<PAGE>
As filed with the Securities And Exchange Commission on June 4, 1999
Registration No. 333-76263
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SOFTWARE.COM, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7373 77-0392373
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
525 Anacapa Street
Santa Barbara, CA 93101
(805) 882-2470
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
John L. MacFarlane
Chief Executive Officer
525 Anacapa Street
Santa Barbara, CA 93101
(805) 882-2470
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Elizabeth R. Flint, Esq. Steven M. Spurlock, Esq.
Susan L. Stapleton, Esq. Richard R. Hesp, Esq.
Stephen E. Gillette, Esq. Kevin A. Lucas, Esq.
Jonathon J. Taylor, Esq. Gunderson Dettmer Stough
Wilson Sonsini Goodrich & Rosati Villeneuve Franklin & Hachigian, LLP
Professional Corporation 155 Constitution Drive
650 Page Mill Road Menlo Park, California 94025
Palo Alto, California 94304 (650) 321-2400
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]_________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 4, 1999
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.
The initial public offering price is expected to be between $10.00 and $12.00
per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "SWCM."
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions Software.com Stockholders
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 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 , 1999.
<PAGE>
"Software.com provides Internet messaging solutions for many of the world's
largest service providers, including:"
Beneath this statement is a graphic that contains company logos arranged in
two columns.
<TABLE>
<S> <C>
Logo of AT&T Logo of GTE
Logo of Excite Logo of @Home Network
Logo of Hong Kong Telecom Logo of Telecom Italia Net
Logo of Ameritech Logo of PSINet
Logo of Road Runner Logo of Telenor
</TABLE>
The names of the companies whose logos are listed above are also written out
between the two columns of logos.
"MESSAGING SOLUTIONS FOR THE GLOBAL NETWORK"
<PAGE>
"Software.com is a global leader in providing Internet messaging solutions to
many of the world's largest service providers, with more than 37 million
electronic mailboxes licensed to date.*"
"Electronic Mailboxes Licensed* by Software.com as of March 31, 1999"
Beneath this statement is a graph that shows the increase in the number of
licensed mailboxes from 1995 to March 31, 1999.
"* The number of mailboxes licensed includes mailboxes that have not yet been
activated. We estimate that there were over 28 million mailboxes activated as
of 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>
"Software.com's strategic relationships include:"
Logo of 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."
Logo of 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"
Logo of 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."
Logo of Telcordia "Our Strategic Solutions and Professional
Technologies Services groups have been working with
Telcordia 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."
"The message is the medium
for communications and
commerce." Logo of Software.com
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 7
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....................... 23
Business............................. 39
Management........................... 55
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Transactions................. 66
Principal and Selling Stockholders... 68
Description of Capital Stock......... 71
Shares Eligible for Future Sale...... 74
Underwriting......................... 76
Notice to Canadian Residents......... 78
Where You Can Find More Information.. 79
Legal Matters........................ 79
Experts.............................. 79
Change in Accountants................ 80
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 , 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 Service, Bell Atlantic Internet
Services, Excite Inc., GTE Internetworking Services, Hongkong Telecom, Pacific
Internet, PSINet, Road Runner, Telecom Italia Net, Telecom 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 intends
to reincorporate 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.
All information in this prospectus is based on the following assumptions:
. the reincorporation of Software.com into Delaware,
. 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 the offering.
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........................ 40,272,627 shares
Use of proceeds....................... For repayment of indebtedness, working
capital and general corporate purposes.
Proposed Nasdaq National Market
symbol............................... SWCM
</TABLE>
Common stock to be outstanding after this offering is based on shares
outstanding as of April 30, 1999. It excludes:
. 8,856,500 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $3.78 per share, of
which 2,531,933 shares are exercisable, and
. 866,903 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $4.23 per share.
---------------
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months
July 11, 1994 ended
(Inception) Year Ended December 31, March 31,
to 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 $57,413
Working capital (deficiency)................... (1,562) 8,438 58,398
Total assets................................... 17,243 27,243 69,290
Long-term debt................................. 40 40 --
Redeemable convertible preferred stock......... 13,580 -- --
Total shareholders' equity (deficit)........... (11,792) 11,788 61,788
</TABLE>
See Note 1 of Notes to 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 an
assumed public offering price of $11.00 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."
6
<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.
7
<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.
8
<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 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."
9
<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;
10
<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,
11
<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
12
<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 40,272,627 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
34,272,627 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 .......................... 34,236,977 85.0%
</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 April 30, 1999, 2,531,933 shares of our common stock were
subject to vested stock options, 6,324,567 were subject to unvested stock
options, and 1,392,514 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
13
<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
14
<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.
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<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 effective 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 $9.46 in the book value per
share of the common stock from the price you pay. This calculation assumes you
purchase the common stock for $11.00 per share. 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.
16
<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. Assuming we sell shares in the offering at
$11.00 per share, the selling stockholders will receive net proceeds of
approximately $10.2 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.
17
<PAGE>
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 $50 million, at an assumed
initial public offering price of $11.00 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 an assumed initial offering price of $11.00 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 $57,413
======== ======== =======
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;
authorized: 1,329,781; 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 87,252
Deferred compensation........................ (1,343) (1,343) (1,343)
Accumulated deficit.......................... (24,121) (24,121) (24,121)
-------- -------- -------
Total shareholders' equity (deficit)......... (11,792) 11,788 61,788
-------- -------- -------
Total capitalization......................... $ 9,741 $ 19,741 $61,788
======== ======== =======
</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 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 an assumed public offering price of $11.00
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 $61.8 million, or approximately
$1.54 per share. This represents an immediate increase in pro forma net
tangible book value of $1.21 per share to existing stockholders and an
immediate dilution of $9.46 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.................... $11.00
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................................................... 1.21
----
Pro forma net tangible book value per share after the offering..... 1.54
------
Dilution per share to new investors................................ $ 9.46
======
</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 assumed
public offering price of $11.00 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>
Average
Shares Purchased Total Consideration Price
--------------------- ---------------------- Per
Number Percentage Amount Percentage Share
---------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 35,241,173 87.6% $32,947,000 37.5% $ 0.15
New investors.............. 5,000,000 12.4 55,000,000 62.5 11.00
---------- ------- ----------- ------- ------
Total.................... 40,241,173 100.0% $87,947,000 100.0% $ 2.18
========== ======= =========== ======= ======
</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 Consolidated Financial Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
In reading the selected consolidated financial data set forth below, you
should refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our 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."
<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>
22
<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 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
23
<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
24
<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.
25
<PAGE>
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>
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
26
<PAGE>
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.
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.
27
<PAGE>
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. 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 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
28
<PAGE>
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 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
29
<PAGE>
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
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.
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
30
<PAGE>
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 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.
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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 Consolidated Financial Statements and the Notes
included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited 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>
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
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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.
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.
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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.
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.
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<PAGE>
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.
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
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<PAGE>
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-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
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<PAGE>
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.
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
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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.
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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 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
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as managed messaging, or more advanced features, such as faxmail and voicemail
integration and sophisticated Web-based interfaces.
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 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
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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.
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.
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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 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.
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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
users above
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>
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
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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.
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
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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 April 30, 1999, our professional services staff consisted of 31
employees. In addition, we also supplement our professional services staff with
outside contractors from time to time.
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 April 30, 1999, our Support Solutions group consisted of 14
employees.
Customers
Numerous service providers around the world use our products as the platform
for their Internet messaging applications. As of April 30, 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.
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. 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.
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 Service Road Runner
Ameritech Interactive Media Services Telecom New Zealand
Bell Atlantic Internet Services Telecom Italia Net
Excite Inc. Telecom 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.
We have relationships with Cisco, Hewlett-Packard, IBM and Telecordia
Technologies as described on the inside cover of this prospectus. We also 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.
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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 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,
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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 Technology 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.
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
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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 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-
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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 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
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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 April 30,
1999, our research and development staff consisted of 73 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 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.
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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.
Employees
As of April 30, 1999, we had 225 full-time employees, 73 of whom were in
research and development, 59 in sales and marketing, 61 in services and support
and documentation, and 32 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.
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<PAGE>
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
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. We anticipate that we will move our East
Coast headquarters to a new facility in Lexington, Massachusetts 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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<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information about our executive officers,
directors and key employees as of April 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John L.
MacFarlane........ 33 Chief Executive Officer, Founder and Director
Valdur Koha........ 43 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.......... 33 General Manager, Asia
Adarbad Master..... 35 Chief Technology Officer
Michele R. Nivens.. 41 Vice President, Human Resources
Brian D. Plackis... 31 General Manager, North America
Craig A.
Shelburne......... 30 Vice President, General Counsel and Corporate Secretary
Frank Perna........ 61 Chairman of the Board
Neal Douglas....... 40 Director
Judith Hamilton.... 54 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, imaging and operating systems. Mr. Koha received his degree in
mathematics and computer science from the University of Bonn.
