managed messaging services for businesses. This same platform is both open and
extensible, meaning that we, as well as customers, partners, integrators, and
others, can provide additional messaging applications based on our core
technology. In addition, the technology that we recently acquired from
Mobility.Net is designed to permit multiple Web-based applications as
extensions of our messaging platform. We intend to make these and other new
services available to service providers as they become available.
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Fully-Integrated Service Offerings
In addition to software products, we offer business planning, system design,
capacity planning, on-site operations training, and integrated support services
to help service providers rapidly pilot, launch and scale innovative new
service offerings. Our professional services personnel have designed, deployed,
and maintained messaging applications at some of the largest service provider
sites in the world, bringing substantial experience in real-world
implementations to each customer. By leveraging our experience, we believe that
customers gain significant time-to-market advantages, improve operational
excellence, and, ultimately, increase customer retention. After completion of a
consulting engagement, our professional services staff passes essential, site-
specific knowledge to our support staff to facilitate a smooth transition from
deployment to ongoing customer care. We support our customers' sites on a 24
hour basis and have developed sophisticated tracking and response systems to
provide customers with the highest quality support.
Software.com Strategy
Our goal is to be the leading provider of Internet software applications
designed for service providers. Key elements of our strategy include:
Focus Exclusively on Service Providers. We have organized our products
and our company to exclusively target the service provider market. We
believe that our exclusive focus on service providers enables us to better
identify and offer the feature sets and attributes that are required for
our products to be successful in the service provider marketplace. In
particular, to address the rapid growth of a service provider's user base
and the importance of messaging in attracting and retaining subscribers, we
have designed our products to scale to support millions of users while
meeting increasing standards of message availability and reliability. In
contrast, we believe that many of our competitors attempt to address the
service provider market by modifying products originally developed for use
in on-premise corporate networks. We have created a structured development
process, including an innovative, proprietary automated system for testing
applications under the loads experienced by large service providers, as
well as a rigorous quality assurance process. These processes enable us to
build, test and release our products with a high degree of initial
reliability. In addition, we have organized all functions within the
company to best serve the service provider market. For example, our
worldwide sales, support and professional service organizations are
specifically designed to address the 24 hour operations and response times
required in the service provider marketplace.
Extend Our Position as a Leading Provider of Internet Messaging Solutions
for Service Providers. We are a leading provider of Internet email
solutions for service providers with over 37 million mailboxes licensed as
of March 31, 1999, and we estimate that over 28 million of these mailboxes
had been activated as of that date. We offer the first Internet email
application specifically designed to capitalize on the growing trend for
service providers to offer managed messaging services to small, medium and
large businesses and other organizations. In addition, we have begun our
first large scale deployment of an integrated voicemail and faxmail
solution with an existing InterMail customer, marking our entry into the
emerging market for Internet standards-based unified messaging.
Leverage Our Core Platform to Build Additional Service Provider
Applications. We have expended considerable time and financial resources to
create a scalable high performance platform for building messaging and
other data-intensive Internet applications. We believe that the core
elements of this platform will allow us to offer multiple applications
which leverage the
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base platform. We further believe that our unique architecture, development
processes, and testing methods enable us to more easily integrate new and
innovative service provider applications with our base platform. For
example, we intend to integrate Mobility.Net's Web-based technology to
enhance the performance of our existing Web interface as well as to
ultimately extend our platform through additional Web-based applications.
We may add additional applications as extensions to the platform through
internal development, partnering arrangements or the acquisition of third
party technologies.
Target Large and Well-Known Accounts. Within the service provider
marketplace, we focus our sales efforts on the world's largest service
providers. Included in this group are service providers that have large
existing user bases or whose brand name or Internet presence places them in
a position to attract users rapidly. We believe that this strategy allows
us to capture the broadest possible user base while targeting a limited
number of accounts. We also believe that winning the large, well-known
accounts helps our sales to smaller and medium sized providers by enhancing
our reputation as a leading provider of Internet messaging products in the
service provider market. We expect that the service provider industry will
continue to consolidate and that the largest members of this group will
eventually acquire and assimilate the smaller providers. We believe that
the scalability of our products allows these service providers to expand
their user base through acquisition with minimum disruption to operations
and limited incremental costs. We intend to expand the geographical
coverage of our direct sales force to focus on the largest service
providers around the world.
Leverage the Expertise of our Professional Services Organization. Our
professional services group has completed over 60 projects for some of the
largest service providers worldwide. These projects generally involve
architecting and deploying messaging solutions for these large service
providers. We will continue to use this experience to help customers
design, build, and deploy systems based on our products. In addition, this
"full service" approach allows us to understand our customers' sites so we
can better design, test, market, and deploy new products. By rotating
employees between our professional services and product development groups,
we utilize the information gained about our customers to drive product
development strategy.
Products and Services
We offer a full range of Internet messaging server applications and services
that enable service providers to support both consumer and business
subscribers. We have developed a scalable, extensible technology platform that
provides the foundation for our Internet messaging services. This platform is
the core technology that underlies our three product packages: InterMail
Post.Office, InterMail Kx, and InterMail Mx. These product packages enable
service providers to support a user base ranging from hundreds to millions of
subscribers. The following table sets forth the target customer and
architecture for these product packages:
<TABLE>
<CAPTION>
InterMail
Post.Office InterMail Kx InterMail Mx
----------- ------------ ------------
<S> <C> <C> <C>
Target Customer 100 to 25,000 users 25,000 to 250,000 250,000 users and above
users
Architecture Single server Multiple servers, Multiple servers,
distributed and distributed and modular
modular
Operating System NT, UNIX UNIX UNIX
Object Store Single multimedia Single, highly- Multiple, highly-
Technology object store parallel multimedia parallel multimedia
object store object stores
</TABLE>
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InterMail Post.Office
Designed to meet the messaging needs of small to medium size service
providers, InterMail Post.Office is typically chosen by service providers with
100 to 25,000 users, although it can scale to support up to 250,000 subscribers
on a single UNIX server. Email system administrators, or postmasters, can use
InterMail Post.Office to easily administer their entire email systems, while
allowing end users to manage their individual email accounts. InterMail
Post.Office provides a user-friendly administration interface featuring fill-
in-the-blank forms and pop-up options assisted by Web-based help links.
InterMail Post.Office offers a broad array of security features, including
multiple password protection levels and numerous user restriction settings.
InterMail Post.Office also provides a variety of features for preventing the
sending and receiving of Internet junk mail, or "spam." InterMail Post.Office
operates independently of the host computer system, making it difficult to
compromise the main system security through the email application.
InterMail Kx and InterMail Mx
The InterMail Mx and recently introduced InterMail Kx product packages are
designed to meet the rapidly evolving needs of service providers. InterMail Kx
and InterMail Mx are designed to enable service providers to offer premium
consumer, business, and Web-based messaging services from a single, integrated
solution. InterMail Kx, which we introduced in March 1999, is designed for
fast-growing, medium-sized service providers with a subscriber base of up to
250,000. InterMail Mx, which is designed for the largest service providers,
scales to support millions of subscribers. The InterMail Kx and InterMail Mx
product packages provide postmasters with a suite of powerful system
administration tools, that enable streamlined subscriber account creation and
management. InterMail Kx and InterMail Mx components run on multiple servers,
providing greater scalability, reliability, and performance than a single
server system.
Within the InterMail Kx and InterMail Mx product packages, we have developed
a broad set of customizable messaging applications, which are designated as
different editions: InterMail Web Edition, InterMail Standard Edition, and
InterMail Business Advantage Edition and the recently developed initial version
of the InterMail IP VoiceMail Edition. In addition, we have an InterMail
Consumer Advantage Edition for the InterMail Mx product package. These editions
provide a range of functionality and allow service providers to create and
customize multiple classes of service at varying price points for consumer and
business subscribers. A single InterMail Kx or InterMail Mx installation can
host multiple classes of messaging services, thereby eliminating the expense
associated with running separate systems. These capabilities help service
providers to expand market share, retain subscribers, lower total cost of
ownership, and derive increased profits from their businesses.
InterMail Web Edition--Designed for mass-market consumer offerings and
portals, InterMail Web Edition lets users read and write emails using a
standard Web browser. With InterMail Web Edition, users can access their
mailboxes from any location where they can access the Internet. Web mail is
typically used as part of mass-market offers where mailboxes are given away for
free or at a nominal cost to attract users, and any associated revenue is
generated from advertisements that are displayed when the user is reading and
composing mail. InterMail Web Edition can be fully personalized and branded by
service providers to promote brand and image. The technology we recently
acquired through our acquisition of Mobility.Net is expected to significantly
enhance the performance of our Web interface and is designed to provide an
extensible, customizable, Java-based platform for other Web applications.
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InterMail Standard Edition--Designed for consumer email offerings, InterMail
Standard Edition provides a standard post office protocol or POP3 mailbox, and
interfaces with commonly used desktop email clients such as Microsoft Outlook
and Outlook Express, Netscape Navigator, and QUALCOMM Eudora. InterMail
Standard Edition also includes many of the features of InterMail Web Edition
including the ability to access mailboxes from any location where the Internet
can be accessed. InterMail Standard Edition is typically bundled with dial-up
or cable access as part of an entry level service provider offering. As with
all our InterMail editions, InterMail Standard Edition supports individual
account spam protection.
InterMail Business Advantage Edition--Designed for service providers offering
managed messaging to businesses, InterMail Business Advantage Edition enables
service providers to offer fully-functional business mailboxes. InterMail
Business Advantage Edition provides a full range of advanced features,
including the advanced Internet protocol for delivery and retrieval of messages
known as IMAP4, enhanced message encryption, delegated administration, and
customer self-care tools.
InterMail Consumer Advantage Edition for InterMail Mx--Designed for premium
consumer offerings, InterMail Consumer Advantage Edition is a full-featured,
flexible consumer email application that incorporates all the features and
functionality of our InterMail Standard Edition and InterMail Web Edition.
InterMail Consumer Advantage Edition enables service providers to promote
differentiated consumer offerings at a premium price by including value-added
features such as family mailboxes, mailing lists, and address books.
InterMail IP VoiceMail Edition--We recently completed the development of the
initial version of InterMail IP VoiceMail Edition focused on unified messaging
that is designed for call answering (voicemail) and universal mailboxes.
InterMail IP VoiceMail Edition is intended to provide a full function
"universal mailbox" that works with Internet standards-based voicemail and
faxmail network components. Our solution is intended to be a cost-efficient
replacement for traditional call answering, or as a more functional universal
mailbox where email, faxmail and voicemail messages are stored in a single
mailbox accessed either by telephone or computer. We have begun our first large
scale deployment of an InterMail IP VoiceMail Edition with an existing
InterMail customer.
Professional and Support Services
We have designed our professional services offerings to enable our customers
to bring their messaging service offerings to market more quickly by leveraging
our significant expertise in deploying and managing large-scale messaging
solutions. Our professional services offerings include a wide range of
consulting services such as business planning services, system assessment,
system architecture review, system migration, and operations management, as
well as rapid deployment and integration of our InterMail messaging products.
We offer professional services in connection with the initial deployment of our
products, as well as on an ongoing basis to address the continuing needs of our
customers. Our services are designed to ensure on-schedule implementation,
whether the customer is installing a completely new system, migrating from an
old system, or expanding an existing Software.com system. We work with our
customers to ensure that all of the components of their messaging systems are
selected, configured, and integrated to manage subscriber services and growth.
As of May 31, 1999, our professional services staff consisted of 37 employees.
In addition, we also supplement our professional services staff with outside
contractors from time to time.
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<PAGE>
Our Support Solutions group provides 24 hour global support services to meet
the demanding needs of the largest service providers. For each customer, we
designate a primary support engineer with responsibility for fielding and
addressing all support issues for that customer. We monitor support issues
internally using a variety of integrated processes, including regular customer
interaction sessions. Customers have access to a dedicated Web site where
information on past and outstanding issues is posted, and through which updates
and upgrades can be delivered for ease of implementation. We maintain support
groups in Santa Barbara, California and Lexington, Massachusetts for North
American customers, as well as Windsor, England for European customers, and
Hong Kong for Asian customers. We plan to establish another support center in
Tokyo, Japan. As of May 31, 1999, our Support Solutions group consisted of 13
employees.
Customers
Numerous service providers around the world use our products as the platform
for their Internet messaging applications. As of May 31, 1999, over 1,000
service providers had purchased licenses for our InterMail messaging software.
Our customers range from some of the largest service providers in the world,
with millions of users, to local Internet service providers providing Internet
connectivity and services with a hundred or more users. In the year ended
December 31, 1998, GTE Internetworking Services accounted for 12% of our
revenue. The majority of our customers can be classified according to the
following criteria:
. Traditional Telecommunication Carriers: These customers are comprised of
the Internet service provider organizations within established
telecommunications companies, such as the Regional Bell Operating
Companies (RBOCs) in the United States and national telephone companies
overseas.
. Internet Service Providers (ISPs) and Wholesalers: This group is made up
of companies focused primarily on providing Internet connectivity and
related services enabled by the Internet, such as Web hosting and managed
messaging. Our customers in this group include hundreds of local ISPs in
North America, South America, Europe, and Asia focused on providing
Internet services to local communities.
. Cable-based Internet Access Providers: Our customer base includes a
number of companies focusing on providing Internet services to end users
through broadband access, notably cable modems. Some of these customers
partner with cable companies, and some are wholly owned divisions within
established cable providers.
. Competitive Local Exchange Carriers (CLECs): This group is made up of
companies, other than RBOCs, that offer local phone service. These
companies typically also offer Internet connectivity and services.
. Internet Portals: A number of companies position themselves as Internet
destination sites, or portals, a point of entry to the Internet for a
consumer or business. Many of these portals offer messaging services to
consumers without charge, generating revenues instead by selling
advertising space on the message screens.
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<PAGE>
Our customers from whom we recognized revenues of over $200,000 in 1998
include:
<TABLE>
<S> <C>
@Home Network PSINet
AT&T Canada RCN/Erols Internet
AT&T WorldNet(R) Service Road Runner
Ameritech Interactive Media Services Telecom New Zealand
Bell Atlantic Internet Services Telecom Italia Net
Excite Inc. Telekom Malaysia
GTE Internetworking Services TeleDanmark
Hongkong Telecom Telenor Nextel AS
KDD Communications Telepac
Pacific Internet Telus
</TABLE>
Strategic Relationships
We have established a number of formal and informal relationships with
companies that provide infrastructure components and software to service
providers. We work with these companies to develop additional products and
services based on our messaging platform. In addition, we believe that these
partners offer opportunities to expand our sales channels. Set forth below are
descriptions of our relationships with several of our partners:
Cisco Systems. We have been working with Cisco Systems on a variety of
product development efforts, including voicemail based on Internet protocols,
network (hosted) applications and directory technology. Our work with Cisco has
focused on providing solutions for common customers and partners. In February
1997, Cisco made the first of two equity investments in Software.com.
Hewlett-Packard. Hewlett-Packard recently selected InterMail as its preferred
messaging application for the service provider market. Hewlett-Packard markets
these solutions to rapidly growing service providers that are building the
infrastructure to offer hosted or "managed" messaging services and to those
offering Internet services to consumers and businesses. We also work closely
with Hewlett-Packard to improve the performance and customization of our
applications on Hewlett-Packard's HP-UX operating systems. In April 1999,
Hewlett-Packard purchased a minority equity interest in Software.com.
IBM. IBM offers InterMail Mx, Kx and Post.Office on its high performance
operating systems and hardware. We work with IBM on a high availability, high
reliability, carrier-scale performance solution based on InterMail and IBM's
Serial Storage Architecture disk subsystems, and high-availability cluster
multiprocessing software. In addition, IBM integrates its Intelligent
Subscriber Management System with InterMail for IBM's service provider
customers.
Telcordia Technologies. Our Strategic Solutions and Professional Services
groups have been working with Telcordia Technologies (formerly Bellcore) on
deploying a next-generation, unified messaging platform based on standard
Internet protocols. We will continue to partner with Telcordia to explore
emerging opportunities created by the convergence of voice and data networks,
including voicemail and faxmail based on Internet protocols.
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We work closely with many other UNIX vendors to customize our messaging
software to run on their systems. These relationships enable us to sell our
products to service providers that use different hardware platforms. We have
relationships with Silicon Graphics (for SGI Irix), Sun Microsystems (for
Solaris), and Compaq/DEC (for Digital UNIX).
In addition, we have relationships with a number of software vendors and
systems integrators that enable us to offer additional product features and
services to our customers, including Internet standards-based voicemail,
managed messaging and enhanced spam prevention. We also work on integration,
sales and marketing projects with other companies that currently sell in the
service provider market, including several billing/provisioning systems
vendors.
Sales
We market and sell our products and services exclusively to service
providers. Our sales strategy focuses on the pursuit of key accounts worldwide
through a direct sales force and additional market segments through a
combination of direct and indirect channels. For the year ended 1998,
approximately 90 percent of our revenue resulted from direct sales efforts,
with the balance coming from sales through resellers, primarily high-end system
integrators who can implement a large hardware and software system. We divide
the service provider market into three segments: Tier One, Tier Two, and Tier
Three. Our sales approach for a given customer depends upon the tier in which
we categorize the customer's account.
Tier One Accounts
Tier One accounts consist of a designated list of the largest and most well-
known service providers in the world, and are targeted by our direct sales
force. Our InterMail Mx product is specifically designed for these Tier One
accounts whose current subscriber base generally exceeds 250,000 users, and
whose projected subscriber base generally exceeds one million users. We have
Tier One direct sales force personnel located in California, Colorado, Texas,
Virginia, Massachusetts, England, Germany, France, Japan, and Hong Kong. The
direct sales force is organized into account teams, consisting of a sales
director and a sales engineer, or "technology evangelist." Each team has
responsibility for a designated number of Tier One accounts in the region. We
generate sales leads for Tier One accounts through a combination of direct and
indirect initiatives, such as seminars, presentations and responses to requests
for proposals. The Tier One sales process typically involves a large expense
commitment from us and the sales cycle in these accounts lasts from several
months to over a year. We intend to increase the size of our direct sales force
in the Americas, Europe, and Asia to further pursue Tier One account
opportunities.
Tier Two Accounts
We characterize Tier Two accounts as those service providers with a current
subscriber base in excess of 25,000 users and a projected subscriber base of up
to 250,000 users. The performance and feature requirements of Tier Two accounts
are closely aligned with those of larger service providers. We currently offer
InterMail Post.Office as well as our recently released InterMail Kx package to
satisfy the requirements for these Tier Two accounts. We target these accounts
through a combination of direct and indirect channels, referred to as the
"territory" channel. We have Tier Two direct sales force personnel located in
California, Massachusetts, England, Singapore, and Japan. The Tier Two direct
sales force is complemented by multiple indirect distribution channel partners,
including resellers, systems integrators, and joint marketing partners, such as
IBM and
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Hewlett-Packard. The majority of our indirect sales partners purchase our
software from us at a specified discount and resell the software to their
customers. The indirect channels are designed to increase geographic sales
coverage for Tier Two service providers and to leverage the existing sales
organizations of key strategic partners. We are in the early stages of building
these distribution channels and intend to significantly increase our indirect
channel for territory sales.
Tier Three Accounts
Tier Three accounts consist of small to medium size service providers that
operate on a single-server architecture and typically have an installed base of
less than 25,000 users. In general, these small to medium size service
providers are best suited for the InterMail Post.Office product packages. We
target these accounts primarily through indirect channels, including resellers,
systems integrators, and joint marketing partners. However, we also have
several Tier Three direct sales force personnel located in California. We
conduct a substantial amount of Tier Three sales via our external website with
direct software downloads to users.