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<PAGE>
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 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
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<PAGE>
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.
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.
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
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<PAGE>
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. 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.
58
<PAGE>
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.
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,
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<PAGE>
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; and
. 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.
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 four most highly compensated executive officers who earned more
than $100,000 during fiscal 1998. These five 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
Robert R. Martin............. 150,000 -- -- --
Senior Vice President,
Strategy
Thomas S. Cullen............. 92,400 179,100 -- 180,000
Vice President Sales,
Worldwide Service Providers
Arthur R. Garofalo........... 100,000 200,500 7,086(1) 140,000
Vice President Sales,
Worldwide Territory/Channel
</TABLE>
- --------
(1) Represents reimbursements for relocation expenses.
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<PAGE>
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 assumed 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.
<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 $ 3,566,960 $ 6,220,292
750,000(2) 20.0 3.65 11/20/08 10,700,881 18,660,875
Valdur Koha............. -- -- -- -- -- --
Robert R. Martin........ -- -- -- -- -- --
Thomas S. Cullen........ 80,000 2.1 3.65 3/13/03 831,128 1,125,249
100,000(4) 2.7 3.65 11/20/03 99,321 1,528,030
Arthur R. Garofalo...... 25,000 0.7 3.65 1/9/03 259,727 351,640
15,000 0.4 3.65 3/13/03 155,836 210,984
40,000 1.1 3.65 5/15/03 415,564 562,624
60,000(4) 1.6 3.65 11/20/03 623,346 843,937
</TABLE>
- ---------------------
(1) Based on the value of our common stock at the assumed initial public
offering price of $11.00 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.
(4) Vest monthly at a rate of 1/48th of the shares subject to the option per
month.
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<PAGE>
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 an assumed initial public
offering price of $11.00 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 $ -- $7,350,000
Valdur Koha................. 386,700 232,021 3,770,325 2,262,205
Robert R. Martin............ 145,833 204,167 1,106,670 1,520,680
Thomas S. Cullen............ 23,750 236,250 174,563 1,736,438
Arthur R. Garofalo.......... 26,250 173,750 192,938 1,277,063
</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.
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, subject
to shareholder approval. 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.
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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.
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, subject to shareholder approval. 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.
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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.
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
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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.
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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
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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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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 April 30, 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 April
30, 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 April 30, 1999, there were 35,272,627 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
Result of
Options and Total Shares
Warrants Beneficially Owned Shares Beneficially
Exercisable Prior To Offering Owned After Offering
Within 60 Days (Including the Number Number of (Including the Number
of April 30, of Shares Shown in Shares of Shares Shown in
1999 the First Column) Being Offered the First Column)
---------------- ------------------------- ------------- ---------------------
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 8.8% -- 3,119,060 7.7%
170 West Tasman Drive
San Jose, CA 95134
AT&T Ventures........... 798,942(1) 2,386,244(2) 6.6 -- 2,386,244 5.8
3000 Sand Hill Road
Building 1, Suite 285
Menlo Park, CA 94025
John L. MacFarlane...... -- 5,037,620 14.3 -- 5,037,620 12.5
Valdur Koha............. 464,040 3,431,384(3) 9.6 -- 3,431,384 8.4
Judith Hamilton......... 12,638 123,626 * -- 123,626 *
Frank Perna, Jr......... 12,638 108,626 * -- 108,626 *
Robert R. Martin........ 189,583 189,583 * -- 189,583 *
Thomas S. Cullen........ 56,667 56,667 * -- 56,667 *
Arthur R. Garofalo...... 56,874 56,874 * -- 56,874 *
Neal Douglas............ 826,442(4) 2,413,744(5) 6.7 -- 2,413,744 5.9
Don Listwin............. 57,500 3,176,560(6) 9.0 -- 3,176,560 7.9
Bernard Puckett......... 57,500 72,500 * -- 72,500 *
Bernhard Woebker........ 57,500 82,500 * -- 82,500 *
Banyan Systems ......... -- 1,361,187 3.9 201,402 1,159,785 2.9
Lawrence S. Barels...... -- 455,492(7) 1.3 26,854 428,638 1.1
Daniel Bathon........... -- 977,018(8) 2.8 16,112 960,906 2.4
J. Scott Benson(9)...... -- 589,576 1.7 42,966 546,610 1.4
Michael S. D'Errico..... -- 1,554,321 4.4 107,414 1,446,907 3.6
Patricia E. Giencke..... -- 721,931 2.0 53,707 668,224 1.7
Bernard J. Haan(9)...... -- 1,123,344 3.2 107,414 1,015,930 2.5
Jonathan Dale Ives(9)... -- 804,360 2.3 80,561 723,799 1.8
Eric R. Kanowsky(9)..... -- 606,480 1.7 32,224 574,256 1.4
Steven E. Karlson....... -- 651,677 1.8 53,707 597,970 1.5
Bryan P. Lockwood....... 4,100 572,819 1.6 37,595 535,224 1.3
Leopold E. O'Donnell.... -- 715,219 2.0 37,595 677,624 1.7
Glenn P. Parker......... 51,000 694,887 2.0 8,056 686,831 1.7
Arthur J. Rice III(9)... -- 718,980 2.0 40,280 678,700 1.7
Richard J.
Rocaberte(9)........... 7,896 564,876 1.6 53,707 511,169 1.3
Paul I. Wren and Mary
Leland Wren............ 12,917 426,677(10) 1.2 10,741 415,936 1.0
Ben-Liou Yao............ 19,200 761,304 2.2 37,595 723,709 1.8
Other selling
stockholders (6
persons, each owning
less than one percent
of our common stock)... 96,948 859,231 2.4 52,070 807,166 2.0
All directors and
executive officers as a
group (15 persons)..... 1,917,622 14,875,834 40.0 -- 14,875,834 35.3
</TABLE>
- --------
* Indicates ownership of less than 1% of the outstanding shares of our common
stock.
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(1) 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.
(2) 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.
(3) Includes 1,000,000 shares held by The Valdur Koha Qualified Annuity Trust.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Former officer of Software.com.
(10) Includes 231,680 shares held by Mary Leland Wren and 182,080 shares held
by Paul I. Wren III.
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DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the filing of the second amended and
restated certificate of incorporation, and subject to stockholder approval, 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 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 April 30, 1999, there were 35,272,627 shares of common stock
outstanding, which were held of record by approximately 264 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 20,618,100
shares of common stock, these holders are entitled to certain rights to have us
register these shares under the Securities
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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 certificate of incorporation 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
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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 certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Elimination of Cumulative Voting. Our 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 EquiServe.
Nasdaq National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "SWCM."
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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 40,272,627 shares
of common stock, based upon shares outstanding as of April 30, 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 34,272,627
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
34,236,977 At various times after 180 days from the date of this
prospectus, subject, in some cases, to volume limitations.
</TABLE>
The 34,236,977 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 April 30, 1999, there were
outstanding 8,856,500 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 402,726 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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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 April 30, 1999, options to purchase a total of 8,856,500 shares were
outstanding and 9,249,014 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
26,950,478 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 April 30, 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.
75
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 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...................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
BancBoston Robertson Stephens Inc. ......................
---------
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 $ per share. The underwriters and
the selling group members may allow a discount of $ 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..................................... $ $ $
Expenses payable by us..................... $ $ $
Underwriting discounts and commissions paid
by the selling stockholders............... $ $ $
</TABLE>
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.
76
<PAGE>
We, our officers and directors and several 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
550,000 shares of common stock for directors, officers, employees and other
persons associated with 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 shareholders 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.
Software.com has applied to list its common stock 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 will be determined by negotiation between
Software.com and the representatives of the underwriters. The principal factors
to be 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.
77
<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.
78
<PAGE>
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.
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.
79
<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.
80
<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 1,645,000 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
Exercise Shares Contractual Exercise Shares 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 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-22
<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...... $ 6,083 $ 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.
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.
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.
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 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. 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.
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
F-27
<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)
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 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 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
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-30
<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............................. $3,463 $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 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 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 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 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 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-36
<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 1,571,000 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 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
Exercise Shares Contractual Exercise Shares 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>
$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 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 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 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 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 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]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Software.com in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 23,019
NASD filing fee................................................ 8,780
Nasdaq National Market listing fee............................. 95,000
Printing and engraving costs................................... 200,000
Legal fees and expenses........................................ 300,000
Accounting fees and expenses................................... 400,000
Blue Sky fees and expenses..................................... 5,000
Transfer Agent and Registrar fees.............................. 10,000
Miscellaneous expenses......................................... 108,201
----------
Total........................................................ $1,150,000
==========
</TABLE>
ITEM 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VIII of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in the
Registrant's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
ITEM 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below.
(a) On December 8, 1994, Software.com sold and issued 6,268,080 shares of our
common stock to John L. MacFarlane, Michael S. D'Errico, Jonathan D. Ives, and
Arthur J. Rice for total consideration valued at $111,930.
II-1
<PAGE>
(b) On August 1, 1995, we sold 1,672,720 shares of our common stock to John
L. MacFarlane, Michael S. D'Errico, Jonathan D. Ives, Eric R. Kanowsky, Richard
Rocaberte and Arthur J. Rice for a total of $29,870 and issued 1,766,240 shares
of our common stock to 2 employees for prior work performed, such work
determined to have a fair value of $31,540.
(c) On October 30, 1995, we issued 2,424,800 shares of our common stock to
eight key employees for prior work performed and such work was determined to
have a fair value of $129,900.
(d) On October 3, 1996, we issued and sold an aggregate of 1,587,302 shares
of Series A preferred stock to entities affiliated with AT&T Ventures for an
aggregate purchase price of approximately $5,000,000. In connection with the
sale of the Series A preferred stock, we issued warrants to entities 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 31, 1998, in exchange for
AT&T Venture's waiver of their redemption rights with respect to the Series A
preferred stock, we lowered the exercise price on all outstanding warrants to
purchase our common stock held by AT&T Ventures (a total of 798,942) to $4.15
per share. These warrants terminate on October 3, 2001.
(e) On February 10, 1997, we issued and sold an aggregate of 1,789,279 shares
of Series B preferred stock to Cisco Systems, Inc. for an aggregate purchase
price of approximately $7,426,000. In connection with the sale of the Series B
preferred stock, we entered into a Development, License and Distribution
Agreement with Cisco for the joint development and distribution of software
products.
(f) On August 10, 1998, we issued a warrant to purchase 67,961 shares of
common stock at an exercise price of $5.15 per share to Coast Business Credit
in connection with the renegotiation of our credit facility.
(g) On August 14, 1998, we issued and sold an aggregate of 1,329,781 shares
of Series C preferred stock to Cisco for an aggregate purchase price of
approximately $6,848,000.
(h) On April 5, 1999, we issued and sold an aggregate of 1,626,016 shares of
Series D preferred stock to Hewlett-Packard Company for an aggregate purchase
price of approximately $10,000,000.
(i) On April 12, 1999, we issued 1,579,294 shares of our common stock for all
of the outstanding shares of Mobility.Net Corporation.
(j) As of April 30, 1999, an aggregate of 1,250,986 shares of common stock
had been issued upon exercise of options under the Registrant's 1995 Stock
Option Plan.
Except as indicated above, none of the foregoing transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and the Registrant believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients in such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the Registrant.
3.2** Form of Second Amended and Restated Certificate of Incorporation of
the Registrant to be filed promptly after the closing of the
offering.
3.3** Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
4.2** Registration Rights Agreement dated as of June 1, 1996, as amended, by
and among the Registrant and certain holders of the Registrant's
Common Stock.
4.3** Amended and Restated Registration Rights Agreement, dated February 10,
1997, as amended, by and among the Registrant and the purchasers of
the Series A Preferred, Series B Preferred, the Series C Preferred
and the Series D Preferred.
4.4** Form of Warrant to purchase Common Stock dated October 3, 1996, as
amended, between the Registrant and certain entities affiliated with
AT&T Ventures.
4.5** Warrant to purchase Common Stock dated August 10, 1998 between the
Registrant and Coast Business Credit.
4.6** Share Purchase Agreement between the Registrant, Mobility.Net
Corporation and Michael Machado dated April 3, 1999.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2** 1995 Stock Plan, as amended and restated.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Mobility.Net Corporation 1999 Stock Option Plan, and form of
agreements thereunder.
10.5** Loan and Security Agreement dated August 29, 1997, as amended, between
the Registrant and Coast Business Credit.
10.6** Form of Severance Agreement in the Event of a Change of Control
entered into between the Registrant and certain executive officers.
10.7** Severance Agreement in the Event of a Change of Control, dated
February 3, 1999 between the Registrant and John S. Ingalls.
10.8** Lease Agreement dated February 21, 1996 between the Registrant and
525 Anacapa LLC.
10.9** Lease Agreement dated November 22, 1996 between the Registrant and
Cito Corporation.
10.10** Lease Agreement dated September 11, 1996 between the Registrant and
91 Hartwell Avenue Trust.
10.11 Lease Agreement dated May 24, 1999 between the Registrant and 10
Maguire Road LLC.
16.1** Letter regarding change in certifying accountant.
21.1** List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
99.1 Consent of International Data Corporation.
</TABLE>
- --------
** Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedules
Valuation and Qualifying Accounts. See page S-1.
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Santa Barbara, State of California, on the 4th day of June, 1999.
SOFTWARE.COM, INC.
By: /s/ John L. MacFarlane
-----------------------------------
John L. MacFarlane,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ John L. MacFarlane Chief Executive Officer June 4, 1999
____________________________________ and Director (Principal
John L. MacFarlane Executive Officer)
* Senior Vice President, June 4, 1999
____________________________________ Chief Financial Officer
John S. Ingalls (Principal Financial
and Accounting Officer)
* Director June 4, 1999
____________________________________
Neal Douglas
* Director June 4, 1999
____________________________________
Judith Hamilton
* Director June 4, 1999
____________________________________
Don Listwin
* Director June 4, 1999
____________________________________
Frank Perna
* Director June 4, 1999
____________________________________
Bernard Puckett
* Director June 4, 1999
____________________________________
Bernhard Woebker
</TABLE>
*By: /s/ John L. MacFarlane
------------------------------
John L. MacFarlane
Attorney-in-Fact
II-5
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Additions Deductions
---------- ----------
Balance at Charged to Amount Balance at
Beginning Costs and Charged to End of
of Period Expenses Reserve Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
December 31, 1997.................. $ 21,000 $123,000 $ 30,000 $114,000
December 31, 1998.................. 114,000 554,000 187,000 481,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Page
------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Second Amended and Restated Certificate of
Incorporation of the Registrant to be filed promptly after the
closing of the offering.
3.3** Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
4.2** Registration Rights Agreement dated as of June 1, 1996, as
amended, by and among the Registrant and certain holders of
the Registrant's Common Stock.
4.3** Amended and Restated Registration Rights Agreement, dated
February 10, 1997, as amended, by and among the Registrant and
the purchasers of the Series A Preferred, Series B Preferred,
the Series C Preferred and the Series D Preferred.
4.4** Form of Warrant to purchase Common Stock dated October 3, 1996,
as amended, between the Registrant and certain entities
affiliated with AT&T Ventures.
4.5** Warrant to purchase Common Stock dated August 10, 1998 between
the Registrant and Coast Business Credit.
4.6** Share Purchase Agreement between the Registrant, Mobility.Net
Corporation and Michael Machado dated April 3, 1999.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2** 1995 Stock Plan, as amended and restated.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Mobility.Net Corporation 1999 Stock Option Plan, and form of
agreements thereunder.
10.5** Loan and Security Agreement dated August 29, 1997, as amended,
between the Registrant and Coast Business Credit.
10.6** Form of Severance Agreement in the Event of a Change of Control
entered into between the Registrant and certain executive
officers.
10.7** Severance Agreement in the Event of a Change of Control, dated
February 3, 1999 between the Registrant and John S. Ingalls.
10.8** Lease Agreement dated February 21, 1996 between the Registrant
and 525 Anacapa LLC.
10.9** Lease Agreement dated November 22, 1996 between the Registrant
and Cito Corporation.
10.10** Lease Agreement dated September 11, 1996 between the Registrant
and 91 Hartwell Avenue Trust.
10.11 Lease Agreement dated May 24, 1999 between Registrant and 10
Maguire Road LLC.
16.1** Letter regarding change in certifying accountant.
21.1** List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
99.1 Consent of International Data Corporation.
</TABLE>
- --------
** Previously filed.
<PAGE>
EXHIBIT 1.1
DRAFT OF 6/4/99
6,000,000 SHARES ---------------
SOFTWARE.COM, INC.
COMMON STOCK, PAR VALUE $0.001 PER SHARE
UNDERWRITING AGREEMENT
----------------------
_________ __, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
BANCBOSTON ROBERTSON STEPHENS INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Software.com, Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell 5,000,000 shares of its Common Stock,
par value $0.001 per share ("SECURITIES"), and the stockholders listed in
Schedule A hereto ("SELLING STOCKHOLDERS") propose severally to sell an
aggregate of 1,000,000 outstanding shares of the Securities (such 6,000,000
shares of Securities being hereinafter referred to as the "FIRM SECURITIES").
The Selling Stockholders also propose to sell to the Underwriters, at the option
of the Underwriters, an aggregate of not more than 900,000 additional
outstanding shares of the Company's Securities, as set forth below (such 900,000
additional shares being hereinafter referred to as the "OPTIONAL SECURITIES").