Marketing
We engage in a broad range of marketing activities, including advertising our
products and services in print and electronic media, sponsoring seminars and
events for customers and potential customers, participating in trade shows and
conferences, and providing product information through our Web site. For
example, in September 1998, we hosted the first ever Spam Roundtable, a forum
on spam, or Internet junk mail, attended by over 20 of the largest service
providers in the world to share concerns and ideas regarding the use and
prevention of spam in messaging operations. In March 1999, we joined with
Hewlett-Packard, IBM, Telcordia Technologies, and Amteva Technologies in
hosting the first IP Voicemail Conference in Santa Barbara, attended by over 30
of the largest service providers. In conjunction with the IP Voicemail
Conference, we hosted the second Spam Roundtable.
We also work closely with the marketing departments of our strategic partners
and customers to promote their messaging initiatives that are enabled by our
products. These efforts are augmented with the assistance of several public
relations firms specializing in the technology marketplace in an effort to
further establish and define the market for highly scalable messaging products
for service providers. For the Tier Two and Tier Three market segments, we
periodically undertake direct mail programs designed to promote brand name
awareness and inform existing customers of advances in product features. In
addition, we periodically publish white papers and industry reports to promote
awareness of our technology and advances in industry practices.
Through product planning, market strategy, competitive analysis, and product
program management, we continue to provide marketing and product leadership for
our customers by delivering quality products and services in a timely and
predictable manner. For example, with our annual Product Roadmap Tour, we
travel to customers and prospects worldwide to gather market research,
competitive information, and customer input on product features so that our
future products and services meet the unique needs and requirements of the
service provider market.
Technology
With our InterMail Mx and InterMail Kx packages, we have developed a
scalable, high performance platform for building messaging and other Internet-
standard, data intensive applications. Our platform is based on a partitioned
cluster architecture, which is described below.
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Partitioned Cluster Architecture--Our software partitions or separates
message processing into a series of steps, such as retrieving a message from
the Internet, storing it on disk, and delivering it to the user. The software
for each step is called a component, and a set of partitioned components makes
up a cluster. All components can run on a single computer for a smaller system,
or can be distributed across many computers for a large system. When required,
components can be duplicated to provide even more capacity. The partitioned
cluster architecture increases performance and capacity by doing steps in
parallel on separate computers. Disk intensive operations, such as saving
messages on the disk, are separated from network intensive operations, such as
delivering messages to the Internet. The computer running a disk-intensive
component can be optimized for high-speed disk access, while the network
intensive component can run on a much less expensive computer. Partitioning
increases overall performance and capacity while minimizing hardware costs.
Components are location independent in that they can be freely moved from one
computer to another to reconfigure the cluster. Hardware can be added or
removed from the cluster while it continues to operate. Duplicating individual
partitions enables high-availability or non-stop operation, where the cluster
continues to run even with a particular partition out of service.
The following diagram illustrates the components and key elements of our
partitioned cluster architecture:
Partitioned Cluster Architecture
[CHART APPEARS HERE]
The chart shows our partitioned cluster architecture and the messaging process
steps of retrieving a message from the Internet, through a user reading the
email.
Distributed Object Protocol--We have developed an innovative distributed
object communications protocol for reliable, efficient communications between
the components. This protocol, called Remote Method Execution, or RME, supports
messaging transactions and journaling to insure that the cluster is reliable. A
transaction is composed of several operations, such as inserting
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a message into a user's mailbox. Our transaction software ensures that every
operation is either fully completed or fully reversed so it can be done at a
later time. A list of completed transactions is kept in a separate file, called
a journal. The journal is used to reconstruct the messages in the event that
there is a system failure. In addition, RME has a "versioning" mechanism that
allows older components to properly work with newer ones. This allows upgrading
the cluster to new software while the cluster is running for non-stop
operation. RME provides a high performance programming interface to all
components and enables us and third parties to create new messaging
applications.
Multimedia Object Store--The object-level storage component is used to
reliably and efficiently store, organize and retrieve a variety of messaging
media types, including text, graphics, voice, audio, video, and facsimile. In
our storage component, messaging data is accessed via an object-oriented
software layer, which uses self-contained, reusable pieces of software code
known as objects to separate, protect, and isolate the data from the components
that use it, so that both the data structures and components can be
independently updated. Our object store is multithreaded, meaning that several
specific tasks within the component are run in parallel. It utilizes a high
degree of caching, where frequently used information is kept in memory, to
increase performance and scalability for data intensive messaging operations.
The object store has an extensible file system layout, so that additional
storage can be added while the system is on-line, supporting high availability
operation.
Replicated, Multi-Master Directory--Each component in a cluster needs to
access common information, such as a user's name and password. This data is
accessed every time a message arrives or a user accesses a mailbox. As a
result, specialized replicated directory technology is needed to support a
large cluster. The cluster has a core database that contains the common
information and a set of high-speed multi-threaded replicas of that
information, meaning that different operations can take place concurrently
within the same program. By using multiple replicas, the common information can
be accessed a virtually unlimited number of times. The replicas support the
industry standard Lightweight Directory Access Protocol (LDAP) access, so third
party applications can access information in a standard format. The directory
is a "multi-master" system, meaning that applications can access or add
information to any replica and the directory will automatically update the
database and other replicas so that data is consistent across all components.
These advanced replication and updating protocols are unique to our messaging
system and are a key element in providing scalability.
Access and Delivery Components--Our cluster has a set of data access and
delivery servers that implement the standard Internet messaging protocols. The
Message Transport Agent (MTA) implements simple mail transfer protocol or SMTP,
the standard protocol used to send mail from one computer to another on the
Internet. POP3 and IMAP4 data access components implement the protocols used by
desktop email applications, such as Microsoft Outlook or Netscape Navigator.
The Web component provides a complete Web server for access email using
standard browsers. With the acquisition of Mobility.Net we intend to extend the
base functionality of our Web server to permit performance enhancements and
greater flexibility for service providers to customize the Web interface. The
number and type of access components can be optimized to meet the requirements
of particular service providers.
The platform technology used for the InterMail Post.Office product package
shares many of the underlying technology components of the InterMail Kx and
InterMail Mx platform. InterMail Post.Office is a single computer package, so
all messaging components are pre-configured to run on the same computer, to
simplify installation and operation. It has a single MTA, POP3, directory and
message store component. We intend to fully integrate the InterMail Post.Office
technology with the
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InterMail Mx and InterMail Kx technology so that all of the functionality is
available in all three product packages.
Mobility.Net Technology. The technology acquired from Mobility.Net consists
primarily of software designed to improve a user's ability to retrieve and send
electronic messages using a Web browser. This is referred to as a Web access
server and represents substantial improvements to the equivalent technology we
were developing before the Mobility.Net acquisition. Initially, we will market
the Mobility.Net technology as a stand-alone product to our existing InterMail
customers, allowing them to upgrade the performance of their existing Web
access servers. Eventually, we intend to fully incorporate the Mobility.Net
technology into our InterMail product line to improve both the performance of
our Web access server and offer additional features, such as calendaring, that
are dependent on advanced Web access server technology.
We have made substantial investments in research and development. We believe
that our future performance will depend in large part on our ability to
maintain and enhance our current platform and product families, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet an expanding range of service provider requirements. As of May 31,
1999, our research and development staff consisted of 85 employees.
Competition
The market for Internet standards-based messaging products and services is
intensely competitive, and we expect it to become increasingly so in the
future. We compete in our core service provider market with many software
providers. We also compete against messaging solutions based on public domain
software that is developed internally by service providers principally on the
basis of performance, features and price. We compete to a more limited extent
with providers of messaging applications designed for the enterprise market.
Our current competitors in the service provider market include Netscape and Sun
Microsystems, which has agreed to acquire many of Netscape's software
operations. We also compete with Microsoft whose current product was developed
for the enterprise market but is sold to some service providers. We believe
that competition will intensify as our current competitors increase the
sophistication of their offerings and as new market participants, including
providers of "outsourced" e-mail solutions, also known as wholesalers, enter
the market. Many of our current and future competitors have longer operating
histories, larger installed customer bases, greater brand recognition, and
significantly greater financial, marketing and other resources than we do. In
addition, these competitors may benefit from existing strategic and other
relationships with each other or with our current customers. We must respond
quickly and effectively to the new products, services, and enhancements offered
by our competitors in order to continue our growth.
In addition, Microsoft and Lucent Technologies, among others, are well-
positioned to become increasingly competitive in our core service provider
messaging market. We believe that Microsoft is currently in the process of
developing electronic messaging software to compete more directly in our core
service provider market. Because of its dominance in other software markets,
Microsoft has many competitive advantages over us. For example, Microsoft could
incorporate electronic messaging technology into its Web browser software, its
client operating system or email interface, or its server software offerings,
possibly at no additional cost to service providers or end users. In addition,
Microsoft may promote technologies and standards that are not compatible with
our technology, or that are less compatible with our technology than
competitive products offered by Microsoft. We believe that Microsoft's
increasing presence in the electronic messaging software industry will
dramatically increase competitive pressure in the market, leading to increased
pricing
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pressure and longer sales cycles. These competitive pressures may force us to
reduce the prices of our products, and may also materially reduce our market
share. In addition, Lucent Technologies could be a formidable competitor in the
Internet voicemail market because it owns Octel, a voicemail provider, and
because it owns a proprietary access server for the conversion of voice to
data. If we are unable to compete effectively with Microsoft, Lucent
Technologies or other emerging competitors, our business, financial condition,
and operating results will suffer.
Intellectual Property and Proprietary Rights
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology, including the
entire InterMail product line. We rely on a combination of copyright, trade
secret, and trademark law to protect our technology, although we believe that
other factors such as the technological and creative skills of our personnel,
new product developments, frequent product and feature enhancements, and
reliable product support and maintenance are more essential to maintaining a
technology leadership position. We currently do not have any patents issued or
pending.
We generally enter into confidentiality and nondisclosure agreements with our
employees, consultants, prospective customers, licensees, and corporate
partners. In addition, we control access to and distribution of our software,
documentation, and other proprietary information. Except for certain limited
escrow arrangements, we do not provide third parties with access to the source
code for our products. Despite our efforts to protect our intellectual property
and proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Effectively policing the
unauthorized use of our products is time-consuming and costly, and there can be
no assurance that the steps taken by us will prevent misappropriation of our
technology, particularly in foreign countries where in many instances the local
laws or legal systems do not offer the same level of protection as in the
United States.
We attempt to avoid infringing known proprietary rights of third parties in
its product development efforts. However, we do not regularly conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. There are many issued patents
as well as patent applications in the electronic messaging field. Because
patent applications in the United States are not publicly disclosed until the
patent is issued, applications may have been filed which relate to our software
products. In addition, our competitors and other companies as well as research
and academic institutions have conducted research for many years in the
electronic messaging field, and this research could lead to the filing of
further patent applications. If we were to discover that our products violated
or potentially violated third party proprietary rights, we might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can we be
certain that any licenses would be available on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in the
software industry, and we expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grows and the functionality of software products in different
industry segments overlaps. Any third-party infringement claims could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product and service delays or require us to enter into
royalty or licensing agreements. Any royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, if at all. A
successful claim of infringement against us and our failure or inability to
license the infringed or similar technology could have a material adverse
effect on our business, financial condition, and results of operations.
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Employees
As of May 31, 1999, we had 252 full-time employees, 85 of whom were in
research and development, 67 in sales and marketing, 64 in services and support
and documentation, and 36 in general and administrative. None of our employees
is represented by a labor union. We have not experienced any work stoppages,
and we consider our relations with our employees to be good.
Legal Matters
From time to time we have been subject to legal proceedings and claims in the
ordinary course of business. Although we are not currently involved in any
material legal proceedings, we expect that we will in the future be subject to
legal disputes, including claims of alleged infringement of third party
patents, trademarks, and other intellectual property rights by us and our
licensees. Any claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources. We are not aware of any
legal proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
results of operations.
Facilities
Our corporate headquarters are located in Santa Barbara, California where we
have two leases for approximately 30,500 square feet of space in separate
office buildings. Our East Coast headquarters are located in Lexington,
Massachusetts where we have a lease for approximately 22,700 square feet of
space in a single office building. In June 1999, we executed a lease for a new
facility in Lexington, Massachusetts. We anticipate that we will move our East
Coast headquarters to this site in the fall of 1999. We lease additional space
in Bellevue, Washington for development personnel and in Windsor, England. In
addition to these facilities, we also lease office space for sales personnel in
Dallas, Denver, Reston, Munich, Tokyo, Singapore, and Hong Kong. We believe
that these existing facilities are adequate to meet current foreseeable
requirements or that suitable additional or substitute space will be available
on commercially reasonable terms.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information about our executive officers,
directors and key employees as of June 15, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John L.
MacFarlane........ 33 Chief Executive Officer, Founder and Director
Valdur Koha........ 44 President
John F. Poulack.... 38 Senior Vice President, Operations
Robert R. Martin... 45 Senior Vice President, Strategy
John S. Ingalls.... 49 Senior Vice President, Chief Financial Officer
Thomas S. Cullen... 38 Vice President Sales, Worldwide Service Providers
Arthur R.
Garofalo.......... 55 Vice President Sales, Worldwide Territory/Channel
Trung Mai.......... 43 General Manager, Asia
Adarbad Master..... 35 Chief Technology Officer
Michele R. Nivens.. 42 Vice President, Human Resources
Brian D. Plackis... 32 General Manager, North America
Mark A. Root....... 34 Director of Accounting
Craig A.
Shelburne......... 30 Vice President, General Counsel and Corporate Secretary
DeAnna Wassom...... 41 Vice President, Marketing
Frank Perna........ 61 Chairman of the Board
Neal Douglas....... 40 Director
Judith Hamilton.... 55 Director
Don Listwin........ 40 Director
Bernard Puckett.... 54 Director
Bernhard Woebker... 49 Director
</TABLE>
Mr. Douglas, Ms. Hamilton, and Mr. Woebker comprise our compensation
committee. Ms. Hamilton, Mr. Perna and Mr. Puckett comprise our audit
committee.
John L. MacFarlane has been Chief Executive Officer and a director of
Software.com since its incorporation. From July 1988 to August 1989, Mr.
MacFarlane was with Harris Corporation working in the Defense Communications
division on military communications systems. From November 1989 to July 1991,
Mr. MacFarlane worked for the U.S. Navy, where he worked on optical signal
processing. Mr. MacFarlane received his B.S. in electrical engineering from
Rensselaer Polytechnic Institute and his M.S. in electrical engineering from
the University of California at Santa Barbara.
Valdur Koha has been President of Software.com since May 1996. From August
1994 to May 1996, Mr. Koha was Chief Executive Officer, President and Chairman
of the Board of Directors of Accordance Corporation, which was acquired by
Software.com in May 1996. From January 1991 to August 1994, Mr. Koha was
Director of Development of the Open Systems at Siemens Nixdorf, Inc., in which
position he was responsible for products in the areas of distributed computing,
multimedia,
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imaging and operating systems. Mr. Koha received his degree in mathematics and
computer science from the University of Bonn.
John F. Poulack has been Senior Vice President, Operations of Software.com
since April 1998. From October 1996 to April 1998, Mr. Poulack held various
positions at Software.com including Engineering Manager, Director of
Engineering and Vice President, Engineering. From August 1994 to September
1996, Mr. Poulack was a Software Engineer at Accordance Corporation. From July
1985 to August 1994, Mr. Poulack was a Software Engineer at Nixdorf Computer
Engineering Corporation and Siemens Nixdorf Information Systems Inc.
Robert R. Martin has been Senior Vice President, Strategy of Software.com
since July 1998. From July 1996 to July 1998, Mr. Martin served as our Vice
President, Product Management. From November 1991 to June 1996, Mr. Martin held
a variety of positions with Banyan Systems, Inc. including Vice President,
Business Development. From September 1986 to October 1991, Mr. Martin was Vice
President of Products for Ontos Inc., an object-oriented database company.
Prior to Ontos, Mr. Martin held various sales and technical positions at Intel
Corporation and Hewlett-Packard Company. Mr. Martin received his B.S. in
electrical engineering from Worcester Polytechnic Institute and his M.S. in
electrical engineering from Massachusetts Institute of Technology.
John S. Ingalls has been Chief Financial Officer and Senior Vice President of
Software.com since February 1999. From September 1998 to February 1999, Mr.
Ingalls was Chief Financial Officer and Senior Vice President of Chrystal
Software, Inc., a subsidiary of Xerox Corporation that develops high-end
document management software. From August 1996 to May 1998, Mr. Ingalls was
Vice President of Finance and Chief Financial Officer of Raptor Systems, Inc.,
a publicly-traded network security software manufacturer. From December 1989 to
March 1996, Mr. Ingalls was Vice President, Corporate Finance for Clean
Harbors, Inc., a publicly-traded environmental services company. Prior to 1989,
Mr. Ingalls was a managing director in the Investment Banking Department of the
Bank of Boston, after ten years as a Wall Street lawyer and partner in the
Boston law firm of Palmer & Dodge. Mr. Ingalls received his B.A. in economics
from Amherst College and his J.D. from the University of Virginia School of
Law.
Thomas S. Cullen has been Vice President, Worldwide Service Providers of
Software.com since November 1998. From October 1997 to November 1998, Mr.
Cullen was Vice President, U.S. Service Providers at Software.com. From October
1992 to February 1997, Mr. Cullen was Vice President of Sales for Radish
Communications (now SystemSoft), a voice/data communications software company.
Mr. Cullen has also held sales positions at Tektronix Color Printers, Apple
Computer International and MCI International. Mr. Cullen received his B.S. from
Cornell University.
Arthur R. Garofalo has been Vice President Sales, Worldwide Territory/Channel
of Software.com since June 1998. From January 1997 to June 1998, Mr. Garofalo
held the position of Director of Territory Sales. Prior to joining
Software.com, he worked for Computervision Inc. as Vice President of Worldwide
Channel Sales & Field Marketing from December 1994 until January 1997. Mr.
Garofalo has also held prior sales positions, including Vice President Sales at
Microcom, Vice President of Worldwide Sales at Avatar, and Vice President of
Worldwide Sales and Marketing at Minicomputer Systems. Mr. Garofalo holds a BBE
in electrical engineering from Manhattan College and an MBA in marketing from
Pace University.
Trung Mai has been Director of Nihon Software.com Ltd. and Software.com
Singapore Pte. Ltd. since January 1998 and General Manager, Asia of
Software.com since August 1998. From February
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1995 to August 1997, Mr. Mai held the positions of District Manager and
Department Head at AT&T Bell Labs, in which position he helped launch the AT&T
Worldnet service. From June 1992 to February 1995, Mr. Mai was a Manager at MCI
Communications, Inc. Mr. Mai received his B.S. in electrical engineering from
McGill University in Montreal.
Adarbad Master has been Chief Technology Officer of Software.com since April
1999. From March 1997 to April 1999, Mr. Master served as Chief Scientist for
our professional services group. Prior to joining Software.com, Mr. Master
worked with Sun Microsystems as an IT Architect from June 1994 until February
1997. From May 1989 until June 1994, he was employed by Inland Steel Company as
a Project Engineer. Mr. Master holds a B.S. in mechanical engineering from the
Indian Institute of Technology at Madras, India and a M.S. in industrial
engineering from State University of New York, Buffalo.
Michele R. Nivens has been Vice President, Human Resources since September
1997. From August 1991 to August 1997, Ms. Nivens was Vice President of Human
Resources for the Systems and Technologies Division at BBN Corporation, a
network technology company that was acquired by GTE in June 1997. Ms. Nivens
received her B.S. in management from the University of Massachusetts and
completed the Sloan Greater Boston Executive Program at the Massachusetts
Institute of Technology.
Brian D. Plackis has been General Manager, North America of Software.com
since February 1998. From July 1989 to February 1998, Mr. Plackis held various
positions at MCI Communications, Inc., including Senior Manager, Integrated
Messaging Engineering and Senior Manager, InnerMail Services. From June 1987 to
June 1989, Mr. Plackis was a systems programmer at the NASA Jet Propulsion
Laboratory. Mr. Plackis received his B.S. in engineering from Rensselaer
Polytechnic Institute.