The Firm Securities and the Optional Securities are herein collectively called
the "OFFERED SECURITIES." The Company and the Selling Stockholders hereby agree
with the several Underwriters named in Schedule B hereto ("UNDERWRITERS") as
follows:
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-76263) relating to
the Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (A) has been
declared effective under the Securities Act of 1933 ("ACT") and is not proposed
to be amended or (B) is proposed to be amended by amendment or post-effective
amendment. If such registration statement (the "INITIAL REGISTRATION STATEMENT")
has been declared effective, either (A) an additional registration statement
(the "ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may
have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(B)")
under the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been
<PAGE>
duly registered under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or (B) such an
additional registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant to such
Rule and upon such filing the Offered Securities will all have been duly
registered under the Act pursuant to the initial registration statement and such
additional registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement has
been filed and the Company does not propose to amend it, and if any post-
effective amendment to either such registration statement has been filed with
the Commission prior to the execution and delivery of this Agreement, the most
recent amendment (if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing pursuant to Rule
462(c) ("RULE 462(C)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement, "EFFECTIVE
TIME" with respect to the initial registration statement or, if filed prior to
the execution and delivery of this Agreement, the additional registration
statement means (A) if the Company has advised the Representatives that it does
not propose to amend such registration statement, the date and time as of which
such registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the Representatives
that it proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as the case
may be, is declared effective by the Commission. If an additional registration
statement has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it proposes to
file one, "EFFECTIVE TIME" with respect to such additional registration
statement means the date and time as of which such registration statement is
filed and becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE" with
respect to the initial registration statement or the additional registration
statement (if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any) and
deemed to be a part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("RULE 430A(B)") under the Act, is
hereinafter referred to as the "INITIAL REGISTRATION STATEMENT." The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "ADDITIONAL REGISTRATION STATEMENT." The Initial
Registration Statement and the Additional Registration are hereinafter referred
to collectively as the "REGISTRATION STATEMENTS" and individually as a
"REGISTRATION STATEMENT." The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("RULE 424(B)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "PROSPECTUS". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the rules
and regulations of the Commission ("RULES AND REGULATIONS") and did not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, (B) on the Effective Date of the Additional Registration Statement
(if any), each Registration Statement conformed or will conform, in all respects
to the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact and did
not omit, or will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (C) on
the date of this Agreement, the Initial Registration Statement and, if the
Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects to the
requirements of the Act and the Rules and Regulations, and neither of such
documents includes, or will include, any untrue statement of a material fact or
omits, or will omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If the Effective Time
of the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will conform in
all respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material fact
or will omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and no Additional
Registration Statement has been or will be filed. The two preceding sentences do
not apply to statements in or omissions from a Registration Statement or
2
<PAGE>
the Prospectus based upon written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information is that described as such
in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of its
business requires such qualification.
(iv) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing under the laws of
the jurisdiction of its incorporation, with power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do business
as a foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued and is
fully paid and nonassessable; and the capital stock of each subsidiary owned by
the Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(v) The Offered Securities and all other outstanding
shares of capital stock of the Company have been duly authorized and validly
issued, fully paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with this
offering.
(vii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to a
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Act.
(viii) The Securities have been approved for listing
subject to notice of issuance on The Nasdaq Stock Market's National Market.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the transactions
contemplated by this Agreement in connection with the sale of the Offered
Securities, except such as have been obtained and made under the Act and such as
may be required under state securities laws.
(x) The execution, delivery and performance of this
Agreement, and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is bound or
to which any of the properties of the Company or any such subsidiary is subject,
or the charter or bylaws of the Company or any such subsidiary, and the Company
has full power and authority to authorize, issue and sell the Offered Securities
as contemplated by this Agreement.
(xi) This Agreement has been duly authorized, executed
and delivered by the Company.
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(xii) Except as disclosed in the Prospectus, the Company
and its subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and except
as disclosed in the Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental agencies
or bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate have
a material adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries taken as
a whole ("MATERIAL ADVERSE EFFECT").
(xiv) No labor dispute with the employees of the Company
or any subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other rights
to inventions, know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary
to conduct the business now operated by them, or presently employed by them, and
have not received any notice of infringement of or conflict with asserted rights
of others with respect to any intellectual property rights that, if determined
adversely to the Company or any of its subsidiaries, would individually or in
the aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL
LAWS"), owns or operates any real property contaminated with any substance that
is subject to any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any claim
relating to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to such a
claim.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or in
the aggregate have a Material Adverse Effect, or would materially and adversely
affect the ability of the Company to perform its obligations under this
Agreement, or which are otherwise material in the context of the sale of the
Offered Securities; and no such actions, suits or proceedings are threatened or,
to the Company's knowledge, contemplated.
(xviii) The financial statements included in each
Registration Statement and the Prospectus present fairly the financial position
of the Company and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis and the
schedules included in each Registration Statement present fairly the information
required to be stated therein, and the assumptions used in preparing the pro
forma financial statements included in each Registration Statement and the
Prospectus provide a reasonable basis for presenting the significant effects
directly attributable to the transactions or events described therein, the
related pro forma adjustments give appropriate effect to those assumptions, and
the pro forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement amounts.
(xix) Except as disclosed in the Prospectus, since the
date of the latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any
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development or event involving a prospective material adverse change, in the
condition (financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as disclosed in
or contemplated by the Prospectus, there has been no dividend or distribution of
any kind declared, paid or made by the Company on any class of its capital
stock.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(xxi) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes and the Company
agrees to comply with such Section if prior to the completion of the
distribution of the Offered Securities it commences doing such business.
(xxii) The Agreement and Plan of Merger dated _________,
1999 (the "Plan of Merger") by and between the Company and Software.com, Inc., a
California corporation ("Software"), has been duly authorized by all necessary
board of directors and stockholder action on the part of the Company and
Software.com and has been duly executed and delivered by each of the parties
thereto. The execution and delivery of the Plan of Merger and the consummation
of the merger contemplated thereby does not contravene any provision of
applicable Federal, California or Delaware corporate law or the certificate of
incorporation or bylaws of the Company or the certificate of incorporation or
bylaws of Software, or, to the knowledge of the Company, any judgment or decree
of any governmental body, agency or court having jurisdiction over the Company
or Software, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company and Software of its obligations under the Plan of
Merger except such as have been obtained. The merger contemplated by the Plan of
Merger is effective under the laws of the State of California and the State of
Delaware.
(xxiii) The Company and each of its subsidiaries has filed
all foreign, federal, state and local tax returns that are required to be filed
or has requested extensions thereof and the Company and each of its subsidiaries
has paid all material taxes required to be paid by it and any other assessment,
fine or penalty levied against it, to the extent that any of the foregoing is
due and payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in or contemplated by
the Registration Statement or the Prospectus.
(xxiv) Neither the Company, nor any of its affiliates, has
taken, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of the Securities to
facilitate the sale or resale of the Offered Securities.
(xxv) To the knowledge of the Company, Ernst & Young LLP,
who have certified the financial statements filed with the Commission as part of
each Registration Statement, are independent public auditors as required by the
Act and the Rules and Regulations. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; and (C) access to assets
is permitted only in accordance with management's general or specific
authorization.
(xxvi) The Company and each of its subsidiaries carry, or
are covered by, insurance in such amounts and covering such risks as is adequate
for the conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(xxvii) The Company and each of its subsidiaries are in
compliance in all material respects with all presently applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no "reportable
event" (as defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company or any of its subsidiaries would have
any liability; the Company and each of its subsidiaries have not incurred and
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do not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Section 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder ("Code"); and each "pension plan" for
which the Company and each of its subsidiaries would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respect and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
(xxviii) To the knowledge of the Company, except as set
forth in each Registration Statement and the Prospectus, there are no
agreements, claims, payment, issuances, arrangements or understandings, whether
oral or written, for services in the nature of finder's, consulting or
origination fees with respect to the sale of the Offered Securities or any other
arrangements, agreements, understandings, payments or issuance with respect to
the Company or any of its officers, directors, shareholders, partners,
employees, subsidiaries or affiliates that may affect the Underwriters'
compensation as determined by the National Association of Securities Dealers,
Inc. (the "NASD").
(xxix) The minute books of the Company and each of its
subsidiaries made available to the Underwriters contain a complete summary of
all meetings and actions of the directors and stockholders of the Company and
each of its subsidiaries, respectively, since the time of its incorporation and
reflects accurately and fairly in all respects all transactions referred to in
such minutes.
(b) Each Selling Stockholder severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing Date and
full right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date hereunder; and upon the delivery of and
payment for the Offered Securities on each Closing Date hereunder the several
Underwriters will acquire valid and unencumbered title to the Offered Securities
to be delivered by such Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the Rules
and Regulations and did not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act and
the Rules and Regulations did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional Registration
Statement is prior to the execution and delivery of this Agreement, the
Additional Registration Statement each conforms, and at the time of filing of
the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the
Effective Date of the Additional Registration Statement in which the Prospectus
is included, each Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the Prospectus
will conform in all respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement of a
material fact or will omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only such
information is that described as such in Section 7(c).
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(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling Stockholder and any
person that would give rise to a valid claim against such Selling Stockholder or
any Underwriter for a brokerage commission, finder's fee or other like payment
in connection with this offering.
(iv) This Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Stockholder and is a valid and
binding agreement of such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(v) Each of the (A) Custody Agreement and (B) Power of
Attorney of such Selling Stockholder has been duly authorized, executed and
delivered by such Selling Stockholder and is a valid and binding agreement of
such Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(vi) The execution and delivery by such Selling
Stockholder of, and the performance by such Selling Stockholder of its
obligations under, this Agreement, the Custody Agreement and the Power of
Attorney or the consummation by such Selling Stockholder or any of the other
transactions contemplated hereby, will not contravene or conflict with, result
in a breach of, or constitute a default under, or require the consent of any
other party to, the charter of bylaws, partnership agreement, trust agreement or
other organizational documents of such Selling Stockholder or any other
agreement or instrument to which such Selling Stockholder is bound or under
which it is entitled to any right or benefit, any provision of applicable law or
any judgment, order, decree or regulation applicable to such Selling Stockholder
of any court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over such Selling Stockholder. No consent,
approval, authorization or other order of, or registration or filing with, any
court or other governmental authority or agency, is required for the
consummation by such Selling Stockholder of the transactions contemplated in
this Agreement, except such as have been obtained or made and are in full force
and effect under the Act, applicable state securities or blue sky laws and from
the NASD.
(vii) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Stockholder of this
Agreement, the Power of Attorney and the Custody Agreement (assuming the making
of all filings required under Rule 424(b) or Rule 430A), and have been obtained.
(viii) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or which has constituted,
or that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Securities to facilitate the sale or resale of
the Securities and, other than as permitted by the Act, such Selling Stockholder
has not distributed, and will not distribute, any prospectus or other offering
material in connection with the Offered Securities.
(ix) Neither such Selling Stockholder nor any of its
affiliates directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section (m) of the Bylaws of
the NASD), any member firm of the NASD.
3. Purchase, Sale and Delivery of Offered Securities. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and each Selling Stockholder, at a purchase price of $ per share,
that number of Firm Securities (rounded up or down, as determined by Credit
Suisse First Boston Corporation ("CSFBC") in its discretion, in order to avoid
fractions) obtained by multiplying Firm Securities in the case of the
Company and the number of Firm Securities set forth opposite the name of such
Selling Stockholder in Schedule A hereto, in the case of a Selling Stockholder,
in each case by a fraction the numerator of
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which is the number of Firm Securities set forth opposite the name of such
Underwriter in Schedule B hereto and the denominator of which is the total
number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with ,
as custodian ("CUSTODIAN"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, at the office of CSFBC,
against payment of the purchase price in Federal (same day) funds by official
bank check or checks or wire transfer to an account at a bank acceptable to
CSFBC drawn to the order of the Company in the case of _________ shares of Firm
Securities and the Custodian in the case of _________ shares of Firm Securities,
at the office of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650
Page Mill Road, Palo Alto, California 94304, at 10:00 A.M., New York time, on
_________, or at such other time not later than seven full business days
thereafter as CSFBC and the Company determine, such time being herein referred
to as the "FIRST CLOSING DATE." The certificates for the Firm Securities so to
be delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the above office of CSFBC at least 24 hours prior to the First
Closing Date.
In addition, upon written notice from CSFBC given to the Company and
the Selling Stockholders from time to time not more than 30 days subsequent to
the date of the Prospectus, the Underwriters may purchase all or less than all
of the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Selling Stockholders agree, severally and not jointly, to
sell to the Underwriters the respective numbers of Optional Securities obtained
by multiplying the number of Optional Securities specified in such notice by a
fraction the numerator of which is the number of shares set forth opposite the
names of such Selling Stockholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" in the case of the Selling
Stockholders and the denominator of which is the total number of Optional
Securities (subject to adjustment by CSFBC to eliminate fractions). Such
Optional Securities shall be purchased from each Selling Stockholder for the
account of each Underwriter in the same proportion as the number of Firm
Securities set forth opposite such Underwriter's name bears to the total number
of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and
may be purchased by the Underwriters only for the purpose of covering over-
allotments made in connection with the sale of the Firm Securities. No Optional
Securities shall be sold or delivered unless the Firm Securities previously have
been, or simultaneously are, sold and delivered. The right to purchase the
Optional Securities or any portion thereof may be exercised from time to time
and to the extent not previously exercised may be surrendered and terminated at
any time upon notice by CSFBC to the Company and the Selling Stockholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company and the Custodian
will deliver the Optional Securities being purchased on each Optional Closing
Date to the Representatives for the accounts of the several Underwriters, at the
office of CSFBC against payment of the purchase price therefor in Federal (same
day) funds by official bank check or checks or wire transfer to an account at a
bank acceptable to CSFBC drawn to the order of the Custodian at the above office
of Wilson Sonsini Goodrich & Rosati, Professional Corporation. The certificates
for the Optional Securities being purchased
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on each Optional Closing Date will be in definitive form, in such denominations
and registered in such names as CSFBC requests upon reasonable notice prior to
such Optional Closing Date and will be made available for checking and packaging
at the above office of CSFBC at a reasonable time in advance of such Optional
Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders.
The Company agrees with the several Underwriters and the Selling Stockholders
that:
(a) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement, the Company will file
the Prospectus with the Commission pursuant to and in accordance with
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CSFBC's consent; and the Company will
also advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best efforts
to prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each
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case in such quantities as CSFBC requests. The Prospectus shall be so furnished
on or prior to 3:00 P.M., New York time, on the business day following the later
of the execution and delivery of this Agreement or the Effective Time of the
Initial Registration Statement. All other such documents shall be so furnished
as soon as available. The Company and the Selling Stockholders will pay the
expenses of printing and distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as required
for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as CSFBC may reasonably
request.
(h) For a period of 180 days after the date of the initial
public offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except grants of employee
stock options pursuant to the terms of a plan in effect on the date hereof,
issuances of Securities pursuant to the exercise of such options or the exercise
of any other employee stock options outstanding on the date hereof.
(i) The Company and each Selling Stockholder agree with the
several Underwriters that the Company and such Selling Stockholder will pay all
expenses incident to the performance of the obligations of the Company and such
Selling Stockholder, as the case may be, under this Agreement, for any filing
fees and other expenses (including fees and disbursements of counsel) in
connection with qualification of the Offered Securities for sale under the laws
of such jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the NASD of the Offered Securities, for any travel expenses of the Company's
officers and employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the Offered
Securities, for any transfer taxes on the sale by the Selling Stockholders of
the Offered Securities to the Underwriters and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(j) Each Selling Stockholder agrees to deliver to CSFBC,
attention: Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(k) Each Selling Stockholder agrees, for a period of 180 days
after the date of the initial public offering of the Offered Securities, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities of the Company or securities
convertible into or exchangeable or exercisable for any shares of Securities, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, without the prior written consent of CSFBC.
(l) The Company shall apply the net proceeds of its sale of the
Offered Securities as set forth in the Prospectus.
(m) The Company and each Selling Stockholder will not take,
directly or indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company.