Mark A. Root has been Director of Accounting of Software.com since March
1999. From November 1993 to February 1999, Mr. Root held various positions at
QAD, Inc., an enterprise resource planning software developer, including
Internal Audit Manager, Assistant Director of Finance, European Region, IPO
Lead, Treasury Manager and Product Marketing Manager. From August 1990 to
November 1993, Mr. Root was an audit professional with KPMG Peat Marwick.
Mr. Root received his B.A. in business administration, accounting from
California State University, Northridge. Mr. Root is a certified public
accountant in California.
Craig Shelburne has been Vice President, General Counsel and Corporate
Secretary of Software.com since February 1998. From February 1996 to February
1998, Mr. Shelburne was an attorney with Wilson Sonsini Goodrich & Rosati, in
which he specialized in corporate law and served as outside corporate counsel
of Software.com. From September 1994 to February 1996, Mr. Shelburne was an
associate with the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Mr. Shelburne received his B.A. in political science and history from Duke
University and his J.D. from the UCLA School of Law.
DeAnna Wassom has been Vice President, Marketing of Software.com since April
1999. From February 1998 to April 1999, Ms. Wassom was Vice President of
Marketing at PrivaSeek, Inc., a developer of software tools for protecting
consumer privacy on the Web. From July 1997 to September 1998, Ms. Wassom was
Vice President of Marketing at MetaCreations Corp., a software company that
designs and develops software tools and technologies for creating digital
images and interactive 3D Web content. From February 1995 to June 1997, Ms.
Wassom was Director of
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Marketing for Radish Communications which was acquired by SystemSoft in
November 1996, a voice/data communications software company. Ms. Wassom
received her B.A. in marketing and advertising from Iowa State University.
Frank Perna has been Chairman of the Board of Software.com since July 1997
and has been a director since January 1996. Since December 1998, Mr. Perna has
been Chairman of the Board and Chief Executive Officer of MacNeal-Schwendler
Corporation, a computer-aided engineering software company. From December 1994
to August 1998, Mr. Perna was the Chief Executive Officer and Chairman of the
Board of EOS Corporation, a provider of power supplies for electrical equipment
and notebook computers. From 1984 to 1993, Mr. Perna served as President, Chief
Executive Officer and Director of MagneTek, a publicly held provider of
electrical equipment and services to utilities and industrial customers. Mr.
Perna holds a B.S. in mechanical engineering from Kettering University, an M.S.
in electrical engineering from Wayne State University and an M.S. in management
from the Massachussetts Institute of Technology Sloan School of Management.
Neal Douglas has been a director of Software.com since July 1998. Since
January 1993, Mr. Douglas has been a General Partner of AT&T Ventures, a
venture capital firm. From May 1989 to January 1993, Mr. Douglas was a partner
of New Enterprise Associates, a venture capital firm. Mr. Douglas currently
serves on the boards of directors of Cellnet Data Systems, Inc., a provider of
fixed network wireless information services, FVC.COM, an Internet video
applications company, TUT Systems, a provider of products that enable high
speed data transmissions over copper wires, and several privately held
companies. Mr. Douglas received a B.S. in electrical engineering from Cornell
University, an M.S. in electrical engineering from Stanford University, and an
M.B.A. from the University of California at Los Angeles.
Judith Hamilton has been a director of Software.com since January 1996. Since
January 1999, Ms. Hamilton has been Chief Executive Officer of Classroom
Connect, a company specializing in K-12 Internet resources. From April 1996 to
July 1998, Ms. Hamilton was President and Chief Executive Officer of FirstFloor
Software, an Internet software publisher. From July 1992 to December 1995, Ms.
Hamilton was President and Chief Executive Officer of Dataquest, Inc., an
information technology market research and consulting firm. From 1987 to 1991,
Ms. Hamilton was Partner and National Director of Market Development for Ernst
& Young. Ms. Hamilton currently serves on the boards of directors of R.R.
Donnelley & Sons Company, a commercial printing company, and several privately
held companies. Ms. Hamilton received her B.A. in history/political science
from Indiana University and her certificate in management from the Graduate
School of Business of the University of California at Los Angeles.
Donald J. Listwin has been a director of Software.com since July 1997. Since
May 1998, Mr. Listwin has been an Executive Vice President at Cisco Systems.
Prior to that, he held a variety of positions at Cisco Systems, including from
April 1997 to May 1998, Senior Vice President of Service Provider Line of
Business, from August 1996 to April 1997, Senior Vice President of IOS
Development and Marketing, from September 1995 to August 1996, Vice President
and General Manager of Cisco's Access Business Unit, and from September 1993 to
September 1995, Vice President of Marketing. Mr. Listwin also serves on the
board of directors of TIBCO Software, Inc. and E-Tek Dynamics, Inc. Mr. Listwin
holds a B.S. degree in electrical engineering from the University of
Saskatchewan, Canada.
Bernard Puckett has been a director of Software.com since July 1997. From
January 1994 to January 1996, Mr. Puckett was President and CEO of Mobile
Telecommunications Technologies.
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From 1967 to 1994, Mr. Puckett was at IBM Corp., where he held a variety of
positions including, Senior Vice President, Corporate Strategy and Development
and Vice President and General Manager, Applications Software. Mr. Puckett
serves on the boards of directors of P-COM, R.R. Donnelley & Sons Company,
Iomega Corporation, IMS Health, and Nielson Media Research. Mr. Puckett
received his B.S. in mathematics from the University of Mississippi.
Bernhard Woebker has been a director of Software.com since July 1997. Since
August 1995, Mr. Woebker has been Vice President, Europe of Versant
Corporation, a database management company. From April 1992 to July 1994, Mr.
Woebker was Vice President, Europe of NeXT, Inc., a software company that has
been acquired by Apple Computer, Inc. From 1976 until 1991, Mr. Woebker held a
variety of positions in Germany and the United States with Nixdorf Computer AG,
Nixdorf Computer Engineering Corp., and Siemens Nixdorf Information Systems,
including President and CEO of Nixdorf Computer Engineering Corp. from 1986 to
1989. From 1973 to 1976, Mr. Woebker was an Assistant Professor at the
Institute for Computer Science/Technical University Hanover, where he
specialized in compiler theory, artificial intelligence, and graphical data
processing. Mr. Woebker received his B.A. from the Technical University of
Hanover.
Board of Directors
We currently have authorized seven directors. Each director holds office
until the next annual meeting of the stockholders or until his or her successor
is duly elected and qualified. Our amended and restated certificate of
incorporation to be filed upon the closing of this offering will provide for a
classified board of directors. In accordance with the terms of the amended and
restated certificate of incorporation, the board of directors will be divided
into three classes, whose terms will expire at different times. The Class I
directors, initially John MacFarlane, Neal Douglas and Frank Perna, will stand
for re-election at the first annual meeting of stockholders following this
offering. The Class II directors, initially Donald Listwin and Bernard Puckett,
will stand for re-election at the second annual meeting of stockholders
following this offering, and the Class III directors, initially Judith Hamilton
and Bernhard Woebker, will stand for re-election at the third annual meeting of
stockholders following this offering. At each annual meeting of stockholders
beginning with the annual meeting following this offering, the successors to
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following election
and until their successors have been duly elected and qualified. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of an equal number of directors.
Committees of the Board of Directors
Our audit committee consists of Ms. Hamilton, Mr. Perna, and Mr. Puckett. The
audit committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent accountants. Our
compensation committee consists of Mr. Douglas, Ms. Hamilton, and Mr. Woebker.
The compensation committee reviews and recommends to our board of directors the
compensation and benefits of our employees and directors. During 1998,
Mr. Listwin also served as a member of our compensation committee.
Compensation Committee Interlocks and Insider Participation
No member of our board of directors or our compensation committee has served
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.
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In October 1996, we issued and sold an aggregate of 1,587,302 shares of
Series A preferred stock to funds affiliated with AT&T Ventures at a per share
price of $3.15. Upon the closing of this offering, the Series A preferred stock
will automatically convert into 1,587,302 shares of common stock. Holders of
the Series A preferred stock will be entitled to "piggyback" and demand
registration rights with respect to the shares of common stock into which the
Series A preferred stock will be converted.
In connection with the sale of the Series A preferred stock, we issued
warrants to funds affiliated with AT&T Ventures to purchase 529,101 shares of
our common stock at an exercise price of $5.00 per share and 269,841 shares of
our common stock at an exercise price of $7.00 per share. Effective July 1998,
in exchange for AT&T Ventures' agreement to extend the redemption date of
redemption rights with respect to the Series A preferred stock, we lowered the
exercise price on all outstanding warrants to $4.15 per share. These warrants
are exercisable until October 3, 2001 and are subject to, among other
provisions, net exercise rights. In addition, we received revenues from
companies affiliated with AT&T Corporation of $2,775,000, $2,687,000, and
$3,599,000 in 1996, 1997, and 1998. Mr. Douglas, one of our directors and a
member of our compensation committee, is a General Partner of AT&T Ventures.
Director Compensation
Directors do not currently receive any cash compensation for their service as
directors, but are reimbursed for reasonable expenses incurred in attending
meetings. Non-employee directors are eligible to receive options under our 1995
stock plan and have been granted the following options under 1995 stock plan:
. On January 18, 1996, Mr. Perna and Ms. Hamilton each received options to
purchase 121,318 shares of our common stock at an exercise price of $1.00
per share, with a vesting period of four years at a rate of 1/48th of the
shares underlying the options vesting each month;
. On July 11, 1997, Messrs. Listwin, Puckett and Woebker each received
options to purchase 30,000 shares of our common stock at an exercise
price of $3.65 per share, with a vesting period of one year at a rate of
1/12th of the shares underlying the options vesting each month;
. On July 10, 1998, Messrs. Douglas, Listwin, Puckett, and Woebker each
received options to purchase 30,000 shares of our common stock at an
exercise price of $3.65 per share, with a vesting period of one year at a
rate of 1/12th of the shares underlying the options vesting each month;
and
. On June 11, 1999, Messrs. Douglas, Listwin, Puckett and Woebker each
received options to purchase 30,000 shares of our common stock at an
exercise price of $11.00 per share. In addition, Mr. Perna and Ms.
Hamilton each received options to purchase 15,000 shares of our common
stock at an exercise price of $11.00 per share. Such options are not
subject to vesting and are immediately exercisable.
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Executive Compensation
Summary Compensation Table
The following table sets forth the compensation earned for services rendered
to Software.com in all capacities for fiscal 1998, by our Chief Executive
Officer and our other most highly compensated executive officer who earned more
than $100,000 during fiscal 1998. These two individuals are referred to as the
"named executive officers" here and elsewhere in this prospectus.
<TABLE>
<CAPTION>
Long-Term
Compensation
-----------------
Annual Compensation
------------------------------ No. of Securities
Other Annual Underlying
Name and Principal Positions Salary Bonus Compensation Options
- ---------------------------- -------- -------- ------------ -----------------
<S> <C> <C> <C> <C>
John L. MacFarlane............ $140,000 $ -- $ -- 1,000,000
Chief Executive Officer
Valdur Koha................... 135,000 150,000 -- --
President
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to stock
options granted to each of the named executive officers in fiscal 1998. The
figures representing percentages of total options granted to employees in the
last fiscal year are based on an aggregate of 3,753,638 options granted by us
during the fiscal year ended December 31, 1998 to our employees and consultants
including the named executive officers.
Also shown below is the potential realizable value over the term of the
option. In accordance with the rules of the Securities and Exchange Commission,
we have based our calculation of the potential realizable value on the term of
the option at its time of grant, and we have assumed that:
. the value of our stock at the initial public offering price appreciates
at the indicated annual rate compounded annually for the entire term of
the option; and
. the option is exercised and sold on the last day of its term for the
appreciated stock price.
These amounts are based on 5% and 10% assumed rates of appreciation and do
not represent our estimate of future stock prices. Actual gains, if any, on
stock option exercises will be dependent on the future performance of the
common stock. Unless otherwise indicated, the options in this table were
granted under the 1995 stock plan, have 5-year terms and vest over a period of
4 years. Twenty-five percent of the shares subject to each option will vest on
the first anniversary of the grant date, and 1/48th of the shares subject to
each option will vest each month thereafter. All of the options have exercise
prices equal to the fair market value of our common stock on the date of grant.
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<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Appreciation
Underlying Employees Exercise for Option Term(1)
Options In Last Price Expiration -----------------------
Name Granted Fiscal Year (per share) Date 5% 10%
- ---- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
John L. MacFarlane...... 250,000(2)(3) 6.7% $3.65 9/25/08 $ 5,195,855 $ 8,814,034
750,000(2) 20.0 3.65 11/20/08 15,587,564 26,442,103
Valdur Koha............. -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Based on the value of our common stock at the initial public offering price
of $15.00 per share.
(2) Twenty-five percent of the shares subject to the option will vest on the
first anniversary of the grant date, and 1/48th of the shares subject to
the option will vest each month thereafter. Granted outside of the 1995
stock plan with a 10-year term.
(3) If Software.com meets certain cash flow goals by the end of the third
quarter of 1999, then all shares subject to the option will vest at that
time.
Fiscal Year-End Option Values
The following table sets forth information with respect to the named
executive officers concerning unexercised stock options held as of December 31,
1998. The named executive officers did not exercise any options during fiscal
1998. The "value of unexercised in-the-money options at December 31, 1998"
figures in the right-hand columns are based on the initial public offering
price of $15.00 per share, minus the per share exercise price, multiplied by
the number of shares issued upon exercise of the option.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John L. MacFarlane.......... -- 1,000,000 $ -- $11,350,000
Valdur Koha................. 386,700 232,021 5,317,125 3,190,289
</TABLE>
Employment Agreements and Change of Control Arrangements
We currently do not have any employment agreements with any of our named
executive officers. We have, however, entered into "change of control"
agreements with each of our named executive officers and other executive
officers. These agreements provide that if an officer's employment is
terminated as a result of an "involuntary termination" during a period
beginning two months before, and ending six months after a change of control,
then one-half of the unvested portion of any stock option held by the officer
will accelerate and become exercisable, subject to certain limitations. For
purposes of the agreement, "involuntary termination" includes a change in the
nature or scope of the officer's duties that is inconsistent with the position
held by the officer immediately before the change of control, a material
reduction of benefits or perquisites, a reduction in base cash salary, a
relocation that is more than 20 miles from the officer's present location, or
any purported termination of the officer by us.
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Employee Benefit Plans
1995 Stock Plan
Our 1995 stock plan, as amended and restated, allows us to grant to employees
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and to grant to employees, directors and consultants nonstatutory
stock options and stock purchase rights. Unless terminated sooner, the plan
will automatically terminate in 2005. Our board of directors approved the plan
in October 1995 and our stockholders approved the plan in January 1996. The
plan was most recently amended by our board of directors in May 1999 and
approved by our stockholders in June 1999. A total of 10,500,000 shares of
common stock is reserved for issuance under the plan, plus annual increases, to
be added on July 1 of each year beginning in 2000, equal to the lesser of:
. 5,000,000 shares;
. 4% of the outstanding shares on such date; or,
. a lesser amount determined by the board.
Our board of directors or an administrator appointed by our board may
administer our 1995 stock plan. The plan administrator has the power to
determine the terms and conditions of the options and stock purchase rights
granted, including:
. the exercise price;
. the number of shares of common stock subject to each option and stock
purchase right;
. the exercisability thereof; and
. the form of consideration payable upon the exercise of the option.
In addition, our board of directors has the authority to amend, suspend or
terminate our plan, provided that no action may affect any share of common
stock previously issued and sold or any option previously granted under our
plan.
Options and purchase rights granted under our 1995 stock plan are not
generally transferable by the optionee. Each option is exercisable during the
lifetime of the optionee only by the optionee. Options granted under our plan
must generally be exercised within three months of the end of optionee's status
as an employee, consultant or director of Software.com, or within twelve months
after the optionee's termination by death or disability. However, an option may
never be exercised later than the expiration of its term.
The exercise price of all incentive stock options granted under the plan is
determined by the administrator, but must be at least equal to the fair market
value of the common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
our outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date.
The exercise price of nonstatutory stock options granted under the plan is
determined by the administrator, but must be equal to at least 85% of the fair
market value on the grant date. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any nonstatutory stock option granted must
equal at least 110% of the fair market value on the grant date. The term of all
other options granted under the 1995 stock plan may not exceed ten years.
However, the term of incentive stock options granted to any participant who
owns stock with more than 10% of the voting power of all classes of our
outstanding capital stock cannot exceed five years.
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Our 1995 stock plan provides that in the event of a merger of Software.com
with or into another corporation, each outstanding option or purchase right
shall be assumed or an equivalent option or right substituted by the successor
corporation. If the outstanding options or rights are not assumed or
substituted as described in the preceding sentence, the options or rights shall
terminate as of the date of the merger.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by our board of directors
in May 1999 and approved by our stockholders in June 1999. A total of 1,000,000
shares of common stock has been reserved for issuance under the purchase plan,
plus annual increases, to be added on July 1 of each year beginning in 2000,
equal to the lesser of:
. 500,000 shares;
. 2% of the shares outstanding on that date; or
. a lesser amount determined by the board.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains successive twenty-four
month offering periods. The offering periods generally start on the first
trading day on or after May 1 and November 1 of each year, except for the first
such offering period which commences on the first trading day on or after the
effective date of this offering and ends on the trading day on or before April
30, 2001.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and for more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock, or
. any employee whose rights to purchase stock under all our employee stock
purchase plans accrues at a rate which exceeds $25,000 worth of stock for
each calendar year.
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 10,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each offering period. The price of
stock purchased under the purchase plan is 85% of the lower of the fair market
value of the common stock at the beginning of the offering period and the end
of each purchase period.
The purchase plan provides that, in the event we merge with or into another
corporation or a sale of substantially all of our assets, each outstanding
option may be assumed or substituted by the successor corporation. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened and a new
exercise date will be set, which will occur before the proposed sale or merger.
The purchase plan will terminate in 2009. The board of directors has the
authority to amend or terminate the purchase plan, except that no such action
may adversely affect any outstanding rights to purchase stock.
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401(k) Plan
In 1996, we adopted a 401(k) Retirement Savings and Investment Plan covering
our full-time employees located in the United States. The plan is intended to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended,
so that (a) contributions to the plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from the plan,
and so that (b) contributions by us, if any, will be deductible by us when
made. Under the plan, eligible employees may elect to make payroll deductions
up to 20% of their compensation, up to the statutorily prescribed annual limit
($10,000 in 1999) and to have the amount of their deduction contributed to the
plan. The plan permits, but does not require, additional matching contributions
by us on behalf of all participants. To date, we have not made any matching
contributions to the plan.
Limitations of Liability and Indemnification
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 (i) any breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemption, or (iv) any
transaction from which the director derived an improper personal benefit. The
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 bylaws provide that we shall indemnify our directors and officers and may
indemnify our 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 his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by or in the right of Software.com, arising out of the person's services
as a director or officer of Software.com, any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and officers.
66
<PAGE>
CERTAIN TRANSACTIONS
Lease of 525 Anacapa. In February 1996, we entered into a contract with 525
Anacapa LLC for the lease of our offices at 525 Anacapa Street, Santa Barbara.
Pursuant to the lease, we agreed to pay 525 Anacapa LLC a flexible amount per
month such that it would recover its costs and expenses in relation to the
ownership and operation of the property, and a 9% return on the actual cash
invested in acquiring and improving the property, as set forth in the lease. In
1996, 1997, and 1998, we paid an aggregate of $132,000, $165,000, and $171,000,
to 525 Anacapa LLC pursuant to the lease. John MacFarlane, Chief Executive
Officer and a director of Software.com, and Frank Perna, a director of
Software.com, are members of 525 Anacapa LLC.