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6. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be purchased
on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders herein, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
shall be on or prior to the date of this Agreement or, if the Effective Time of
the Initial Registration Statement is subsequent to the execution and delivery
of this Agreement, shall be prior to the filing of the amendment or post-
effective amendment to the registration statement to be filed shortly prior to
such Effective Time), of Ernst & Young LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules examined by them and included or incorporated by reference in the
Registration Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards No. 71,
Interim Financial Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility for
financial and accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that:
(A) the unaudited financial statements included in
the Registration Statements do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the related published
Rules and Regulations or any material modifications should be made to such
unaudited financial statements for them to be in conformity with generally
accepted accounting principles;
(B) the unaudited consolidated net sales, net
operating income, net income and net income per share amounts for the ___-month
periods ended ___________ included in the Prospectus do not agree with the
amounts set forth in the unaudited consolidated financial statements for those
same periods or were not determined on a basis substantially consistent with
that of the corresponding amounts in the audited statements of income;
(C) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date not more than three
business days prior to the date of such letter, there was any change in the
capital stock or any increase in short-term indebtedness or long-term debt of
the Company and its consolidated subsidiaries or, at the date of the latest
available balance sheet read by such accountants, there was any decrease in
consolidated net current assets or net assets, as compared with amounts shown on
the latest balance sheet included in the Prospectus; or
(D) for the period from the closing date of the
latest income statement included in the Prospectus to the closing date of the
latest available income statement read by such accountants there were any
decreases, as compared with the corresponding period of the previous year and
with the period of corresponding length ended the date of the latest income
statement included in the Prospectus, in consolidated net sales or net operating
income in the total or per share amounts of consolidated income before
extraordinary items or net income;
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except in all cases set forth in clauses (C) and (D) above for changes,
increases or decreases which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent that such
dollar amounts, percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries subject to the
internal controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts, percentages and
other financial information to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and delivery of
this Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statements is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration Statement
is subsequent to such execution and delivery, "REGISTRATION STATEMENTS" shall
mean the Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the post-
effective amendment to be filed shortly prior to its Effective Time, and (iii)
"PROSPECTUS" shall mean the prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or such later date as shall have been consented to by CSFBC. If
the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Stockholder, the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, properties
or results of operations of the Company or its subsidiaries which, in the
judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or inadvisable
to proceed with completion of the public offering or the sale of and payment for
the Offered Securities; (ii) any suspension or limitation of trading in
securities generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter market;
(iii) any banking moratorium declared by U.S. Federal or New York authorities;
or (iv) any outbreak or escalation of major hostilities in which the United
States is involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its business as
described in the Prospectus; and the Company is duly qualified to do business
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as a foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires such
qualification;
(ii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus. The Offered Securities delivered
on such Closing Date and all other outstanding shares of the Common Stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive rights with
respect to the Securities;
(iii) There are no contracts, agreements or understandings
known to such counsel between the Company and any person granting such person
the right to require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Act;
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940;
(v) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required to be
obtained or made by the Company or any Selling Stockholder for the consummation
of the transactions contemplated by this Agreement or the Custody Agreement in
connection with the sale of the Offered Securities, except such as have been
obtained and made under the Act and such as may be required under state
securities laws;
(vi) The execution, delivery and performance of this
Agreement or the Custody Agreement and the consummation of the transactions
herein or therein contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or any court having
jurisdiction over the Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is bound or
to which any of the properties of the Company or any such subsidiary is subject,
or the charter or bylaws of the Company or any such subsidiary;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became effective under
the Act as of the date and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to the subparagraph of
Rule 424(b) specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of such
counsel, no stop order suspending the effectiveness of a Registration Statement
or any part thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Act, and each
Registration Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates, complied as to form in
all material respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective date or as
of such Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such Closing
Date, contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; the descriptions
in the Registration Statements and Prospectus of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; and such counsel do not
know of any legal or governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not described as required or
of any contracts or documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as exhibits to a
Registration Statement which are not described and filed as required; it
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being understood that such counsel need express no opinion as to the financial
statements or other financial data contained in the Registration Statements or
the Prospectus;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company; and
(ix) The Agreement and Plan of Merger dated _________,
1999 (the "Plan of Merger") by and between the Company and Software.com, Inc., a
California corporation ("Software"), has been duly authorized by all necessary
board of directors and stockholder action on the part of the Company and
Software and has been duly executed and delivered by each of the parties
thereto. The execution and delivery of the Plan of Merger and the consummation
of the merger contemplated thereby does not contravene any provision of
applicable federal, California or Delaware corporate law or the certificate of
incorporation or bylaws of the Company or the certificate of incorporation or
bylaws of Software, or, to the knowledge of such counsel, any judgment or decree
of any governmental body, agency or court having jurisdiction over the Company
or Software, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company and Software of its obligations under the Plan of
Merger except such as have been obtained. The merger contemplated by the Plan of
Merger is effective under the laws of the State of California and the State of
Delaware.
(x) All of the Securities have been duly authorized and
accepted for quotation on the Nasdaq National Market, subject to official notice
of issuance.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Selling Stockholders, to the effect that:
(i) Each Selling Stockholder had valid and unencumbered
title to the Offered Securities delivered by such Selling Stockholder on such
Closing Date and had full right, power and authority to sell, assign, transfer
and deliver the Offered Securities delivered by such Selling Stockholder on such
Closing Date hereunder; and the several Underwriters have acquired valid and
unencumbered title to the Offered Securities purchased by them from the Selling
Stockholders on such Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required to be
obtained or made by any Selling Stockholder for the consummation of the
transactions contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under the Act and such
as may be required under state securities laws;
(iii) The execution, delivery and performance of the
Custody Agreement and this Agreement and the consummation of the transactions
therein and herein contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or any court having
jurisdiction over any Selling Stockholder or any of their properties or any
agreement or instrument to which any Selling Stockholder is a party or by which
any Selling Stockholder is bound or to which any of the properties of any
Selling Stockholder is subject, or the charter or bylaws of any Selling
Stockholder which is a corporation;
(iv) The Power of Attorney and related Custody Agreement
with respect to each Selling Stockholder has been duly authorized, executed and
delivered by such Selling Stockholder and constitute valid and legally binding
obligations of each such Selling Stockholder enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights and to general equity principles; and
(v) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.
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(f) The Representatives shall have received from Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the
Underwriters, such opinion or opinions, dated such Closing Date, with respect to
the incorporation of the Company, the validity of the Offered Securities
delivered on such Closing Date, the Registration Statements, the Prospectus and
other related matters as the Representatives may require, and the Selling
Stockholders and the Company shall have furnished to such counsel such documents
as they request for the purpose of enabling them to pass upon such matters. In
rendering such opinion, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP may rely as to the incorporation of the Company and all other
matters governed by Delaware law upon the opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation referred to above.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the dates of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received from each person who
is a director or officer of the Company and all holders of the outstanding
Securities an agreement dated on or before the date of this Agreement to the
effect that such person will not, for a period beginning from the date of the
final Prospectus and ending one hundred eighty (180) days thereafter, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities of the Company or securities
convertible into or exchangeable or exercisable for any shares of Securities, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, without the prior written consent of CSFBC.
(i) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three days prior to such Closing Date
for the purposes of this subsection.
The Selling Stockholders and the Company will furnish the
Representatives with such conformed copies of such opinions, certificates,
letters and documents as the Representatives reasonably request. CSFBC may in
its sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person, if any who controls such Underwriter within the meaning of Section
15 of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance
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upon and in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below.
(b) The Selling Stockholders, jointly and severally, will
indemnify and hold harmless each Underwriter, its partners, directors and
officers and each person who controls such Underwriter within the meaning of
Section 15 of the Act, against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Selling Stockholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; provided, further, that a
Selling Stockholder shall only be subject to such liability to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
is based upon information provided by such Selling Stockholder or contained in a
representation or warranty given by such Selling Stockholder in this Agreement
or the Custody Agreement and provided, further, that the liability under this
subsection of each Selling Stockholder shall be limited to an amount equal to
the aggregate gross proceeds to such Selling Stockholder from the sale of
Securities sold by such Selling Stockholder hereunder.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if any,
who controls the Company within the meaning of Section 15 of the Act, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company and each Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of: (i) the concession and reallowance figures appearing in the fourth paragraph
under the caption "Underwriting," and (ii) the information contained in the
sixth and twelfth paragraphs under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the
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indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or (c)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (e). Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders
under this Section shall be in addition to any liability which the Company and
the Selling Stockholders may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed a Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CSFBC may make arrangements satisfactory to the Company and the Selling
Stockholders for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC, the Company and the Selling Stockholders
for the purchase
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of such Offered Securities by other persons are not made within 36 hours after
such default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Selling Stockholders, of the Company or its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company and the Selling
Stockholders will, jointly and severally, reimburse the Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel) reasonably
incurred by them in connection with the offering of the Offered Securities.
9. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department - Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 525 Anacapa Street,
Santa Barbara, CA 93101-1603, Attention: General Counsel, or, if sent to the
Selling Stockholders or any of them, will be mailed, delivered or telegraphed
and confirmed to _________ at _________; provided, however, that any notice to
an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.
10. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
11. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters. __________________ will act
for the Selling Stockholders in connection with such transactions, and any
action under or in respect of this Agreement taken by __________________ will be
binding upon all the Selling Stockholders.
12. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
13. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. The Company irrevocably appoints as its
authorized agent in the Borough of Manhattan in The City of New York upon which
process may be served in any such suit or proceeding, and agrees that service of
process upon such agent, and written notice of said service to the Company by
the person serving the same to the address provided in Section 10, shall be
deemed in every respect effective service
18
<PAGE>
of process upon the Company in any such suit or proceeding. The Company further
agrees to take any and all action as may be necessary to maintain such
designation and appointment of such agent in full force and effect for a period
of seven years from the date of this Agreement.
19
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE A HERETO,
ACTING SEVERALLY
____________________________________________________
Attorney-in-fact for the Selling Stockholders
SOFTWARE.COM, INC.
By:_________________________________________________
[Title]
The foregoing Underwriting Agreement is hereby confirmed
and accepted as of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BANCBOSTON ROBERTSON STEPHENS INC.