Accordance Merger. In May 1996, in connection with the merger of Accordance
Corporation and Software.com, we issued 3,107,344 shares of our common stock to
Valdur Koha, the former President of Accordance and our current President.
Additionally, we issued 715,219 shares of our common stock to John Poulack, a
former Principal Software Engineer of Accordance and our current Senior Vice
President, Operations.
Common Stock Registration Rights Agreement. Certain holders of our common
stock are entitled to "piggyback" and demand registration rights pursuant to a
Registration Rights Agreement dated as of June 1, 1996, as amended. Some of our
directors and executive officers, including Mr. MacFarlane, Mr. Koha, and Mr.
Poulack, are parties to this registration rights agreement.
Series B and Series C Preferred Stock. On February 10, 1997, we issued and
sold an aggregate of 1,789,279 shares of Series B preferred stock to Cisco
Systems, at a per share price of $4.15, and on August 14, 1998, we issued and
sold an aggregate of 1,329,781 shares of Series C preferred stock to Cisco at a
per share price of $5.15. Upon the closing of this offering, the Series B and
Series C preferred stock will automatically convert into 1,789,279 and
1,329,781 shares of our common stock.
Holders of the Series B and Series C preferred stock will be entitled to
"piggyback" and demand registration rights with respect to the shares of common
stock into which the Series B and Series C preferred stock will be converted.
Mr. Listwin, one of our directors, is an Executive Vice President of Cisco
Systems.
Change of Control Agreements. We have entered into our standard form
severance agreement in the event of a change of control with all of our
executive officers, except for Mr. Ingalls.
We entered into a severance agreement with Mr. Ingalls, dated March 1, 1999,
which obligates us to provide certain benefits to Mr. Ingalls in connection
with a change of control of Software.com. Upon a change in control, one-half of
the unvested portion of any options held by Mr. Ingalls will vest and become
immediately exercisable. If Mr. Ingalls' employment is terminated by us for any
reason or by Mr. Ingalls as a result of "involuntary termination" during a
period beginning two months prior to, and ending twelve months after any change
in control, then Mr. Ingalls shall be paid a lump sum equal to his annual base
salary and highest possible bonus for the fiscal year in which the termination
occurs plus any "parachute payment" excise tax and the entire unvested portion
of any stock options held by Mr. Ingalls shall vest and become immediately
exercisable.
Our offer letter dated February 9, 1999 to John S. Ingalls, our Senior Vice
President and Chief Financial Officer, obligates us to pay Mr. Ingalls a lump
sum severance payment if we terminate his employment other than for cause. The
amount of the severance payment will equal three months of his then current
annual base salary plus one additional week for each month that he has been
employed by us, up to a maximum of one year. In addition, we agreed to retain
Mr. Ingalls as a consultant for the period of time as is necessary to allow
one-half of the unvested portion of his option to purchase 400,000 shares of
our common stock to vest.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table on the following page sets forth information known to Software.com
regarding the beneficial ownership of our common stock as of June 15, 1999, and
as adjusted to reflect the sale of common stock offered hereby by:
. each person or entity who is known by us to beneficially own more than 5%
of our common stock;
. each of the named executive officers;
. each of our directors;
. each selling stockholder that beneficially owns more than 1% of our
common stock;
. all directors and executive officers as a group; and
. all other selling stockholders as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after June
15, 1999 are deemed outstanding, while these shares are not deemed outstanding
for purposes of computing percentage ownership of any other person.
Unless otherwise indicated in the table, the address of each individual
listed in the table who beneficially owns more than 5% of our common stock is
Software.com, Inc., 525 Anacapa St., Santa Barbara, CA 93101.
As of June 15, 1999, there were 35,671,753 shares of our common stock
outstanding. Unless otherwise indicated in the footnotes below, the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable.
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<PAGE>
The numbers shown in the table below assume no exercise of the underwriters'
over-allotment option. If the underwriters' over-allotment option is exercised
in full, the selling stockholders would sell an additional 900,000 shares.
Principal and Selling Stockholders Table
<TABLE>
<CAPTION>
Number of Shares
Beneficially
Owned as a Total Shares
Result of Beneficially Owned Shares Beneficially
Options and Prior To Offering Owned After Offering
Warrants (Including the (Including the
Exercisable Number of Shares Number of Number of Shares
Within 60 Days Shown in the First Shares Shown in the First
of June 15, 1999 Column) Being Offered Column)(1)
Name or Group of ---------------- ----------------------- ------------- --------------------
Beneficial Owners Number Number Percentage Number Number Percentage
- ----------------- ---------------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cisco Systems, Inc...... -- 3,119,060 8.7% -- 3,119,060 7.7%
170 West Tasman Drive
San Jose, CA 95134
AT&T Ventures........... 798,942(2) 2,386,244(3) 6.5 -- 2,386,244 5.8
3000 Sand Hill Road
Building 1, Suite 285
Menlo Park, CA 94025
John L. MacFarlane...... -- 5,037,620 14.1 -- 5,037,620 12.4
Valdur Koha............. 489,820 3,457,164(4) 9.6 -- 3,457,164 8.4
Judith Hamilton......... 30,165 141,153 * -- 141,153 *
Frank Perna, Jr......... 30,165 126,153 * -- 126,153 *
Neal Douglas............ 858,942(5) 2,446,244(6) 6.7 -- 2,446,244 5.9
Don Listwin............. 37,500 3,229,060(7) 9.0 -- 3,229,060 7.9
Bernard Puckett......... 90,000 105,000 * -- 105,000 *
Bernhard Woebker........ 90,000 115,000 * -- 115,000 *
Banyan Systems ......... -- 1,361,187 3.8 178,940 1,182,247 2.9
Lawrence S. Barels...... -- 455,492(8) 1.3 18,421 437,071 1.1
Daniel Bathon........... -- 905,498(9) 2.5 15,789 889,709 2.2
J. Scott Benson(10)..... -- 589,576 1.7 42,105 547,471 1.3
Michael S. D'Errico..... -- 1,554,321 4.4 105,264 1,449,057 3.6
Patricia E. Giencke..... -- 721,931 2.0 52,632 669,299 1.6
Bernard J. Haan(10)..... -- 1,123,344 3.1 105,264 1,018,080 2.5
Jonathan Dale Ives(10).. -- 804,360 2.3 78,948 725,412 1.8
Eric R. Kanowsky(10).... -- 606,480 1.7 31,579 574,901 1.4
Steven E. Karlson....... -- 651,677 1.8 52,632 599,045 1.5
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially
Owned as a
Result of Total Shares
Options and Beneficially Owned Shares Beneficially
Warrants Prior To Offering Owned After Offering
Exercisable (Including the Number Number of (Including the Number
Within 60 Days of Shares Shown in Shares of Shares Shown in
of June 15, 1999 the First Column) Being Offered the First Column)(1)
Name or Group of ---------------- ------------------------- ------------- ---------------------
Beneficial Owners Number Number Percentage Number Number Percentage
- ----------------- ---------------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bryan P. Lockwood....... 6,800 575,519 1.6 26,316 549,203 1.4
Leopold E. O'Donnell.... -- 715,219 2.0 78,948 636,271 1.6
Glenn P. Parker......... 53,833 697,720 2.0 15,789 681,931 1.7
Arthur J. Rice III(10).. -- 718,980 2.0 39,474 679,506 1.7
Richard J.
Rocaberte(10).......... 1,562 573,813 1.6 52,632 521,181 1.3
Paul I. Wren and Mary
Leland Wren............ 13,750 427,510(11) 1.2 15,788 411,722 1.0
Ben-Liou Yao............ 1,067 732,371 2.1 36,842 695,529 1.7
Other selling
stockholders (6
persons, each owning
less than one percent
of our common stock)... 1,771 859,231 2.4 52,637 806,594 2.0
All directors and
executive officers as a
group (9 persons)...... 1,658,411 14,707,394 39.4 -- 14,707,394 34.7
</TABLE>
- -------
* Indicates ownership of less than 1% of the outstanding shares of our common
stock.
(1) Assumes no exercise of the underwriters' over-allotment option. If such
option is exercised in full, Banyan Systems would sell an additional
161,045 shares; Lawrence S. Barels would sell an additional 16,579 shares;
Daniel Bathon would sell an additional 14,211 shares. J. Scott Benson
would sell an additional 37,895 shares; Michael S. D'Errico would sell an
additional 94,736 shares; Patricia E. Giencke would sell an additional
47,368 shares; Bernard J. Haan would sell an additional 94,736 shares;
Jonathan Dale Ives would sell an additional 71,052 shares; Eric R.
Kanowsky would sell an additional 28,421 shares; Steven E. Karlson would
sell an additional 47,368 shares; Bryan P. Lockwood would sell an
additional 23,684 shares; Leopold E. O'Donnell would sell an additional
71,052 shares; Glenn P. Parker would sell an additional 14,211 shares;
Arthur J. Rice III would sell an additional 35,526 shares; Richard J.
Rocaberte would sell an additional 47,368 shares; Paul I. Wren and Mary
Leland Wren would sell an additional 14,212 shares; Ben-Lion Yao would
sell an additional 33,158 shares; and other selling stockholders would
sell an additional 47,378 shares.
(2) Includes 399,472 and 399,470 shares issuable upon exercise of warrants
held by Venture Fund I, LP and AT&T Venture Fund II, LP.
(3) Includes 793,651 shares held by Venture Fund I, LP and 793,651 shares held
by AT&T Venture Fund II, LP. The general partners of these funds are Dick
Bodman, Brad Burnham and Neal Douglas.
(4) Includes 1,000,000 shares held by The Valdur Koha Qualified Annuity Trust.
(5) Includes 399,472 and 399,470 shares issuable upon exercise of warrants
held by Venture Fund I, LP and AT&T Venture Fund II, LP.
(6) Includes 793,651 shares held by Venture Fund I, LP and 793,651 shares held
by AT&T Venture Fund II, LP. Mr. Douglas, one of our directors, is a
General Partner of AT&T Ventures. Mr. Douglas disclaims beneficial
ownership of all shares except to the extent of his pecuniary interest in
the partnerships.
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<PAGE>
(7) Includes 3,119,060 shares held by Cisco Systems, Inc. Mr. Listwin, one of
our directors, is an Executive Vice President of Cisco Systems and
disclaims beneficial ownership of all shares held by Cisco Systems.
(8) Includes 167,581 shares held by the Barels Family Trust, 163,911 shares
held by Lawrence S. Barels & Wendy L. Barels Charitable Remainder Trust
Account, 10,000 shares held by Orion R. Barels, and 10,000 shares held by
Tiare A. Barels. Mr. Barels was formerly a director of Software.com.
(9) Includes 50,000 shares held by Mr. Bathon's spouse, Julie Bathon, 250,000
shares held by Bathon Investments LLP, 105,000 shares held by The DHB, Jr.
Family Trust, and 3,250 shares held by each of The APB 1999 Irrevocable
Trust, The DHB III 1999 Irrevocable Trust, and The GMB 1999 Irrevocable
Trust.
(10) Former officer of Software.com.
(11) Includes 231,680 shares held by Mary Leland Wren and 182,080 shares held
by Paul I. Wren III.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering and the filing of the second amended and
restated certificate of incorporation, we will be authorized to issue 150
million shares of common stock, $.001 par value, and 5,000,000 shares of
undesignated preferred stock, $.001 par value. The following description of our
capital stock does not purport to be complete and is subject to and qualified
in its entirety by our second amended and restated certificate of incorporation
and bylaws, which are included as exhibits to the registration statement of
which this prospectus forms a part, and by the provisions of applicable
Delaware law.
Common Stock
As of June 15, 1999, there were 35,671,753 shares of common stock
outstanding, which were held of record by approximately 298 stockholders.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of Software.com, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders
of common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, any or all of which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of any preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of
Software.com without further action by the stockholders. Immediately prior to
the closing no shares of preferred stock will be outstanding, and we have no
present plans to issue any shares of preferred stock.
Warrants
Upon the closing of this offering, we will have outstanding warrants to
purchase 798,942 shares of common stock at an exercise price of $4.15 and
67,961 shares at an exercise price of $5.15. These warrants expire on October
3, 2001 and August 10, 2003.
Registration Rights
Under the terms of an agreement between us and the holders of 20,516,580
shares of common stock, these holders are entitled to certain rights to have us
register these shares under the Securities
72
<PAGE>
Act. Under these registration rights, holders of these "registrable securities"
may require that we register their shares for public resale on Form S-3 or
similar short-form registration, provided we are eligible to use Form S-3 or
similar short-form registration and provided further that the value of the
securities to be registered is at least $500,000. Furthermore, in the event we
elect to register any of our shares of common stock for purposes of effecting a
public offering, these holders of registrable securities are entitled to
include their shares of common stock in the registration, subject however to
the right of the managing underwriter to reduce the number of shares proposed
to be registered in view of market conditions. All expenses in connection with
any registration (other than underwriting discounts and commissions) will be
borne by us.
The holders of 6,332,378 shares of common stock to be issued upon the
automatic conversion of the Series A, Series B, Series C, or Series D preferred
stock upon the closing of this offering and the holders of 798,942 shares of
common stock to be issued upon the exercise of warrants are entitled to certain
registration rights. Under the terms of an agreement between us and these
shareholders, beginning 180 days following the closing of this offering,
holders of a majority of the then outstanding registrable securities may
require that we register their shares for public resale. We are not obligated
to register these shares at any time after the two-year period following the
effective date of this offering, or after we have effected one registration
under the agreement. Additionally, if we elect to register any of our common
stock on a form that would be suitable for a registration of the registrable
stock after our initial public offering, we will give the holders of
registrable stock notice of such registration and include any shares of
registrable stock requested for inclusion, subject however to the right of the
underwriter, if any, to reduce the number of shares proposed to be registered
in view of market conditions. Furthermore, a majority of the holders of
registrable stock may require on two separate occasions that we register their
shares for public resale on Form S-3 or similar short-form registration
statement, provided we are eligible to use Form S-3 or similar short-form
registration statement and provided further that the value of the securities to
be registered is at least $500,000. All expenses in connection with any
registration (other than underwriting discounts and commissions) will be borne
by us. All registration rights will terminate at such time as our shares are
publicly traded and the holder is entitled to sell all of its shares in any 90
day period under Rule 144 of the Securities Act and the holders of the
registrable stock hold less that 1% of our outstanding common stock.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our second amended and restated
certificate of incorporation to be filed upon the closing of this offering and
bylaws could make more difficult the acquisition of Software.com by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors. These provisions, summarized below, are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of Software.com to
first negotiate with us. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Software.com outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
Election and Removal of Directors. Our second amended and restated
certificate of incorporation to be filed upon the closing of the offering
provides for the division of our board of directors into three classes, as
nearly equal in number as possible, with the directors in each class serving
for a three-term, and one class being elected each year by our stockholders.
This system of electing and removing directors may tend to discourage a third
party from making a tender offer or
73
<PAGE>
otherwise attempting to obtain control of Software.com and may maintain the
incumbency of our board of directors, as it generally makes it more difficult
for stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only our board of directors, our
Chairman of the Board, our Chief Executive Officer, our President or the
holders of not less than 51% of the shares of our stock that are entitled to
vote at the meeting may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a committee thereof.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, 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. The existence of this provision would be expected
to have an anti-takeover effect with respect to transactions not approved in
advance by our board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by stockholders.
Elimination of Stockholder Action By Written Consent. Our second amended and
restated certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting.
Elimination of Cumulative Voting. Our second amended and restated certificate
of incorporation and bylaws do not provide for cumulative voting in the
election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of Software.com. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in control or
management of Software.com.
Amendment of Restated Charter. The amendment of some of the above provisions
in our second amended and restated certificate of incorporation would require
approval by holders of at least 66 2/3% of our outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is BankBoston, N.A.
Nasdaq National Market Listing
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "SWCM."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock and a
significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of common stock,
including shares issued upon exercise of outstanding options and warrants, in
the public market following this offering could harm market prices and could
impair our ability to raise capital through sale of our equity securities. As
described below, less than 1% of our 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 our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 40,671,753 shares
of common stock, based upon shares outstanding as of June 15, 1999 and no
exercise of outstanding options or warrants. Of these shares, the 6,000,000
shares sold in this offering will be freely tradable without restriction under
the Securities Act, except for shares purchased by our "affiliates" as that
term is defined in Rule 144 under the Securities Act. The remaining 34,671,753
shares of common stock held by existing stockholders are "restricted shares,"
as that term is defined in Rule 144, and are eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
35,650 After the date of this prospectus
34,636,103 At various times after 180 days from the date of this
prospectus, subject, in some cases, to volume limitations.
</TABLE>
The 34,636,103 restricted shares are subject to lock-up agreements or other
contractual restrictions providing that the stockholder will not offer, sell,
contract to sell or otherwise dispose of the shares, for a period of 180 days
after the date of this prospectus, without the prior written consent of Credit
Suisse First Boston Corporation. As a result of these lock-up agreements and
other contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, none of these
shares will be resellable until 181 days after the date of this prospectus.
Beginning 181 days after the date of this prospectus, approximately 30,950,817
restricted shares will be eligible for sale in the public market, all of which
are subject to volume limitations under Rule 144, except approximately
16,582,083 shares eligible for sale under Rule 144(k) and 762,213 shares
eligible for sale under Rule 701. In addition, as of June 15, 1999, there were
outstanding 9,099,018 options, some of which may be exercised prior to the
closing of this offering, and 866,903 warrants to purchase common stock. Those
options and warrants are also subject to lock-up agreements. Credit Suisse
First Boston Corporation may, in its sole discretion and at any time without
notice, release any portion of the securities subject to lock-up agreements or
other contractual restrictions.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate of Software.com, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of: (i)
1% of the number of shares of common stock then outstanding, which will equal
approximately 406,717 shares immediately after this offering; or (ii) the
average weekly trading volume of the common stock during the four calendar
weeks preceding the filing of a Form 144 in connection with the sale. Sales
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<PAGE>
under Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of ours
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, including the
holding period of any prior owner except an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation, or notice provisions of Rule 144.
Within 90 days following the effectiveness of this offering, we will file a
registration statement on Form S-8 to register shares of common stock subject
to outstanding options or reserved for future issuance under our stock plans.
As of June 15, 1999, options to purchase a total of 9,099,018 shares were
outstanding and 789,084 shares were reserved for future issuance under our
stock plan. Common stock issued upon exercise of outstanding vested options,
other than common stock issued to our affiliates, is available for immediate
resale in the open market.
Also beginning six months after the date of this offering, holders of
26,848,958 restricted shares and holders of warrants to purchase 866,903 shares
of common stock will be entitled to have us register their shares for sale in
the public market, based upon shares outstanding as of June 15, 1999. See
"Description of Capital Stock--Registration Rights." If we register any of
these shares, they will become freely tradable without restriction under the
Securities Act, except for shares purchased by affiliates, immediately upon the
effectiveness of such registration.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated June 23, 1999, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and BancBoston
Robertson Stephens Inc. are acting as representatives, the following respective
numbers of shares of common stock:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation................... 2,080,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................ 2,080,000
BancBoston Robertson Stephens Inc. ...................... 1,040,000
Adams, Harkness & Hill, Inc. ............................ 100,000
Invemed Associates, Inc. ................................ 100,000
Needham & Company, Inc. ................................. 100,000
Charles Schwab & Co., Inc. .............................. 100,000
SG Cowen Securities Corporation.......................... 100,000
C.E. Unterberg, Towbin .................................. 100,000
Volpe Brown Whelan & Company, LLC........................ 100,000
Thomas Weisel Partners LLC............................... 100,000
---------
Total.................................................... 6,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.
The selling stockholders have granted to the underwriters a 30-day option to
purchase on a pro rata basis up to 900,000 additional shares at the initial
public offering less the underwriting discounts and commissions. The option may
be exercised only to cover over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $0.63 per share. The underwriters
and the selling group members may allow a discount of $0.10 per share on sales
to other broker/dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Total
------------------------
Without Over- With Over-
Per Share allotment allotment
--------- ------------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions paid
by us..................................... $1.05 $5,250,000 $5,250,000
Expenses payable by us..................... $0.25 $1,250,000 $1,250,000
Underwriting discounts and commissions paid
by the selling stockholders............... $1.05 $1,050,000 $1,995,000
</TABLE>
77
<PAGE>
The underwriters have informed us that they do not expect discretionary sales
by the underwriters to exceed 5% of the shares of common stock being offered in
this offering.
We, our officers and directors and other stockholders have agreed that we
will not offer, sell, contract to sell, announce our intention to sell, pledge
or otherwise dispose of, directly or indirectly, or file with the Securities
and Exchange Commission a registration statement under the Securities Act
relating to, any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in our case issuances pursuant to the exercise of employee stock options, the
exercise of warrants outstanding on the date of this prospectus, and pursuant
to our employee stock purchase plan.
The underwriters have reserved for sale, at the initial offering price up to
450,000 shares of common stock for directors, officers, employees and business
associates of Software.com. The number of shares of common stock available for
sale to the general public in the offering will be reduced to the extent these
persons purchase these reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
Software.com and the selling stockholders have agreed to indemnify the
underwriters against liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in that respect.
The shares of common stock have been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "SWCM."
Prior to this offering, there has been no public market for the common stock.
The initial public offering price was determined by negotiation between
Software.com and the representatives of the underwriters. The principal factors
considered in determining the public offering price include: the information
set forth in this prospectus and otherwise available to the representatives;
the history and the prospects for the industry in which Software.com will
compete; the ability of Software.com's management; the prospects for future
earnings of Software.com; the present state of Software.com's development and
its current financial condition; the general condition of the securities
markets at the time of this offering; and the recent market prices of, and the
demand for, publicly traded common stock of generally comparable companies.
The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives of the underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
78
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Software.com and the
selling stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of common stock are
effected. Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to Software.com, the selling stockholders and the
dealer from whom such purchase confirmation is received that (1) such purchaser
is entitled under applicable provincial securities laws to purchase such common
stock without the benefit of a prospectus qualified under such securities laws,
(2) where required by law, such purchaser is purchasing as principal and not as
agent, and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers, as well as the experts named
herein and the selling stockholders, may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from Software.com. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
79
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration statement
on Form S-1 under the Securities Act of 1933, that registers the shares of
common stock offered hereby. This prospectus does not contain all of the
information stated in the registration statement and the exhibits and schedule
filed with the registration statement. For more information about us and the
common stock offered hereby, you should review the registration statement and
the exhibits and schedule filed with the registration statement. Statements
contained in this prospectus regarding the contents of any contract or any
other document to which reference is made are not necessarily complete, and, in
each instance, you should review the copy of such contract or other documents
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedule filed with the registration statement
may be inspected and copied at the following location of the Securities and
Exchange Commission:
Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
You may also obtain copies of all or any part of the registration statement
from that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http:\\www.sec.gov.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Software.com by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters will be passed upon for the
underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our historical
consolidated financial statements and supplementary consolidated financial
statements at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their reports. We have
included these financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
80
<PAGE>
CHANGE IN ACCOUNTANTS
Effective July 1997, Ernst & Young LLP was engaged as our independent
auditors and replaced Arthur Andersen LLP who were dismissed as our independent
auditors. The decision to change independent auditors was approved by our board
of directors. In the period from December 1994 to July 1997, Arthur Andersen
LLP issued no audit report which was qualified or modified as to uncertainty,
audit scope or accounting principles, no adverse opinions or disclaimers of
opinion on any of our financial statements, and there were no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures. Arthur
Andersen LLP has not audited or reported on any of the financial statements or
information included in this prospectus. Prior to July 1997, we had not
consulted with Ernst & Young LLP on items which involved our accounting
principles or the form of audit opinion to be issued on our financial
statements.
81
<PAGE>
SOFTWARE.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Historical Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Supplementary Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors.......................... F-22
Consolidated Balance Sheets................................................ F-23
Consolidated Statements of Operations...................................... F-24
Consolidated Statements of Shareholders' Equity (Deficit).................. F-25
Consolidated Statements of Cash Flows...................................... F-26
Notes to Consolidated Financial Statements................................. F-27
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Software.com, Inc.
We have audited the accompanying consolidated balance sheets of Software.com,
Inc. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, shareholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Software.com,
Inc. 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.
Ernst & Young LLP
Woodland Hills, California
April 12, 1999
F-2
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31 Equity
------------------ March 31, at March 31,
1997 1998 1999 1999
-------- -------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...... $ 6,080 $ 5,431 $ 5,352
Short-term investments......... 892 496 --
Accounts receivable, less
allowance of $114, $481, and
$788 for December 31, 1997,
1998 and March 31, 1999....... 2,543 9,091 7,856
Prepaid expenses and other
assets........................ 629 501 622
-------- -------- --------
Total current assets......... 10,144 15,519 13,830
Property and equipment, net...... 3,533 3,264 3,096
Deposits and other assets........ 254 249 284
-------- -------- --------
$ 13,931 $ 19,032 $ 17,210
======== ======== ========
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable............... $ 610 $ 1,129 $ 1,711
Accrued payroll and related
liabilities................... 532 1,291 1,191
Other accrued liabilities...... 1,342 1,848 1,253
Deferred revenue............... 3,565 3,747 3,328
Note payable to bank........... 4,388 7,395 7,673
Current portion of long-term
debt.......................... 240 240 240
-------- -------- --------
Total current liabilities.... 10,677 15,650 15,396
Long-term debt................... 340 100 40
Redeemable convertible preferred
stock--Series A, no par value,
1,587,302 shares authorized,
issued and outstanding in 1997
and 1998........................ 5,440 5,972 6,182
Redeemable convertible preferred
stock--Series B, no par value,
1,789,279 shares authorized,
issued and outstanding in 1997
and 1998........................ 7,398 7,398 7,398
Shareholders' equity (deficit):
Convertible preferred stock--
Series C, no par value,
1,329,781 shares authorized,
issued and outstanding in
1998.......................... -- 6,848 $ 6,848 $ --
Common stock, no par value,
authorized--50,000,000 shares
in 1997 and 1998, issued and
outstanding--26,435,681 and
27,052,862 shares at December
31, 1997 and 1998,
respectively, and 27,329,501
shares at March 31, 1999 and
32,035,863 shares issued and
outstanding pro forma......... 3,694 6,336 6,752 27,180
Deferred compensation.......... -- (1,447) (1,343) (1,343)
Accumulated deficit............ (13,618) (21,825) (24,063) (24,063)
-------- -------- -------- --------
Total shareholders' equity
(deficit)................... $ (9,924) $(10,088) $(11,806) $ 1,774
======== ======== ======== ========
Total liabilities and
shareholders' equity
(deficit)................... $ 13,931 $ 19,032 $ 17,210
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31 March 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses........ $ 6,555 $ 7,859 $17,461 $ 3,098 $ 5,045
Services................. 1,327 2,807 8,157 1,800 3,013
------- -------- ------- ------- -------
Total revenues......... 7,882 10,666 25,618 4,898 8,058
------- -------- ------- ------- -------
Cost of revenues:
Software licenses........ 218 689 1,568 485 376
Services................. 767 2,675 7,451 1,647 2,044
------- -------- ------- ------- -------
Total cost of
revenues.............. 985 3,364 9,019 2,132 2,420
------- -------- ------- ------- -------
Gross profit............... 6,897 7,302 16,599 2,766 5,638
Operating expenses:
Sales and marketing...... 4,554 8,607 10,769 2,284 3,560
Research and
development............. 3,457 6,309 8,716 2,135 2,711
General and
administrative.......... 2,136 3,081 4,014 955 1,170
Legal matter............. -- 1,000 (400) -- --
------- -------- ------- ------- -------
Total operating
expenses.............. 10,147 18,997 23,099 5,374 7,441
------- -------- ------- ------- -------
Loss from operations....... (3,250) (11,695) (6,500) (2,608) (1,803)
Other income (expense):
Interest income.......... 87 298 293 79 60
Interest expense......... -- (59) (645) (130) (205)
Other.................... -- -- (84) (39) (12)
------- -------- ------- ------- -------
Total other income
(expense)............. 87 239 (436) (90) (157)
------- -------- ------- ------- -------
Loss before income taxes... (3,163) (11,456) (6,936) (2,698) (1,960)
Provision for income
taxes..................... -- 1 446 1 68
------- -------- ------- ------- -------
Net loss................... (3,163) (11,457) (7,382) (2,699) (2,028)
Accretion on redeemable
convertible preferred
stock..................... (180) (730) (825) (210) (210)
------- -------- ------- ------- -------
Net loss applicable to
common shareholders....... $(3,343) $(12,187) $(8,207) $(2,909) $(2,238)
======= ======== ======= ======= =======
Basic and diluted net loss
per share................. $ (0.13) $ (0.46) $ (0.31) $ (0.11) $ (0.08)
======= ======== ======= ======= =======
Weighted-average shares of
common stock outstanding
used in computing basic
and diluted net loss per
share..................... 25,419 26,235 26,649 26,476 27,170
======= ======== ======= ======= =======
Pro forma basic and diluted
net loss per share
(unaudited)............... $ (0.24) $ (0.06)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per share
(unaudited)............... 30,531 31,876
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Preferred Retained
Stock Common Stock Earnings/
------------- ------------- Accumulated Deferred
Shares Amount Shares Amount (Deficit) Compensation Total
------ ------ ------ ------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $ -- 24,506 $ 639 $ 1,912 $ -- $ 2,551
Issuance of common
stock for cash........ -- -- 1,544 2,178 -- -- 2,178
Issuance of common
stock as
compensation.......... -- -- 60 60 -- -- 60
Issuance of warrants... -- -- -- 430 -- -- 430
Issuance of stock
options............... -- -- -- 46 -- -- 46
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (180) -- (180)
Stock option
exercises............. -- -- 53 53 -- -- 53
Net loss............... -- -- -- -- (3,163) -- (3,163)
----- ------ ------ ------ -------- ------- --------
Balance at December 31,
1996................... -- -- 26,163 3,406 (1,431) -- 1,975
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (730) -- (730)
Stock option
exercises............. -- -- 273 288 -- -- 288
Net loss............... -- -- -- -- (11,457) -- (11,457)
----- ------ ------ ------ -------- ------- --------
Balance at December 31,
1997................... -- -- 26,436 3,694 (13,618) -- (9,924)
Issuance of preferred
Series C.............. 1,330 6,848 -- -- -- -- 6,848
Repricing of warrants.. -- -- -- 294 -- -- 294
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (825) -- (825)
Stock option
exercises............. -- -- 617 759 -- -- 759
Issuance of warrants... -- -- -- 94 -- -- 94
Deferred compensation
related to stock
options............... -- -- -- 1,495 -- (1,495) --
Amortization of
deferred compensation
in connection with
stock options......... -- -- -- -- -- 48 48
Net loss............... -- -- -- -- (7,382) -- (7,382)
----- ------ ------ ------ -------- ------- --------
Balance at December 31,
1998................... 1,330 6,848 27,053 6,336 (21,825) (1,447) (10,088)
Accretion of mandatory
redemption value of
preferred stock
(unaudited)........... -- -- -- -- (210) -- (210)
Stock option exercises
(unaudited)........... -- -- 277 416 -- -- 416
Amortization of
deferred compensation
in connection with
stock options
(unaudited)........... -- -- -- -- -- 104 104
Net loss (unaudited)... -- -- -- -- (2,028) -- (2,028)
----- ------ ------ ------ -------- ------- --------
Balance at March 31,
1999 (unaudited)....... 1,330 $6,848 27,330 $6,752 $(24,063) $(1,343) $(11,806)
===== ====== ====== ====== ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
--------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(3,163) $(11,457) $ (7,382) $(2,699) $(2,028)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Depreciation and
amortization......... 436 1,204 1,648 373 474
Stock issued as
compensation......... 60 -- -- -- --
Deferred
compensation......... -- -- 48 -- 104
Fair value of options
issued related to
lease signing........ 46 -- -- -- --
Contribution of fixed
assets from
customers............ (317) -- -- -- --
Provision for doubtful
accounts............. 69 123 554 106 308
Changes in operating
assets and
liabilities:
Accounts
receivable......... (359) (1,246) (7,102) (1,282) 927
Prepaid expenses and
other current
assets............. (501) (17) 128 43 (121)
Deferred income
taxes.............. (216) 258 -- -- --
Accounts payable.... 424 51 519 817 581
Accrued payroll and
related
liabilities........ 79 291 759 120 (100)
Other accrued
liabilities........ (57) 1,248 506 53 (595)
Deferred revenue.... (672) 3,452 182 (25) (419)
Other............... -- -- 23 -- --
------- -------- -------- ------- -------
Net cash used in
operating
activities....... (4,171) (6,093) (10,117) (2,494) (869)
Investing activities
Acquisition of property
and equipment.......... (2,047) (2,555) (1,379) (284) (307)
Purchases of short-term
investments............ -- (892) (504) -- --
Maturities of short-term
investments............ -- -- 900 892 496
Increase (decrease) in
other assets........... 8 (197) 77 (4) (34)
------- -------- -------- ------- -------
Net cash provided
by (used in)
investing
activities....... (2,039) (3,644) (906) 604 155
Financing activities
Proceeds from long-term
debt................... -- 600 -- -- --
Repayments of long-term
debt................... -- (20) (240) (120) (60)
Proceeds from note
payable to bank, net... -- 4,388 3,007 26 279
Issuance of preferred
stock.................. 4,960 7,398 6,848 -- --
Exercise of stock
options................ 53 288 759 147 416
Issuance of common
stock.................. 2,178 -- -- -- --
------- -------- -------- ------- -------
Net cash provided
by financing
activities....... 7,191 12,654 10,374 53 635
------- -------- -------- ------- -------
Net (decrease) increase
in cash and cash
equivalents............ 981 2,917 (649) (1,837) (79)
Cash and cash
equivalents at
beginning of year...... 2,182 3,163 6,080 6,080 5,431
------- -------- -------- ------- -------
Cash and cash
equivalents at end of
year................... $ 3,163 $ 6,080 $ 5,431 $ 4,243 $ 5,352
======= ======== ======== ======= =======
Income taxes paid....... $ 700 $ 1 $ 383 $ -- $ 68
======= ======== ======== ======= =======
Interest paid........... $ -- $ 59 $ 625 $ 41 $ 189
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business
Software.com, Inc. (the Company) develops, markets, sells, and supports a
variety of Internet standards-based messaging software products to service
providers worldwide, including telecommunications companies, Internet Service
Providers, cable-based Internet access providers, Internet Portals, and
Internet service wholesalers. Service providers use these products to provide
advanced messaging offerings, such as Internet mail services, to their consumer
and business customers.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
As further described in Note 11, the Company acquired Mobility.Net
Corporation on April 12, 1999.
Interim Financial Statements
The accompanying balance sheet as of March 31, 1999 and the statements of
operations and cash flows for the three months ended March 31, 1998 and 1999
and the statement of shareholders' equity for the three months ended March 31,
1999 are unaudited. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of operating results to be expected for the full fiscal year.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid debt instruments purchased with
original maturity dates of three months or less and investments in money market
funds to be cash equivalents. Investments with maturities between three to
twelve months are considered to be short-term investments. Short-term
investments consist of corporate commercial paper.
Concentration of Credit Risk, Other Risks and Significant Customers
The Company's business is extremely competitive and is characterized by rapid
technology change, new product development and product obsolescence, and
evolving industry standards.
The Company grants credit terms in the normal course of business to its
customers. The Company does not require collateral; however, it does perform
periodic credit evaluations and analysis of the amounts due from its customers.
Credit losses have been within management's expectations and potential
uncollectible accounts have been provided for in the financial statements.
F-7
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Revenues from the Company's two largest customers in each of the years ended
December 31, 1996, 1997 and 1998, accounted for 35% and 24%, 17% and 11% and
12% and 10% of total revenues, respectively. At December 31, 1997, and 1998 the
three largest customer receivable balances totaled 50% and 36% of total
accounts receivable, respectively.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Expenditures for additions and major
improvements are capitalized.
Depreciation and leasehold improvements amortization are computed on a
straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and
software................ 3 to 5 years
Furniture and fixtures... 7 years
Leasehold improvements... Lesser of estimated useful life or life of lease
</TABLE>
Income Taxes
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", issued by the Financial Accounting Standards Board (FASB) (see Note 5).
Under this method, deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Accounting for Stock Based Compensation
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant.
The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4 and
SOP 98-9, "Software Revenue Recognition." These statements provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. This guidance is effective for the Company's
transactions entered into subsequent to January 1, 1998. The application of
certain provisions were deferred until fiscal years beginning on or after March
15, 1999. Final adoption of
F-8
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
these provisions is not expected to have a material impact on the Company's
financial condition or results of operation.
Revenue from Software Licenses. The Company recognizes revenue from sales of
software upon delivery of a license key to the customer, provided that
persuasive evidence of an arrangement exists, the license fee is fixed and
determinable, and collection of the fee is considered probable. If the license
agreement has a multi-year term or the license fees are calculated based on
variable measures, such as the number of mailboxes in use, the Company
recognizes revenue as the customer activates mailboxes on their system. Revenue
is earned and recognized under revenue sharing arrangements based on a
percentage of the quarterly revenue generated by the customers' internet
related service offerings that use the Company's products. To date, revenues
and expenses related to these revenue sharing arrangements have not been
significant. Revenues from sales to resellers are not recognized until the
product is sold through to the end user and the license key is issued.
Revenue from Services. Support and maintenance contracts generally call for
the company to provide technical support and software updates and upgrades to
customers. Support and maintenance revenue is recognized ratably over the
support or maintenance period. Other services revenue, primarily consulting and
training, is recognized under the percentage of completion method and is billed
monthly on a time and materials basis.
When software and services are billed prior to the time the related revenue
is recognized under the foregoing policy, deferred revenue is recorded. There
were no unbilled accounts receivable at December 31, 1997 or 1998.
Research and Development
Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
development costs related to software products are expensed as incurred until
the "technological feasibility" of the product has been established. Because of
the relatively short time period between "technological feasibility" and
product release, and the insignificant amount of costs incurred during such
period, no software development costs have been capitalized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
totaled $594,000, $528,000 and $296,000 for 1996, 1997 and 1998, respectively.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial
F-9
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
statements and is effective for fiscal years beginning after December 15, 1997.
To date, the Company has not had any transactions that are required to be
reported as Comprehensive Income.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period. The Company has excluded all redeemable
convertible preferred stock, convertible preferred stock, warrants and
outstanding stock options from the calculation of diluted loss per share
because all such securities are antidilutive for all periods presented.
Pro Forma Shareholders' Equity and Net Loss Per Share (unaudited)
If the offering contemplated by this Prospectus is consummated, the
outstanding shares of Series A, B and C convertible preferred stock will
automatically be converted into common stock. Pro forma shareholders' equity at
March 31, 1999, as adjusted for the assumed conversion is disclosed on the
balance sheet.
Pro forma basic and diluted net loss per share, as presented in the
statements of operations, has been computed as described above and also gives
effect to the conversion of the convertible preferred stock from the original
date of issuance.
Segment Information
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (FAS
131). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers, presented in Notes 1 and 8. Based on the
provisions of FAS 131 and the manner in which management analyzes its business,
the Company has determined that it does not have separately reportable
operating segments.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, short term investments, accounts receivable and accounts payable
approximate their fair values due to the short term nature of these financial
instruments. The fair values of the note payable to bank and the long term debt
are estimated based on current interest rates available to the Company for debt
instruments with similar terms, degrees of risk and remaining maturities. The
carrying values of the note payable to bank and the long term debt approximates
their fair values.