Acting on behalf of themselves and as the Representatives of
the several Underwriters.
By CREDIT SUISSE FIRST BOSTON CORPORATION
By________________________________________
[Insert title]
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF OPTIONAL
FIRM SECURITIES SECURITIES TO
SELLING STOCKHOLDER TO BE SOLD BE SOLD
------------------- --------------- ---------------
<S> <C> <C>
---------- ------------
Total..............................
========== ============
</TABLE>
S-1
<PAGE>
SCHEDULE B
----------
NUMBER OF
FIRM SECURITIES
UNDERWRITER TO BE PURCHASED
----------- --------------
Credit Suisse First Boston Corporation........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated............
BancBoston Robertson Stephens Inc.............................
--------------
Total
==============
S-2
<PAGE>
Exhibit 4.1
===============================================================================
NUMBER SHARES
[ ] [ ]
COMMON STOCK [LOGO TO COME] COMMON STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE
CUSIP B3402P 10 4
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE OF $0.001 PER SHARE, OF
SOFTWARE.COM, INC.
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Craig A. Shelburne [CORPORATE SEAL /s/ Frank Partner
OF SOFTWARE.COM, INC.]
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED:
BANCBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/
AUTHORIZED SIGNATURE
================================================================================
<PAGE>
================================================================================
The Corporation will furnish without charge to each shareholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights, so far as the same shall have been fixed, and a statement of the
authority of the Board of Directors to designate and fix any preferences,
rights and limitations of any wholly unissued series. Such requests shall be
made to the Corporation's Secretary of the principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-.........Custodian.........
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act..................
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT- .....Custodian (until age..)
common (Cust)
......under Uniform Transfer
(Minor)
to Minors Act...............
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
_____________________________
_____________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated ____________________________
X__________________________________
X__________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
-----------
Software.com, Inc.
525 Anacapa Street
Santa Barbara, CA 93101
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on April 14, 1999 (Registration No. 333-
76263), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 6,900,000
shares of your Common Stock, $0.001 par value per share (the "Shares"). The
Shares include an over-allotment option granted to the underwriters of the
offering to purchase up to 900,000 shares. We understand that the Shares are to
be sold to the underwriters of the offering for resale to the public as
described in the Registration Statement. As your legal counsel, we have
examined the proceedings taken, and are familiar with the proceedings proposed
to be taken, by you in connection with the sale and issuance of the Shares to be
sold by you ("Company Shares") and the sale of the Shares to be sold by certain
of your stockholders ("Selling Stockholder Shares").
It is our opinion that (i) upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Company Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Company Shares, when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and non-assessable
and (ii) the Selling Stockholder Shares are legally issued, fully paid and non-
assessable.
We are members of the Bar of the State of California only and express no
opinion as to any matter relating to the laws of any jurisdiction other than the
laws of the State of California and the federal laws of the United States.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
Exhibit 10.11
LEXINGTON CORPORATE CENTER
L E A S E
ARTICLE 1
---------
Reference Data
--------------
1.1 Subject Referred To
-------------------
Each reference in this Lease to any of the following subjects shall be
construed to incorporate the data stated for that subject in this Section
1.1.
Date of this Lease: As of May 24, 1999
Building: The Building constructed in Lexington,
Massachusetts on a parcel of land described
in the deed filed with the Middlesex South
Registry District of the Land Court on April
16, 1997 as Document No. 1029106, and known
as 10 Maguire Road (the Building and such
parcel of land hereinafter being collectively
referred to as the "Property").
Premises: The portion of the Building known as "Area
4," substantially as shown on Exhibit A
attached hereto.
Rentable Floor
Area of Premises: Approximately 31,046 rentable square feet
Landlord: 10 Maguire Road LLC
Original Notice
Address of Landlord: c/o Nordblom Management Company, Inc.
31 Third Avenue
Burlington, Massachusetts 01803
Tenant: Software.com, Inc. a ____________ corporation
Original Notice
Address of Tenant: 10 Maguire Road
Lexington, Massachusetts 02173
Expiration Date: The last day of the fifth (5th) Lease Year (as
hereinafter defined)
Delivery Date: September 1, 1999
Allowance: $683,012.00
Annual Fixed
Rent Rate: $776,150.00 during the 1st and 2nd Lease
Years; $807,196.00 during the 3rd Lease Year
and $838,242.00 thereafter.
Monthly Fixed
Rent Rate: $64,679.16 during the 1st and 2nd Lease
Years; $67,266.33 during the 3rd Lease Year
and $69,853.50 thereafter.
Rent
Commencement
Date: The date that is one (1) month from the
Commencement Date (as defined in Section 2.2).
Letter of Credit
Amount: $800,000.00, subject to reduction pursuant to
Section 4.4
Base Operating
Costs: $1,225,698.00
Base Taxes: $484,578.00
Tenant's Percentage: The ratio of the Rentable Floor Area of the
Premises to the total rentable area of the
Building, which shall initially be deemed to
be 10.89%.
Permitted Uses: General business offices and ancillary uses
incidental thereto, including without
limitation, incidental storage, kitchenette
and lunchroom areas for use by Tenant's
employees.
Public Liability Insurance Limits:
Comprehensive General Liability: $1,000,000 per occurrence
$5,000,000 general aggregate
1.2 Exhibits.
--------
The Exhibits listed below in this section are incorporated in this Lease by
reference and are to be construed as a part of this Lease.
EXHIBIT A Plan showing the Premises
EXHIBIT B Commencement Date Notification
EXHIBIT C Base Building Work
EXHIBIT C-1 Conceptual Plan of TIW
EXHIBIT D Work Change Order
EXHIBIT E Rules and Regulations
EXHIBIT F Form of Letter of Credit
EXHIBIT G Cleaning and Janitorial Standards
1
<PAGE>
1.3 Table of Articles and Sections.
------------------------------
ARTICLE 1 -- Reference Data
---------------------------
1.1 Subjects Referred To...................................... 1
1.2 Exhibits.................................................. 1
1.3 Table of Articles and Sections............................ 2
ARTICLE 2 -- Premises and Term
------------------------------
2.1 Premises.................................................. 3
2.2 Term...................................................... 3
2.3 Extension Option.......................................... 3
2.4 Termination Right......................................... 4
ARTICLE 3 -- Improvements
-------------------------
3.1 Performance of Work and Approval of Landlord's Work....... 4
3.2 Acceptance of the Premises................................ 4
3.3 Pre-Commencement Entry by Tenant.......................... 5
ARTICLE 4 -- Rent
-----------------
4.1 The Fixed Rent............................................ 5
4.2 Additional Rent........................................... 5
4.2.1 Real Estate Taxes.................................. 5
4.2.2 Personal Property Taxes............................ 5
4.2.3 Operating Costs.................................... 5
4.2.4 Insurance.......................................... 6
4.2.5 Utilities.......................................... 7
4.3 Late Payment of Rent...................................... 7
4.4 Letter of Credit.......................................... 7
4.4.1 Amount of Letter of Credit......................... 7
4.4.1.1 Annual Reduction; Tenant's Election....... 7
4.4.2 Renewal of Letter of Credit........................ 7
4.4.3 Draws to Cure Defaults............................. 8
4.4.4 Draws to Pay Damages............................... 8
4.4.5 Draws for Failure to Deliver Substitute Letter
of Credit......................................... 8
4.4.6 Transferability.................................... 8
4.4.7 Substitution of Cash............................... 8
4.4.8 Return of Letter of Credit at End of Term.......... 8
ARTICLE 5 -- Landlord's Covenants
---------------------------------
5.1 Affirmative Covenants..................................... 8
5.1.1 Heat and Air Conditioning.......................... 8
5.1.2 Electricity........................................ 8
5.1.3 Cleaning; Water.................................... 8
5.1.4 Fire Alarm......................................... 8
5.1.5 Repairs............................................ 8
5.1.6 Landscaping; Snow Removal.......................... 8
5.1.7 On-Site Amenities.................................. 8
5.1.8 Access............................................. 8
5.1.9 Y2K Compliance..................................... 8
5.2 Interruption.............................................. 8
5.3 Outside Services.......................................... 8
5.4 Landlord's Insurance...................................... 8
ARTICLE 6 -- Tenant's Additional Covenants
------------------------------------------
6.1 Affirmative Covenants..................................... 8
6.1.1 Perform Obligations................................ 8
6.1.2 Use................................................ 8
6.1.3 Repair and Maintenance............................. 8
6.1.4 Compliance with Law................................ 8
6.1.5 Indemnification.................................... 8
6.1.6 Landlord's Right to Enter..........................10
6.1.7 Personal Property at Tenant's Risk.................10
6.1.8 Payment of Landlord's Cost of Enforcement..........10
6.1.9 Yield Up...........................................10
6.1.10 Rules and Regulations..............................10
6.1.11 Estoppel Certificate...............................10
6.1.12 Landlord's Expenses Re Consents....................10
6.2 Negative Covenants........................................10
6.2.1 Assignment and Subletting..........................10
6.2.2 Nuisance...........................................11
6.2.3 Hazardous Wastes and Materials.....................11
6.2.4 Floor Load; Heavy Equipment........................11
6.2.5 Installation, Alterations or Additions.............11
6.2.6 Abandonment........................................12
6.2.7 Signs..............................................12
6.2.8 Parking and Storage................................12
ARTICLE 7 -- Casualty or Taking
-------------------------------
7.1 Termination...............................................12
7.2 Restoration...............................................12
7.3 Award.....................................................12
ARTICLE 8 -- Defaults
---------------------
8.1 Events of Default.........................................12
8.2 Remedies..................................................13
2
<PAGE>
8.3 Remedies Cumulative.......................................13
8.4 Landlord's Right to Cure Defaults.........................13
8.5 Effect of Waivers of Default..............................13
8.6 No Waiver, etc............................................13
8.7 No Accord and Satisfaction................................13
ARTICLE 9 -- Rights of Mortgage Holders
---------------------------------------
9.1 Rights of Mortgage Holders................................13
9.2 Lease Superior or Subordinate to Mortgages................13
ARTICLE 10 -- Miscellaneous Provisions
--------------------------------------
10.1 Notices From One Party to the Other......................14
10.2 Quiet Enjoyment..........................................14
10.3 Lease Not to be Recorded.................................14
10.4 Limitation of Landlord's Liability.......................14
10.5 Acts of God..............................................14
10.6 Landlord's Default.......................................14
10.7 Brokerage................................................14
10.8 Applicable Law and Construction..........................14
ARTICLE 2
---------
Premises and Term
-----------------
2.1 Premises. Landlord hereby leases to Tenant and Tenant hereby leases from
--------
Landlord, subject to and with the benefit of the terms, covenants,
conditions and provisions of this Lease, the Premises, excluding the roof,
exterior faces of exterior walls, the common stairways, stairwells,
elevators and elevator shafts, and pipes, ducts, conduits, wires, and
appurtenant fixtures serving exclusively or in common other parts of the
Building (and any areas, such as the space above the ceiling or in the
walls, that may contain such pipes, ducts, conduits, wires or appurtenant
fixtures), and if Tenant's space includes less than entire rentable area of
any floor, excluding the central core area of such floor.
Tenant shall have, as appurtenant to the Premises, rights to use in common,
subject to reasonable rules of general applicability to tenants of the
Building from time to time made by Landlord of which Tenant is given
reasonable advance notice, the common areas and facilities of the Building,
including, without limitation: (a) the common lobbies, hallways,
stairways, elevators and lavatories of the Building, loading docks and
ramps, (b) common walkways and driveways necessary for access to the
Building, (c) the common parking areas serving the Building, and (d) the
cafeteria and exercise facility, including the locker/shower room, on the
Property.
Tenant shall be permitted to use up to 109 parking spaces in the parking
area serving the Building.
Landlord reserves the right from time to time, without unreasonable
interference with use of the Premises: (a) to install, use, maintain,
repair, replace and relocate for service to the Premises and other parts of
the Building, or either, pipes, ducts, conduits, wires and appurtenant
fixtures, wherever located in the Premises or Building, provided that any
such work is installed above the finished ceiling, below the finished
floor, or within existing chases, (b) to alter or relocate any other common
facility, (c) to make any repairs and replacements to the Premises which
Landlord is required or permitted to make hereunder, and (d) in connection
with any excavation made upon adjacent land of Landlord or others, to
enter, and to license others to enter, upon the Premises to do such work as
the person causing such excavation deems necessary to preserve the wall of
the Building from injury or damage and to support the same. Landlord will
use reasonable efforts to minimize any disruption to Tenant's use of the
Premises in Landlord's exercise of its rights hereunder.
2.2 Term. TO HAVE AND TO HOLD for a term (the "Original Term") beginning on
----
the Commencement Date, which shall be the earlier of (a) the date on which
the work to be performed by Landlord pursuant to Exhibits C and C-1 has
been Substantially Completed (defined below) or (b) the opening by Tenant
of its business in the Premises, and ending on the Expiration Date, unless
sooner terminated as hereinafter provided. The term "Substantially
Completed" as used herein shall mean that the work to be performed by
Landlord pursuant to Exhibits C and C-1 has been completed with the
exception of minor items which can be fully completed without material
interference with Tenant's use of the Premises and other items which
because of the season or weather or the nature of the item are not
practicable to do at the time, provided that none of said items is
necessary to make the Premises tenantable for the Permitted Uses. If
Landlord's Work is delayed due to Tenant Delay (hereinafter defined), then,
for the purposes of determining the Commencement Date, the Landlord's Work
shall be deemed to be substantially completed on the date that such work
would have been substantially completed but for such Tenant Delay. If
Landlord's Work is deemed substantially completed, pursuant to the
foregoing (and the Original Term shall have commenced by reason thereof),
but the Landlord's Work is not in fact substantially completed, Tenant
shall not (except with Landlord's consent which consent shall not be
unreasonably withheld) be entitled to take possession of the Premises for
any purpose until the Landlord's Work is in fact substantially completed.
Any items of Landlord's Work not fully completed on the date when
Landlord's Work is in fact substantially completed shall thereafter be so
completed with reasonable diligence by Landlord. For the purposes hereof
"Tenant Delay" shall be defined as any delay in the performance of
Landlord's Work in fact caused by any action or inaction (where action by
Tenant is required hereunder) by Tenant or any of its agents, employees or
contractors, including, without limitation, any delay in the performance
thereof caused by (i) any special work or long lead-time items for which
Landlord identifies in writing a specified period of Tenant Delay at the
time of approval of the plans therefor, or change orders made by Tenant
under subsection 3.1 hereof for which Landlord identifies in writing a
specified period of Tenant Delay at the time of approval (and Tenant does
not withdraw or alter such special work, long lead-time item or change
order so as to avoid such delay), (ii) the delay of Tenant in submitting
any plans and/or specifications, supplying information required to be
supplied by Tenant, approving plans, specifications or estimates, giving
authorizations or otherwise, in each case beyond the time specified
hereunder for Tenant so to act (or where no time is specified, beyond a
reasonable period), (iii) default on the part of Tenant, (iv) any failure
to comply with Article 3 or any interference with the performance of
Landlord's Work by Tenant, or any of its agents, employees, engineers,
architects or contractors.
When the dates of the beginning and end of the Original Term have been
determined, such dates shall be evidenced by a document, in the form
attached hereto as Exhibit B, which Landlord shall complete and deliver to
Tenant, and which shall be deemed conclusive unless Tenant shall notify
Landlord of any disagreement therewith within fifteen (15) days of receipt.
The term "Lease Year" as used herein shall mean a period of twelve (12)
consecutive full calendar months. The first Lease Year shall begin on the
Rent Commencement Date if the Rent Commencement Date is the first day of a
calendar month; if not, then the first Lease Year shall commence upon the
first day of the calendar month next following the Rent Commencement Date.
Each succeeding Lease Year shall commence upon the anniversary date of the
first Lease Year.
2.3 Extension Option. Provided that as of the date of the notice specified
----------------
below and at the commencement of the Extended Term, Tenant is not in
default of its obligations under this Lease after notice thereof and the
expiration of any applicable grace period, Tenant shall have the right to
extend the term of this Lease for one additional period of five (5) years,
to begin immediately upon the expiration of the Original Term of this Lease
(the "Extended Term"). All of the terms, covenants and provisions of this
Lease shall apply to such
3
<PAGE>
Extended Term except that (i) the Annual Fixed Rent Rate for such
extension period shall be the market rate at the commencement of such
Extended Term, as designated by Landlord, subject to the following
provisions of this Section 2.3, and (ii) the Letter of Credit Amount
shall be reduced to $200,000.00 during such Extended Term pursuant to the
provisions of Subsection 4.4.1.1(b) of this Lease. If Tenant shall elect
to exercise the aforesaid option, it shall do so by giving Landlord
notice in writing of its intention to do so not later than nine (9)
months prior to the expiration of the Original Term of this Lease. If
Tenant gives such notice, the extension of this Lease shall be
automatically effected without the execution of any additional documents.
The Original Term and the Extended Term are hereinafter collectively
called the "term".
Within fifteen (15) business days following such notice by Tenant, Landlord
shall give written notice to Tenant setting forth Landlord's determination
of the market rate. Within ten (10) business days after Landlord's notice,
Tenant shall (i) revoke its exercise of the aforesaid option by giving
written notice thereof to Landlord (in which case such exercise shall be
rendered ineffective and the right of extension shall expire and be of no
further force and effect), (ii) propose its determination of the market
rate by giving written notice thereof to