F-10
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results may differ materially from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Software for Internal Use" (SOP 98-1), which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not
expected to have a material impact on the Company's financial condition or
results of operations. To date the Company has not incurred significant costs
developing internal-use software which would be capitalizable.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The Company is required to adopt FAS 133 in its fiscal year ending
December 31, 2000. FAS 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
2. Property and Equipment
The major components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
-------------
1997 1998
------ ------
<S> <C> <C>
Computer equipment and software............................ $3,453 $4,604
Furniture and fixtures..................................... 971 987
Leasehold improvements..................................... 830 1,043
------ ------
5,254 6,634
Less accumulated depreciation and amortization............. 1,721 3,370
------ ------
$3,533 $3,264
====== ======
</TABLE>
3. Note Payable to Bank and Long-Term Debt
The Company has an arrangement with a financial institution which provides
for a total line of credit not to exceed the lesser of $15,000,000 (of which
the Company may draw down up to
F-11
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
$2,500,000 as an equipment acquisition loan), or an amount based on certain
receivables collection criteria. As of December 31, 1998 the Company had
borrowings of $7,735,000 and an additional $4,153,000 was available under this
financing arrangement.
At December 31, 1997 and 1998, borrowings under the line of credit and the
equipment acquisition loan totaled $4,388,000 and $580,000, and $7,395,000 and
$340,000, respectively. The interest rates for borrowing under the line of
credit and the equipment acquisition loan are prime rate plus 1.5% (9.25% at
December 31, 1998) and prime rate plus 1.75% (9.5% at December 31, 1998),
respectively. The credit facility expires on August 31, 2000. The equipment
acquisition loan is classified as long-term debt. Maturities on the equipment
acquisition loan outstanding at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999............................................................... $240
2000............................................................... 100
----
$340
====
</TABLE>
In connection with a renegotiation of the credit facility in 1998, the
Company issued a warrant to the financial institution to purchase 67,961 shares
of common stock of the Company at an exercise price of $5.15 per share. The
fair value of the warrants was determined to be approximately $94,000, using
the Black-Scholes option pricing model with an expected volatility factor of
35%, risk-free interest rate of 6%, no dividend yield, and a 5 year life, and
is being amortized as interest expense over the term of the credit facility
agreement.
The line of credit is collateralized by receivables, inventory, investment
property, equipment, deposit accounts and certain other assets. The financing
agreement also contains certain compliance covenants and restrictive
provisions, among which are restrictions on borrowings and payments of
dividends. At March 31, 1999, the Company was not in compliance with the
minimum tangible net worth provision of the existing credit agreement. However,
the Company obtained a waiver on such covenant from the financial institution.
4. Preferred Stock
In October 1996, the Company issued to AT&T Ventures 1,587,302 shares of
Series A, no par value, redeemable convertible preferred stock (the Preferred
Stock A), for net proceeds of $4,960,000 (the Series A Preferred Stock
Financing Agreement). The Company also issued a warrant to purchase 529,101
shares of common stock of the Company at an exercise price of $5.00 per share
and a warrant to purchase 269,841 shares of common stock at an exercise price
of $7.00 per share (the Common Stock Purchase Warrants). At the option of the
holder, the Preferred Stock A is convertible into shares of common stock at the
conversion ratio of 1:1 subject to anti-dilution protection at any time. The
Preferred Stock A is entitled to voting rights and dividends based on the
number of shares of common stock issuable upon conversion of the Preferred
Stock A. The holders of the Preferred Stock A have liquidation preference at
$3.15 per share plus any declared but unpaid dividends. The
F-12
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
warrants are exercisable for a period of five years from the date of issuance.
At issuance, the fair value of the warrants, approximately $430,000, was
recorded as common stock on the Company's balance sheet. The fair value of the
warrants was determined using the Black-Scholes option pricing model using an
expected volatility factor of 30%, risk free interest rate of 6%, no dividend
yield, and a 5-year life.
In February 1997, the Company issued to Cisco Systems, Inc. 1,789,279 shares
of Series B, no par value, redeemable convertible preferred stock (the
Preferred Stock B), for net proceeds of $7,398,000 (the Series B Preferred
Stock Financing Agreement). At the option of the holder, the Preferred Stock B
is convertible into shares of common stock at the conversion ratio of 1:1
subject to anti-dilution protection at any time. The Preferred Stock B is
entitled to voting rights and dividends based on the number of shares of common
stock issuable upon conversion of the Preferred Stock B. The holders of the
Preferred Stock B have liquidation preference at $4.15 per share plus any
declared but unpaid dividends.
The Preferred Stock A and B will be automatically converted into common stock
at the then applicable conversion rate in the event of an underwritten public
offering of shares of common stock in which the Company receives not less than
$15,000,000 in total proceeds and per share consideration of $5.15 (Qualifying
IPO). Under the terms of the Series A and B Preferred Stock Financing
Agreements, beginning on October 3, 1998 (the Redemption Date), if a Qualifying
IPO had not yet occurred, the holders of a majority of the Preferred Stock A
could request at any time that the Company redeem their shares (Redemption
Request) as described below.
In July 1998, the Company executed an agreement with the holders of the
Preferred Stock A (the Waiver of Redemption Rights Agreement) whereby the
holders of such shares agreed to extend the Redemption Date for a period of 15
months to January 3, 2000. In consideration of the Waiver of Redemption Rights
Agreement, the Company executed an amendment to the Common Stock Purchase
Warrants which reduced the exercise price of such warrants to $4.15 per share.
The exercise period of the warrants remained unchanged. As a result of the
change in the exercise price, the fair value of the warrants increased by
approximately $294,000, which was reclassified from redeemable convertible
preferred stock into common stock.
If a Redemption Request is made by the Preferred Stock A shareholders, the
holders of a majority of the Preferred Stock B may then elect whether or not to
join such Redemption Request. The Preferred Stock A redemption price will be
$3.15 per share plus declared and unpaid dividends and a redemption premium of
10% per year compounded annually.
The Preferred Stock B redemption price will be $4.15 per share plus declared
and unpaid dividends.
The initial fair value of the Preferred Stock A is being increased by
periodic accretions, using the interest method, so that the carrying amount
will equal the mandatory redemption amount at the redemption date. For the
years ended December 31, 1996, 1997, 1998 and the three months ended March 31,
1998 and 1999, such periodic accretions totaled $180,000, $730,000, $825,000
and $210,000 and $210,000 respectively, and are being effected by charges
against accumulated deficit.
F-13
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
If the holders of a majority of the Preferred Stock B elect to join, the
Company shall redeem one-third of the total shares of each series of Preferred
Stock A and B joining in that and each successive Redemption Request. Each
successive Redemption Request must occur at least one year after the previous
Redemption Request, and no Redemption Request will be permitted after January
3, 2003. If the holders of a majority of the Preferred Stock B elect not to
join the first Redemption Request, the Company shall forthwith redeem all
outstanding shares of Preferred Stock A. Six months after such redemption has
occurred, the holders of a majority of the Preferred Stock B may make their own
redemption request (Series B Redemption Request). Upon that and each successive
Series B Redemption Request, the Company shall redeem one-half of the
outstanding shares of Preferred Stock B. Each successive Series B Redemption
Request must occur at least six months after the previous Series B Redemption
Request, and no Series B Redemption Request will be permitted after January 3,
2003.
On August 14, 1998, the Company issued to Cisco Systems, Inc. 1,329,781
shares of Series C, no par value, convertible preferred stock (the Preferred
Stock C) for net proceeds of $6,848,000. The Preferred Stock C contains voting
and dividend rights, preferences and privileges substantially identical to the
Preferred Stock A and B except that the Preferred Stock C is not entitled to
any redemption rights. In addition, in the event of a liquidation, the
Preferred Stock C is entitled to a non-participating liquidation preference
senior to the Preferred Stock A and B.
The Company has reserved 4,706,362 shares of common stock for the conversion
of the Preferred Stock A, B, and C. In addition, the Company has reserved
866,903 shares of common stock for issuance in the event of exercise of
outstanding warrants.
5. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ -- $ --
State................................................... -- 1 1
Foreign................................................. -- -- 445
---- ---- ----
-- 1 446
Deferred:................................................. -- -- --
---- ---- ----
Total................................................. $ -- $ 1 $446
==== ==== ====
</TABLE>
F-14
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
The provision for foreign income taxes in 1998 relates to foreign withholding
taxes. A reconciliation of the statutory federal income tax rate to the
effective tax rate, as a percentage of loss before income tax is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate.......... (34)% (34)% (34)%
State income tax benefits............................ -- (4) (2)
Foreign income taxes................................. -- -- 7
Changes in valuation allowance....................... 34 41 47
Research and development credits..................... -- (2) (6)
Nonqualified stock options........................... -- -- (7)
Other................................................ -- (1) 2
--- --- ---
--% --% 7%
=== === ===
</TABLE>
The components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards........................ $ 3,206 $ 5,923
Research and development tax credit carryforwards....... 222 996
Deferred revenue........................................ 1,544 1,232
Accruals and reserves................................... 276 317
------- -------
Deferred tax assets..................................... 5,248 8,468
Valuation allowance..................................... (5,248) (8,468)
------- -------
Net deferred tax assets................................. $ -- $ --
======= =======
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
At December 31, 1998, the Company had net operating loss carryforwards
available to reduce future federal and state income of $15,914,000 and
$5,797,000 respectively, which expire from 2010 to 2018 for federal and 2001 to
2003 for state.
The Company has federal and state research and development credits of
approximately $462,000 and $150,000, respectively, expiring in 2011 to 2013,
which may be used to offset future tax liabilities. The Company also has a
foreign tax credit of approximately $382,000, which will expire in the year
2003.
Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss and tax credit carryforwards may be limited based on changes in
the percentage of ownership of the Company.
F-15
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Included in the valuation allowance balance is $541,000 related to the
exercise of stock options which is not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation
allowance relating to this amount will be recorded in equity and not reflected
as an income tax benefit in the statement of operations.
6. Commitments and Contingencies
The Company leases its facilities and other equipment under noncancelable
operating leases which expire at various dates through 2001. Approximate
minimum annual lease commitments under operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999............................................................... $1,194
2000............................................................... 506
2001............................................................... 422
2002............................................................... 26
2003............................................................... --
------
$2,148
======
</TABLE>
Rent expense totaled $285,000, $955,000 and $1,378,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
The Company leases one of its facilities from a related party (see Note 9).
The lease expires in February 2002.
The Company has been involved in a contract dispute with a third party
technology partner under a licensing agreement entered into in 1996. The
dispute relates to a minimum royalty obligation of $1,000,000 purportedly owed
by the Company to the third party under the licensing agreement. In 1997, the
third party asserted a claim to the minimum royalty. Based on an analysis of
the claim asserted, the Company accrued $1,000,000 for its potential exposure
under the claim. In February 1999, the parties entered into an agreement to
settle all outstanding claims. Under the terms of the settlement agreement, the
Company agreed to pay the third party a minimum of $400,000, with a contingent
obligation to pay an additional $200,000 if the Company does not take certain
actions prior to December 31, 1999. As a result of this settlement, and the
reduction in the estimated potential liability, the related accrual has been
reduced to $600,000 at December 31, 1998.
7. Stock Options
In October 1995, the Company adopted a stock option plan (the Plan) which
provides for the issuance of incentive and nonqualified stock options. Options
under the stock option plan are granted for a term of five years at an exercise
price equal to the fair market value of the shares at the date of grant, as
determined by the board of directors. The options generally vest over a period
of four years at 25% per year. The Plan authorizes a total of up to 10,500,000
shares of Common Stock for
F-16
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
issuances as either incentive stock or nonqualified options. At December 31,
1998 and March 31, 1999, 3,046,000 and 1,822,000 shares, respectively remain
available for grant under this plan and 6,511,000 and 7,508,000 shares,
respectively are reserved for issuance upon the exercise of outstanding
options.
In addition to the options granted under the Plan, the Company has granted
options outside of the Plan to purchase an aggregate of 1,000,000 shares of
common stock. These options contain the same vesting provisions as those
granted under the Plan except that an option to purchase 250,000 shares is
subject to accelerated vesting in certain circumstances.
A summary of the stock option activity is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Exercise Price
--------------------
Weighted
Shares Low High Average
------ ----- ----- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996............ 5,016 $1.00 $3.35 $1.56
Granted................................... 2,333 3.50 3.65 3.63
Exercised................................. (273) 1.00 3.35 1.06
Canceled.................................. (1,567) 1.00 3.65 1.43
------ ----- ----- -----
Outstanding at December 31, 1997............ 5,509 1.00 3.65 2.50
Granted................................... 3,754 3.65 3.65 3.65
Exercised................................. (617) 1.00 3.65 1.23
Canceled.................................. (1,135) 1.00 3.65 3.06
------ ----- ----- -----
Outstanding at December 31, 1998............ 7,511 1.00 3.65 3.10
Granted (unaudited)....................... 1,401 5.50 6.15 5.71
Exercised (unaudited)..................... (277) 1.00 3.65 1.51
Canceled (unaudited)...................... (127) 3.00 5.50 3.68
------ ----- ----- -----
Outstanding at March 31, 1999 (unaudited)... 8,508 $1.00 $6.15 $3.57
====== ===== ===== =====
</TABLE>
F-17
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable
December 31, 1998 at December 31, 1998
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Shares Contractual Exercise Shares Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
- -------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00--$1.50............. 1,565 2.22 $1.16 1,014 1.16
$3.00--$3.65............. 5,946 3.78 $3.61 1,175 3.51
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable
March 31, 1999 at March 31, 1999
(unaudited) (unaudited)
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Shares Contractual Exercise Shares Exercise
Price Range Outstanding Life Price Exercisable Price
- ----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00--$1.50............. 1,342 1.67 $1.18 874 1.18
$3.00--$3.65............. 5,768 3.54 $3.61 1,301 3.52
$5.50--$6.15............. 1,398 4.00 $5.71 17 5.50
</TABLE>
If the Company recognized employee stock option-related compensation expense
in accordance with FAS 123 and used the minimum value method for determining
the weighted average fair value of options granted during 1996, 1997 and 1998,
its pro forma net loss applicable to common shareholders would have been
$3,524,000, $12,737,000 and $8,979,000 respectively. The pro forma basic and
diluted loss per share would have been $0.14, $0.49 and $0.34 for 1996, 1997
and 1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for 1996, 1997 and 1998 is not representative of the pro forma effect
on net income or loss in future years because compensation expense in future
years will reflect the amortization of a larger number of stock options granted
in several succeeding years.
In computing the pro forma compensation expense under FAS 123, a weighted-
average fair value of $0.31 for 1996 and $0.65 for 1997 and 1998 stock option
grants was estimated at the date of grant using the minimum value option
pricing model with the following assumptions for 1996, 1997 and 1998: risk-free
interest rate of approximately 6%, a weighted-average expected life of the
options of 3.9, 3.4, and 3.3 years, respectively, and no assumed dividend
yield.
As of December 31, 1998, the Company's stock options had a weighted-average
remaining contractual life of 3.5 years.
In connection with the grant of certain share options to employees during
1998, the Company recorded deferred compensation of approximately $1,495,000
for the aggregate differences between the exercise prices of options at their
dates of grant and the deemed fair value for accounting
F-18
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
purposes of the common shares subject to such options. Such amount is being
amortized over the vesting period of the related options. Amortization expense
recognized during 1998 and the three months ended March 31, 1999 totaled
$48,000 and $104,000, respectively.
8. Geographic Information
Information regarding revenues and long-lived assets attributable to the
Company's primary geographic operating regions is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended
December 31
----------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Revenues:
United States................................... $6,935 $ 7,403 $13,377
Europe.......................................... 360 1,034 5,130
Asia............................................ 430 1,232 3,884
Canada.......................................... -- 701 2,754
Other........................................... 157 296 473
------ ------- -------
Total revenues................................ $7,882 $10,666 $25,618
====== ======= =======
</TABLE>
The geographic classification of revenues is based upon the location of the
customer.
<TABLE>
<CAPTION>
December 31
-------------
1997 1998
------ ------
<S> <C> <C>
Long-lived assets:
United States............................................ $3,533 $3,177
Europe................................................... -- 53
Asia..................................................... -- 34
------ ------
Total long-lived assets................................ $3,533 $3,264
====== ======
</TABLE>
9. Related Party Transactions
The Company leases one of its facilities from a limited liability company,
which includes two members of the board of directors. The aggregate lease
commitments related to this lease totaled $496,000 at December 31, 1998. Rent
expense under this lease for the years ended December 31, 1996, 1997, and 1998
and the three months ended March 31, 1998 and 1999 totaled $132,000, $165,000,
$171,000, $41,000 and $47,000, respectively.
For the years ended December 31, 1996, 1997, and 1998 and the three months
ended March 31, 1998 and 1999, revenues from companies affiliated with AT&T
Corporation, which is considered a related party due to its involvement with
AT&T Ventures, a preferred shareholder, totaled approximately $2,775,000,
$2,687,000, $3,599,000, $730,000 and $588,000, respectively. At December 31,
1997 and 1998 and March 31, 1999, accounts receivable from such companies
totaled approximately $948,000 and $847,000 and $626,000, respectively.
F-19
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
10. Retirement Plan
The Company maintains a defined contribution 401(k) plan under which its
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company may make voluntary contributions to the Plan.
Participants are fully vested in the Company's contributions after a specified
number of years of service, as defined under the plan. No Company contributions
had been made to date under the plan.
11. Subsequent Events
Series D Preferred Stock
On April 5, 1999, the Company issued to Hewlett-Packard Company 1,626,016
shares of Series D, no par value, convertible preferred stock (the Preferred
Stock D) for aggregate proceeds of $10,000,000. The Preferred Stock D contains
voting and dividend rights, preferences and privileges substantially identical
to the Preferred Stock C (see Note 4). In addition, in the event of a
liquidation, the Preferred Stock D is entitled to a non-participating
liquidation preference on a parity with the Preferred Stock C. In connection
with this issuance, the board of directors approved an increase in the number
of common shares authorized for issuance from 50,000,000 to 60,000,000.
Acquisition of Mobility.Net Corporation
On April 12, 1999, the Company completed its acquisition of Mobility.Net,
incorporated in July 1996, which offers products for Web messaging using a
Java-based technology platform, that complements the Company's product
offerings. The acquisition was accounted for as a pooling-of-interests. The
Company issued 1,579,294 shares of its common stock in exchange for all of the
outstanding shares of Mobility.Net. The Company also assumed and exchanged all
options to purchase Mobility.Net stock for options to purchase an aggregate of
74,424 shares of the Company's common stock.
F-20
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Operating results of Mobility.Net for the years ended December 31, 1997 and
1998 and the three months ended March 31, 1998 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, March 31,
-------------- -----------------------
1997 1998 1998 1999
------ ------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues.............................. $ -- $ 1 $-- $ 13
====== ====== === ====
Net loss.............................. $ (12) $ (21) $(5) $(25)
====== ====== === ====
</TABLE>
Diluted net loss per share of Software.com on a combined basis after giving
effect to the acquisition of Mobility.Net for the years ended December 31, 1997
and 1998 and for the three months ended March 31, 1998 and 1999 would have been
$(0.44), $(0.29), $(0.10) and $(0.08), respectively.
The financial position of Mobility.Net as of December 31, 1997 and 1998 and
March 31, 1999 were as follows:
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Total Assets........................................ $ 13 $ 27 $33
====== ====== ===
Total Liabilities................................... $ 1 $ -- $19
====== ====== ===
</TABLE>
The Company's operating results for the years ended December 31, 1997 and
1998 and the three months ended March 31, 1998 and 1999 and financial position
as of December 31, 1997 and 1998 and March 31, 1999, after giving effect to the
acquisition of Mobility.Net are presented in the Supplementary Consolidated
Financial Statements.
Initial Public Offering Registration
On April 12, 1999, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission covering the proposed sale of shares of its common stock to the
public. Upon completion of this proposed sale, all outstanding shares of the
Company's convertible preferred stock will automatically convert into common
stock (see Note 1 and Note 4).
Reincorporation
On April 12, 1999, the board of directors authorized the reincorporation of
the Company in the state of Delaware subject to shareholder approval.
F-21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Software.com, Inc.
We have audited the accompanying supplementary consolidated balance sheets of
Software.com, Inc. as of December 31, 1997 and 1998, and the related
supplementary consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Software.com,
Inc. 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.
Ernst & Young LLP
Woodland Hills, California
April 12, 1999
F-22
<PAGE>
SOFTWARE.COM, INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31 Equity
------------------ March 31, at March 31,
1997 1998 1999 1999
-------- -------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...... $ 6,083 $ 5,447 $ 5,366
Short-term investments......... 892 496 --
Accounts receivable, less
allowance of $114, $481, and
$788 for December 31, 1997,
1998 and March 31, 1999....... 2,543 9,091 7,857
Prepaid expenses and other
assets........................ 629 501 630
-------- -------- --------
Total current assets......... 10,147 15,535 13,853
Property and equipment, net...... 3,543 3,275 3,106
Deposits and other assets........ 254 249 284
-------- -------- --------
$ 13,944 $ 19,059 $ 17,243
======== ======== ========
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable............... $ 610 $ 1,129 $ 1,711
Accrued payroll and related
liabilities................... 532 1,291 1,191
Other accrued liabilities...... 1,343 1,848 1,272
Deferred revenue............... 3,565 3,747 3,328
Note payable to bank........... 4,388 7,395 7,673
Current portion of long-term
debt.......................... 240 240 240
-------- -------- --------
Total current liabilities.... 10,678 15,650 15,415
Long-term debt................... 340 100 40
Redeemable convertible preferred
stock--Series A, no par value,
1,587,302 shares authorized,
issued and outstanding in 1997
and 1998........................ 5,440 5,972 6,182
Redeemable convertible preferred
stock--Series B, no par value,
1,789,279 shares authorized,
issued and outstanding in 1997
and 1998........................ 7,398 7,398 7,398
Shareholders' equity (deficit):
Convertible preferred stock--
Series C, no par value,
1,329,781 shares authorized,
issued and outstanding in
1998.......................... -- 6,848 $ 6,848 $ --
Common stock, no par value,
authorized--50,000,000 shares
in 1997 and 1998, issued and
outstanding--28,014,975 and
28,632,156 shares at December
31, 1997 and 1998,
respectively, and 28,908,795
shares at March 31, 1999 and
33,615,157 shares issued and
outstanding pro forma......... 3,718 6,396 6,824 27,252
Deferred compensation.......... -- (1,447) (1,343) (1,343)
Accumulated deficit............ (13,630) (21,858) (24,121) (24,121)
-------- -------- -------- --------
Total shareholders' equity
(deficit)................... (9,912) (10,061) $(11,792) $ 1,788
======== ======== ======== ========
Total liabilities and
shareholders' equity
(deficit)................... $ 13,944 $ 19,059 $ 17,243
======== ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
SOFTWARE.COM, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31 March 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses........ $ 6,555 $ 7,859 $17,462 $ 3,098 $ 5,058
Services................. 1,327 2,807 8,157 1,800 3,013
------- -------- ------- ------- -------
Total revenues......... 7,882 10,666 25,619 4,898 8,071
------- -------- ------- ------- -------
Cost of revenues:
Software licenses........ 218 689 1,568 485 376
Services................. 767 2,675 7,451 1,647 2,044
------- -------- ------- ------- -------
Total cost of
revenues.............. 985 3,364 9,019 2,132 2,420
------- -------- ------- ------- -------
Gross profit............... 6,897 7,302 16,600 2,766 5,651
Operating expenses:
Sales and marketing...... 4,554 8,607 10,769 2,284 3,560
Research and
development............. 3,457 6,309 8,716 2,135 2,741
General and
administrative.......... 2,136 3,093 4,036 960 1,178
Legal matter............. -- 1,000 (400) -- --
------- -------- ------- ------- -------
Total operating
expenses.............. 10,147 19,009 23,121 5,379 7,479
------- -------- ------- ------- -------
Loss from operations....... (3,250) (11,707) (6,521) (2,613) (1,828)
Other income (expense):
Interest income.......... 87 298 293 79 60
Interest expense......... -- (59) (645) (130) (205)
Other.................... -- -- (84) (39) (12)
------- -------- ------- ------- -------
Total other income
(expense)............. 87 239 (436) (90) (157)
------- -------- ------- ------- -------
Loss before income taxes... (3,163) (11,468) (6,957) (2,703) (1,985)
Provision for income
taxes..................... -- 1 446 1 68
------- -------- ------- ------- -------
Net loss................... (3,163) (11,469) (7,403) (2,704) (2,053)
Accretion on redeemable
convertible preferred
stock..................... (180) (730) (825) (210) (210)
------- -------- ------- ------- -------
Net loss applicable to
common shareholders....... $(3,343) $(12,199) $(8,228) $(2,914) $(2,263)
======= ======== ======= ======= =======
Basic and diluted net loss
per share................. $ (0.13) $ (0.44) $ (0.29) $ (0.10) $ (0.08)
======= ======== ======= ======= =======
Weighted-average shares of
common stock outstanding
used in computing basic
and diluted net loss per
share..................... 25,419 27,814 28,228 28,055 28,749
======= ======== ======= ======= =======
Pro forma basic and diluted
net loss per share
(unaudited)............... $ (0.23) $ (0.06)
======= =======
Shares used in computing
pro forma basic and
diluted net loss per share
(unaudited)............... 32,110 33,455
======= =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
SOFTWARE.COM, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Preferred Retained
Stock Common Stock Earnings/
------------- ------------- Accumulated Deferred
Shares Amount Shares Amount (Deficit) Compensation Total
------ ------ ------ ------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $ -- 24,506 $ 639 $ 1,912 $ -- $ 2,551
Issuance of common
stock for cash........ -- -- 1,544 2,178 -- -- 2,178
Issuance of common
stock as
compensation.......... -- -- 60 60 -- -- 60
Issuance of warrants... -- -- -- 430 -- -- 430
Issuance of stock
options............... -- -- -- 46 -- -- 46
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (180) -- (180)
Stock option
exercises............. -- -- 53 53 -- -- 53
Net loss............... -- -- -- -- (3,163) -- (3,163)
----- ------ ------ ------ -------- ------- --------
Balance at December 31,
1996................... -- -- 26,163 3,406 (1,431) -- 1,975
Issuance of common
stock................. -- -- 1,579 24 -- -- 24
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (730) -- (730)
Stock option
exercises............. -- -- 273 288 -- -- 288
Net loss............... -- -- -- -- (11,469) -- (11,469)
----- ------ ------ ------ -------- ------- --------
Balance at December 31,
1997................... -- -- 28,015 3,718 (13,630) -- (9,912)
Issuance of preferred
Series C.............. 1,330 6,848 -- -- -- -- 6,848
Repricing of warrants.. -- -- -- 294 -- -- 294
Capital contribution... -- -- -- 36 -- -- 36
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (825) -- (825)
Stock option
exercises............. -- -- 617 759 -- -- 759
Issuance of warrants... -- -- -- 94 -- -- 94
Deferred compensation
related to stock
options............... -- -- -- 1,495 -- (1,495) --
Amortization of
deferred compensation
in connection with
stock options......... -- -- -- -- -- 48 48
Net loss............... -- -- -- -- (7,403) -- (7,403)
----- ------ ------ ------ -------- ------- --------
Balance at December 31,
1998................... 1,330 6,848 28,632 6,396 (21,858) (1,447) (10,061)
Capital contribution
(unaudited)........... -- -- -- 12 -- -- 12
Accretion of mandatory
redemption value of
preferred stock
(unaudited)........... -- -- -- -- (210) -- (210)
Stock option exercises
(unaudited)........... -- -- 277 416 -- -- 416
Amortization of
deferred compensation
in connection with
stock options
(unaudited)........... -- -- -- -- -- 104 104
Net loss (unaudited)... -- -- -- -- (2,053) -- (2,053)
----- ------ ------ ------ -------- ------- --------
Balance at March 31,
1999 (unaudited)....... 1,330 $6,848 28,909 $6,824 $(24,121) $(1,343) $(11,792)
===== ====== ====== ====== ======== ======= ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
SOFTWARE.COM, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months ended
Year ended December 31, March 31,
--------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(3,163) $(11,469) $ (7,403) $(2,704) $(2,053)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Depreciation and
amortization......... 436 1,204 1,652 378 475
Stock issued as
compensation......... 60 -- -- -- --
Deferred
compensation......... -- -- 48 -- 104
Fair value of options
issued related to
lease signing........ 46 -- -- -- --
Contribution of fixed
assets from
customers............ (317) -- -- -- --
Provision for doubtful
accounts............. 69 123 554 106 308
Changes in operating
assets and
liabilities:
Accounts
receivable......... (359) (1,246) (7,102) (1,282) 926
Prepaid expenses and
other current
assets............. (501) (17) 128 43 (129)
Deferred income
taxes.............. (216) 258 -- -- --
Accounts payable.... 424 51 519 817 581
Accrued payroll and
related
liabilities........ 79 291 759 120 (100)
Other accrued
liabilities........ (57) 1,249 506 53 (576)
Deferred revenue.... (672) 3,452 182 (25) (419)
Other............... -- -- 23 -- --
------- -------- -------- ------- -------
Net cash used in
operating
activities....... (4,171) (6,104) (10,134) (2,494) (883)
Investing activities
Acquisition of property
and equipment.......... (2,047) (2,555) (1,385) (284) (307)
Purchases of short-term
investments............ -- (892) (504) -- --
Maturities of short-term
investments............ -- -- 900 892 496
Increase (decrease) in
other assets........... 8 (197) 77 (4) (34)
------- -------- -------- ------- -------
Net cash provided
by (used in)
investing
activities....... (2,039) (3,644) (912) 604 155
Financing activities
Proceeds from long-term
debt................... -- 600 -- -- --
Repayments of long-term
debt................... -- (20) (240) (120) (60)
Proceeds from note
payable to bank, net... -- 4,388 3,007 26 279
Issuance of preferred
stock.................. 4,960 7,398 6,848 -- --
Exercise of stock
options................ 53 288 759 147 416
Issuance of common
stock.................. 2,178 14 36 -- 12
------- -------- -------- ------- -------
Net cash provided
by financing
activities....... 7,191 12,668 10,410 53 647
------- -------- -------- ------- -------
Net (decrease) increase
in cash and cash
equivalents............ 981 2,920 (636) (1,837) (81)
Cash and cash
equivalents at
beginning of year...... 2,182 3,163 6,083 6,083 5,447
------- -------- -------- ------- -------
Cash and cash
equivalents at end of
year................... $ 3,163 $ 6,083 $ 5,447 $ 4,246 $ 5,366
======= ======== ======== ======= =======
Income taxes paid....... $ 700 $ 1 $ 383 $ -- $ 68
======= ======== ======== ======= =======
Interest paid........... $ -- $ 59 $ 625 $ 41 $ 189
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business
Software.com, Inc. (the Company) develops, markets, sells, and supports a
variety of Internet standards-based messaging software products to service
providers worldwide, including telecommunications companies, Internet Service
Providers, cable-based Internet access providers, Internet Portals, and
Internet service wholesalers. Service providers use these products to provide
advanced messaging offerings, such as Internet mail services, to their consumer
and business customers.
Principles of Consolidation
The accompanying supplementary consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
As further described in Note 11, the Company acquired Mobility.Net
Corporation on April 12, 1999. The acquisition was accounted for as a pooling-
of-interests. Accordingly, the financial information presented reflects the
combined financial position and operations of the Company and Mobility.Net for
all dates and periods presented.
Supplementary Interim Financial Statements
The accompanying supplementary balance sheet as of March 31, 1999 and the
supplementary statements of operations and cash flows for the three months
ended March 31, 1998 and 1999 and the supplementary statement of shareholders'
equity for the three months ended March 31, 1999 are unaudited. In the opinion
of management, the unaudited supplementary financial statements have been
prepared on the same basis as the audited supplementary financial statements
and include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the interim periods. The results of operations
for the three months ended March 31, 1999 are not necessarily indicative of
operating results to be expected for the full fiscal year.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid debt instruments purchased with
original maturity dates of three months or less and investments in money market
funds to be cash equivalents. Investments with maturities between three to
twelve months are considered to be short-term investments. Short-term
investments consist of corporate commercial paper.
Concentration of Credit Risk, Other Risks and Significant Customers
The Company's business is extremely competitive and is characterized by rapid
technology change, new product development and product obsolescence, and
evolving industry standards.
F-27
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
The Company grants credit terms in the normal course of business to its
customers. The Company does not require collateral; however, it does perform
periodic credit evaluations and analysis of the amounts due from its customers.
Credit losses have been within management's expectations and potential
uncollectible accounts have been provided for in the financial statements.
Revenues from the Company's two largest customers in each of the years ended
December 31, 1996, 1997 and 1998, accounted for 35% and 24%, 17% and 11% and
12% and 10% of total revenues, respectively. At December 31, 1997, and 1998 the
three largest customer receivable balances totaled 50% and 36% of total
accounts receivable, respectively.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Expenditures for additions and major
improvements are capitalized.
Depreciation and leasehold improvements amortization are computed on a
straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and
software................ 3 to 5 years
Furniture and fixtures... 7 years
Leasehold improvements... Lesser of estimated useful life or life of lease
</TABLE>
Income Taxes
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," issued by the Financial Accounting Standards Board (FASB) (see Note 5).
Under this method, deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Accounting for Stock Based Compensation
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant.
The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4 and
SOP 98-9, "Software Revenue Recognition." These statements provide guidance on
applying generally accepted accounting
F-28
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
principles in recognizing revenue on software transactions. This guidance is
effective for the Company's transactions entered into subsequent to January 1,
1998. The application of certain provisions were deferred until fiscal years
beginning on or after March 15, 1999. Final adoption of these provisions is not
expected to have a material impact on the Company's financial condition or
results of operation.
Revenue from Software Licenses. The Company recognizes revenue from sales of
software upon delivery of a license key to the customer, provided that
persuasive evidence of an arrangement exists, the license fee is fixed and
determinable, and collection of the fee is considered probable. If the license
agreement has a multi-year term or the license fees are calculated based on
variable measures, such as the number of mailboxes in use, the Company
recognizes revenue as the customer activates mailboxes on their system. Revenue
is earned and recognized under revenue sharing arrangements based on a
percentage of the quarterly revenue generated by the customers' internet
related service offerings that use the Company's products. To date, revenues
and expenses related to these revenue sharing arrangements have not been
significant. Revenues from sales to resellers are not recognized until the
product is sold through to the end user and the license key is issued.
Revenue from Services. Support and maintenance contracts generally call for
the company to provide technical support and software updates and upgrades to
customers. Support and maintenance revenue is recognized ratably over the
support or maintenance period. Other services revenue, primarily consulting and
training, is recognized under the percentage of completion method and is billed
monthly on a time and materials basis.
When software and services are billed prior to the time the related revenue
is recognized under the foregoing policy, deferred revenue is recorded. There
were no unbilled accounts receivable at December 31, 1997 or 1998.
Research and Development
Pursuant to Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
development costs related to software products are expensed as incurred until
the "technological feasibility" of the product has been established. Because of
the relatively short time period between "technological feasibility" and
product release, and the insignificant amount of costs incurred during such
period, no software development costs have been capitalized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
totaled $594,000, $528,000 and $296,000 for 1996, 1997 and 1998, respectively.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for the reporting and
F-29
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
display of comprehensive income and its components in a full set of general
purpose financial statements and is effective for fiscal years beginning after
December 15, 1997. To date, the Company has not had any transactions that are
required to be reported as Comprehensive Income.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period. The Company has excluded all redeemable
convertible preferred stock, convertible preferred stock, warrants and
outstanding stock options from the calculation of diluted loss per share
because all such securities are antidilutive for all periods presented.
Pro Forma Shareholders' Equity and Net Loss Per Share (unaudited)
If the offering contemplated by this Prospectus is consummated, the
outstanding shares of Series A, B and C convertible preferred stock will
automatically be converted into common stock. Pro forma shareholders' equity at
March 31, 1999, as adjusted for the assumed conversion is disclosed on the
balance sheet.
Pro forma basic and diluted net loss per share, as presented in the
supplementary statements of operations, has been computed as described above
and also gives effect to the conversion of the convertible preferred stock from
the original date of issuance.
Segment Information
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (FAS
131). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers, presented in Notes 1 and 8. Based on the
provisions of FAS 131 and the manner in which management analyzes its business,
the Company has determined that it does not have separately reportable
operating segments.
Fair Value of Financial Instruments
The carrying amounts reported in the supplementary balance sheets for cash
and cash equivalents, short term investments, accounts receivable and accounts
payable approximate their fair values due to the short term nature of these
financial instruments. The fair values of the note payable to bank and the long
term debt are estimated based on current interest rates available to the
Company for debt instruments with similar terms, degrees of risk and remaining
maturities. The carrying values of the note payable to bank and the long term
debt approximates their fair values.
F-30
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results may differ materially from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Software for Internal Use" (SOP 98-1), which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not
expected to have a material impact on the Company's financial condition or
results of operations. To date the Company has not incurred significant costs
developing internal-use software which would be capitalizable.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The Company is required to adopt FAS 133 in its fiscal year ending
December 31, 2000. FAS 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
2. Property and Equipment
The major components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Computer equipment and software............................ $3,463 $4,615
Furniture and fixtures..................................... 971 987
Leasehold improvements..................................... 830 1,043
------ ------
5,264 6,645
Less accumulated depreciation and amortization............. 1,721 3,370
------ ------
$3,543 $3,275
====== ======
</TABLE>
3. Note Payable to Bank and Long-Term Debt
The Company has an arrangement with a financial institution which provides
for a total line of credit not to exceed the lesser of $15,000,000 (of which
the Company may draw down up to
F-31
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
$2,500,000 as an equipment acquisition loan), or an amount based on certain
receivables collection criteria. As of December 31, 1998 the Company had
borrowings of $7,735,000 and an additional $4,153,000 was available under this
financing arrangement.
At December 31, 1997 and 1998, borrowings under the line of credit and the
equipment acquisition loan totaled $4,388,000 and $580,000, and $7,395,000 and
$340,000, respectively. The interest rates for borrowing under the line of
credit and the equipment acquisition loan are prime rate plus 1.5% (9.25% at
December 31, 1998) and prime rate plus 1.75% (9.5% at December 31, 1998),
respectively. The credit facility expires on August 31, 2000. The equipment
acquisition loan is classified as long-term debt. Maturities on the equipment
acquisition loan outstanding at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999................................................................ $240
2000................................................................ 100
----
$340
====
</TABLE>
In connection with a renegotiation of the credit facility in 1998, the
Company issued a warrant to the financial institution to purchase 67,961 shares
of common stock of the Company at an exercise price of $5.15 per share. The
fair value of the warrants was determined to be approximately $94,000, using
the Black-Scholes option pricing model with an expected volatility factor of
35%, risk-free interest rate of 6%, no dividend yield, and a 5 year life, and
is being amortized as interest expense over the term of the credit facility
agreement.
The line of credit is collateralized by receivables, inventory, investment
property, equipment, deposit accounts and certain other assets. The financing
agreement also contains certain compliance covenants and restrictive
provisions, among which are restrictions on borrowings and payments of
dividends. At March 31, 1999, the Company was not in compliance with the
minimum tangible net worth provision of the existing credit agreement. However,
the Company obtained a waiver on such covenant from the financial institution.
4. Preferred Stock
In October 1996, the Company issued to AT&T Ventures 1,587,302 shares of
Series A, no par value, redeemable convertible preferred stock (the Preferred
Stock A), for net proceeds of $4,960,000 (the Series A Preferred Stock
Financing Agreement). The Company also issued a warrant to purchase 529,101
shares of common stock of the Company at an exercise price of $5.00 per share
and a warrant to purchase 269,841 shares of common stock at an exercise price
of $7.00 per share (the Common Stock Purchase Warrants). At the option of the
holder, the Preferred Stock A is convertible into shares of common stock at the
conversion ratio of 1:1 subject to anti-dilution protection at any time. The
Preferred Stock A is entitled to voting rights and dividends based on the
number of shares of common stock issuable upon conversion of the Preferred
Stock A. The holders of the Preferred Stock A have liquidation preference at
$3.15 per share plus any declared but unpaid dividends. The
F-32
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
warrants are exercisable for a period of five years from the date of issuance.
At issuance, the fair value of the warrants, approximately $430,000, was
recorded as common stock on the Company's balance sheet. The fair value of the
warrants was determined using the Black-Scholes option pricing model using an
expected volatility factor of 30%, risk free interest rate of 6%, no dividend
yield, and a 5-year life.
In February 1997, the Company issued to Cisco Systems, Inc. 1,789,279 shares
of Series B, no par value, redeemable convertible preferred stock (the
Preferred Stock B), for net proceeds of $7,398,000 (the Series B Preferred
Stock Financing Agreement). At the option of the holder, the Preferred Stock B
is convertible into shares of common stock at the conversion ratio of 1:1
subject to anti-dilution protection at any time. The Preferred Stock B is
entitled to voting rights and dividends based on the number of shares of common
stock issuable upon conversion of the Preferred Stock B. The holders of the
Preferred Stock B have liquidation preference at $4.15 per share plus any
declared but unpaid dividends.
The Preferred Stock A and B will be automatically converted into common stock
at the then applicable conversion rate in the event of an underwritten public
offering of shares of common stock in which the Company receives not less than
$15,000,000 in total proceeds and per share consideration of $5.15 (Qualifying
IPO). Under the terms of the Series A and B Preferred Stock Financing
Agreements, beginning on October 3, 1998 (the Redemption Date), if a Qualifying
IPO had not yet occurred, the holders of a majority of the Preferred Stock A
could request at any time that the Company redeem their shares (Redemption
Request) as described below.
In July 1998, the Company executed an agreement with the holders of the
Preferred Stock A (the Waiver of Redemption Rights Agreement) whereby the
holders of such shares agreed to extend the Redemption Date for a period of 15
months to January 3, 2000. In consideration of the Waiver of Redemption Rights
Agreement, the Company executed an amendment to the Common Stock Purchase
Warrants which reduced the exercise price of such warrants to $4.15 per share.
The exercise period of the warrants remained unchanged. As a result of the
change in the exercise price, the fair value of the warrants increased by
approximately $294,000, which was reclassified from redeemable convertible
preferred stock into common stock.
If a Redemption Request is made by the Preferred Stock A shareholders, the
holders of a majority of the Preferred Stock B may then elect whether or not to
join such Redemption Request. The Preferred Stock A redemption price will be
$3.15 per share plus declared and unpaid dividends and a redemption premium of
10% per year compounded annually.
The Preferred Stock B redemption price will be $4.15 per share plus declared
and unpaid dividends.
The initial fair value of the Preferred Stock A is being increased by
periodic accretions, using the interest method, so that the carrying amount
will equal the mandatory redemption amount at the redemption date. For the
years ended December 31, 1996, 1997, 1998 and the three months ended March 31,
1998 and 1999, such periodic accretions totaled $180,000, $730,000, $825,000
and $210,000 and $210,000 respectively, and are being effected by charges
against accumulated deficit.
F-33
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
If the holders of a majority of the Preferred Stock B elect to join, the
Company shall redeem one-third of the total shares of each series of Preferred
Stock A and B joining in that and each successive Redemption Request. Each
successive Redemption Request must occur at least one year after the previous
Redemption Request, and no Redemption Request will be permitted after
January 3, 2003. If the holders of a majority of the Preferred Stock B elect
not to join the first Redemption Request, the Company shall forthwith redeem
all outstanding shares of Preferred Stock A. Six months after such redemption
has occurred, the holders of a majority of the Preferred Stock B may make their
own redemption request (Series B Redemption Request). Upon that and each
successive Series B Redemption Request, the Company shall redeem one-half of
the outstanding shares of Preferred Stock B. Each successive Series B
Redemption Request must occur at least six months after the previous Series B
Redemption Request, and no Series B Redemption Request will be permitted after
January 3, 2003.
On August 14, 1998, the Company issued to Cisco Systems, Inc. 1,329,781
shares of Series C, no par value, convertible preferred stock (the Preferred
Stock C) for net proceeds of $6,848,000. The Preferred Stock C contains voting
and dividend rights, preferences and privileges substantially identical to the
Preferred Stock A and B except that the Preferred Stock C is not entitled to
any redemption rights. In addition, in the event of a liquidation, the
Preferred Stock C is entitled to a non-participating liquidation preference
senior to the Preferred Stock A and B.
The Company has reserved 4,706,362 shares of common stock for the conversion
of the Preferred Stock A, B, and C. In addition, the Company has reserved
866,903 shares of common stock for issuance in the event of exercise of
outstanding warrants.
5. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $ -- $ -- $ --
State.................................................... -- 1 1
Foreign.................................................. -- -- 445
---- ---- ----
-- 1 446
Deferred:.................................................. -- -- --
---- ---- ----
Total.................................................. $ -- $ 1 $446
==== ==== ====
</TABLE>
F-34
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
The provision for foreign income taxes in 1998 relates to foreign withholding
taxes. A reconciliation of the statutory federal income tax rate to the
effective tax rate, as a percentage of loss before income tax is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate........... (34)% (34)% (34)%
State income tax benefits............................. -- (4) (2)
Foreign income taxes.................................. -- -- 7
Changes in valuation allowance........................ 34 41 47
Research and development credits...................... -- (2) (6)
Nonqualified stock options............................ -- -- (7)
Other................................................. -- (1) 2
--- --- ---
--% --% 7%
=== === ===
</TABLE>
The components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards......................... $ 3,206 $ 5,923
Research and development tax credit carryforwards........ 222 996
Deferred revenue......................................... 1,544 1,232
Accruals and reserves.................................... 276 317
------- -------
Deferred tax assets...................................... 5,248 8,468
Valuation allowance...................................... (5,248) (8,468)
------- -------
Net deferred tax assets.................................. $ -- $ --
======= =======
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
At December 31, 1998, the Company had net operating loss carryforwards
available to reduce future federal and state income of $15,914,000 and
$5,797,000 respectively, which expire from 2010 to 2018 for federal and 2001 to
2003 for state.
The Company has federal and state research and development credits of
approximately $462,000 and $150,000, respectively, expiring in 2011 to 2013,
which may be used to offset future tax liabilities. The Company also has a
foreign tax credit of approximately $382,000, which will expire in the year
2003.
Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss and tax credit carryforwards may be limited based on changes in
the percentage of ownership of the Company.
F-35
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Included in the valuation allowance balance is $541,000 related to the
exercise of stock options which is not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation
allowance relating to this amount will be recorded in equity and not reflected
as an income tax benefit in the supplementary statement of operations.
6. Commitments and Contingencies
The Company leases its facilities and other equipment under noncancelable
operating leases which expire at various dates through 2001. Approximate
minimum annual lease commitments under operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999............................................................. $1,194
2000............................................................. 506
2001............................................................. 422
2002............................................................. 26
2003............................................................. --
------
$2,148
======
</TABLE>
Rent expense totaled $285,000, $955,000 and $1,378,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
The Company leases one of its facilities from a related party (see Note 9).
The lease expires in February 2002.
The Company has been involved in a contract dispute with a third party
technology partner under a licensing agreement entered into in 1996. The
dispute relates to a minimum royalty obligation of $1,000,000 purportedly owed
by the Company to the third party under the licensing agreement. In 1997, the
third party asserted a claim to the minimum royalty. Based on an analysis of
the claim asserted, the Company accrued $1,000,000 for its potential exposure
under the claim. In February 1999, the parties entered into an agreement to
settle all outstanding claims. Under the terms of the settlement agreement, the
Company agreed to pay the third party a minimum of $400,000, with a contingent
obligation to pay an additional $200,000 if the Company does not take certain
actions prior to December 31, 1999. As a result of this settlement, and the
reduction in the estimated potential liability, the related accrual has been
reduced to $600,000 at December 31, 1998.
7. Stock Options
In October 1995, the Company adopted a stock option plan (the Plan) which
provides for the issuance of incentive and nonqualified stock options. Options
under the stock option plan are granted for a term of five years at an exercise
price equal to the fair market value of the shares at the date of grant, as
determined by the board of directors. The options generally vest over a period
of four years at 25% per year. The Plan authorizes a total of up to 10,500,000
shares of Common Stock for
F-36
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
issuances as either incentive stock or nonqualified options. At December 31,
1998 and March 31, 1999, 3,046,000 and 1,822,000 shares, respectively remain
available for grant under this plan and 6,511,000 and 7,582,000 shares,
respectively are reserved for issuance upon the exercise of outstanding
options.
In addition to the options granted under the Plan, the Company has granted
options outside of the Plan to purchase an aggregate of 1,000,000 shares of
common stock. These options contain the same vesting provisions as those
granted under the Plan except that an option to purchase 250,000 shares is
subject to accelerated vesting in certain circumstances.
A summary of the stock option activity is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Exercise Price
--------------------
Weighted
Shares Low High Average
------ ----- ----- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996............... 5,016 $1.00 $3.35 $1.56
Granted...................................... 2,333 3.50 3.65 3.63
Exercised.................................... (273) 1.00 3.35 1.06
Canceled..................................... (1,567) 1.00 3.65 1.43
------ ----- ----- -----
Outstanding at December 31, 1997............... 5,509 1.00 3.65 2.50
Granted...................................... 3,754 3.65 3.65 3.65
Exercised.................................... (617) 1.00 3.65 1.23
Canceled..................................... (1,135) 1.00 3.65 3.06
------ ----- ----- -----
Outstanding at December 31, 1998............... 7,511 1.00 3.65 3.10
Granted (unaudited).......................... 1,475 0.63 6.15 5.46
Exercised (unaudited)........................ (277) 1.00 3.65 1.51
Canceled (unaudited)......................... (127) 3.00 5.50 3.68
------ ----- ----- -----
Outstanding at March 31, 1999 (unaudited)...... 8,582 $0.63 $6.15 $3.54
====== ===== ===== =====
</TABLE>
F-37
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable
December 31, 1998 at December 31, 1998
------------------------------------- --------------------
Weighted Weighted
Number of Weighted Average Average Number of Average
Exercise Shares Remaining Exercise Shares Exercise
Price Range Outstanding Contractual Life Price Exercisable Price
----------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00--$1.50..... 1,565 2.22 $1.16 1,014 1.16
$3.00--$3.65..... 5,946 3.78 $3.61 1,175 3.51
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at March 31, 1999 at March 31, 1999
(unaudited) (unaudited)
------------------------------------- --------------------
Weighted Weighted
Number of Weighted Average Average Number of Average
Shares Remaining Exercise Shares Exercise
Price Range Outstanding Contractual Life Price Exercisable Price
----------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.63--$1.50..... 1,416 2.10 $1.15 874 1.18
$3.00--$3.65..... 5,768 3.54 $3.61 1,301 3.52
$5.50--$6.15..... 1,398 4.00 $5.71 17 5.50
</TABLE>
If the Company recognized employee stock option-related compensation expense
in accordance with FAS 123 and used the minimum value method for determining
the weighted average fair value of options granted during 1996, 1997 and 1998,
its pro forma net loss applicable to common shareholders would have been
$3,524,000, $12,749,000 and $8,999,000 respectively. The pro forma basic and
diluted loss per share would have been $0.14, $0.46 and $0.32 for 1996, 1997
and 1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for 1996, 1997 and 1998 is not representative of the pro forma effect
on net income or loss in future years because compensation expense in future
years will reflect the amortization of a larger number of stock options granted
in several succeeding years.
In computing the pro forma compensation expense under FAS 123, a weighted-
average fair value of $0.31 for 1996 and $0.65 for 1997 and 1998 stock option
grants was estimated at the date of grant using the minimum value option
pricing model with the following assumptions for 1996, 1997 and 1998: risk-free
interest rate of approximately 6%, a weighted-average expected life of the
options of 3.9, 3.4, and 3.3 years, respectively, and no assumed dividend
yield.
As of December 31, 1998, the Company's stock options had a weighted-average
remaining contractual life of 3.5 years.
In connection with the grant of certain share options to employees during
1998, the Company recorded deferred compensation of approximately $1,495,000
for the aggregate differences between the exercise prices of options at their
dates of grant and the deemed fair value for accounting
F-38
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
purposes of the common shares subject to such options. Such amount is being
amortized over the vesting period of the related options. Amortization expense
recognized during 1998 and the three months ended March 31, 1999 totaled
$48,000 and $104,000, respectively.
8. Geographic Information
Information regarding revenues and long-lived assets attributable to the
Company's primary geographic operating regions is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1996 1997 1998
---------------- --------
<S> <C> <C> <C>
Revenues:
United States................................... $ 6,935 $ 7,403 $ 13,378
Europe.......................................... 360 1,034 5,130
Asia............................................ 430 1,232 3,884
Canada.......................................... -- 701 2,754
Other........................................... 157 296 473
------- -------- --------
Total revenues................................ $ 7,882 $ 10,666 $ 25,619
======= ======== ========
</TABLE>
The geographic classification of revenues is based upon the location of the
customer.
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Long-lived assets:
United States............................................... $3,543 $3,188
Europe...................................................... -- 53
Asia........................................................ -- 34
------ ------
Total long-lived assets................................... $3,543 $3,275
====== ======
</TABLE>
9. Related Party Transactions
The Company leases one of its facilities from a limited liability company,
which includes two members of the board of directors. The aggregate lease
commitments related to this lease totaled $496,000 at December 31, 1998. Rent
expense under this lease for the years ended December 31, 1996, 1997, and 1998
and the three months ended March 31, 1998 and 1999 totaled $132,000, $165,000,
$171,000, $41,000 and $47,000, respectively.
For the years ended December 31, 1996, 1997, and 1998 and the three months
ended March 31, 1998 and 1999, revenues from companies affiliated with AT&T
Corporation, which is considered a related party due to its involvement with
AT&T Ventures, a preferred shareholder, totaled approximately $2,775,000,
$2,687,000, $3,599,000, $730,000 and $588,000, respectively. At December 31,
1997 and 1998 and March 31, 1999, accounts receivable from such companies
totaled approximately $948,000 and $847,000 and $626,000, respectively.
F-39
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
10. Retirement Plan
The Company maintains a defined contribution 401(k) plan under which its
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company may make voluntary contributions to the Plan.
Participants are fully vested in the Company's contributions after a specified
number of years of service, as defined under the plan. No Company contributions
had been made to date under the plan.
11. Subsequent Events
Series D Preferred Stock
On April 5, 1999, the Company issued to Hewlett-Packard Company 1,626,016
shares of Series D, no par value, convertible preferred stock (the Preferred
Stock D) for aggregate proceeds of $10,000,000. The Preferred Stock D contains
voting and dividend rights, preferences and privileges substantially identical
to the Preferred Stock C (see Note 4). In addition, in the event of a
liquidation, the Preferred Stock D is entitled to a non-participating
liquidation preference on a parity with the Preferred Stock C. In connection
with this issuance, the board of directors approved an increase in the number
of common shares authorized for issuance from 50,000,000 to 60,000,000.
Acquisition of Mobility.Net Corporation
On April 12, 1999, the Company completed its acquisition of Mobility.Net,
incorporated in July 1996, which offers products for Web messaging using a
Java-based technology platform, that complements the Company's product
offerings. The acquisition was accounted for as a pooling-of-interests.
Accordingly, the supplementary financial information presented reflects the
combined financial position and operations of the Company and Mobility.Net for
all dates and periods presented. The Company issued 1,579,294 shares of its
common stock in exchange for all of the outstanding shares of Mobility.Net. The
Company also assumed and exchanged all options to purchase Mobility.Net stock
for options to purchase an aggregate of 74,424 shares of the Company's common
stock.
F-40
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
Separate operating results of the combined entities for the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
----------------- -----------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software.com...................... $ 10,666 $25,618 $ 4,898 $ 8,058
Mobility.Net...................... -- 1 -- 13
-------- ------- ------- -------
Combined........................ $ 10,666 $25,619 $ 4,898 $ 8,071
======== ======= ======= =======
Net loss:
Software.com...................... $(11,457) $(7,382) $(2,699) $(2,028)
Mobility.Net...................... (12) (21) (5) (25)
-------- ------- ------- -------
Combined........................ $(11,469) $(7,403) $(2,704) $(2,053)
======== ======= ======= =======
</TABLE>
Diluted net loss per share of Software.com on a historical basis without
giving effect to the acquisition of Mobility.Net for the years ended December
31, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 were
$(0.46), $(0.31), $(0.11) and $(0.08), respectively.
The financial position of the combined entities as of December 31, 1997 and
1998 and March 31, 1999 were as follows:
<TABLE>
<CAPTION>
December 31, March 31,
--------------- -----------
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Total Assets:
Software.com..................................... $13,931 $19,032 $17,210
Mobility.Net..................................... 13 27 33
------- ------- -------
Combined....................................... $13,944 $19,059 $17,243
======= ======= =======
Total Liabilities:
Software.com..................................... $11,017 $15,750 $15,436
Mobility.Net..................................... 1 -- 19
------- ------- -------
Combined....................................... $11,018 $15,750 $15,455
======= ======= =======
</TABLE>
There were no intercompany transactions between the two companies or
significant conforming accounting adjustments.
Initial Public Offering Registration
On April 12, 1999, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission covering the proposed sale of
F-41
<PAGE>
SOFTWARE.COM, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 1999 and for the three months ended March 31, 1998
and March 31, 1999 is unaudited)
shares of its common stock to the public. Upon completion of this proposed
sale, all outstanding shares of the Company's convertible preferred stock will
automatically convert into common stock (see Note 1 and Note 4).
Reincorporation
On April 12, 1999, the board of directors authorized the reincorporation of
the Company in the state of Delaware subject to shareholder approval.
F-42
<PAGE>
Software.com technology enables a variety of Internet messaging services.
Graphic displaying ovals with center oval titled "Software.com's Messaging
Solutions" from which arrows point to smaller ovals titled:
"Consumer Service Providers (e.g., Telecom Italia Net)", with arrows pointing
to smaller ovals titled "E-commerce", "Email at home", and "Internet
voicemail";
"Telecom Companies (e.g., GTE)", with arrows pointing to smaller ovals titled
"Email at home", "Business email", and "Internet voicemail";
"Web Portals (e.g., Excite)", with arrows pointing to smaller ovals titled
"Web kiosks", "Universal email access", and "E-commerce";
"Cable Access Providers (e.g., @Home)", with arrows pointing to smaller ovals
titled "Web-top appliances", "Email at home", and "Business networking"; and
"Messaging Wholesalers (e.g., PSINET)", with arrows pointing to smaller ovals
titled "Business email", "Hosted messaging", and "Internet voicemail".
Graphic displaying a box titled "LEGEND" with top oval titled "Software.com",
with an arrow pointing down to an oval titled "Service providers", with an
arrow pointing down to an oval titled "End-user services."
<PAGE>
[LOGO]
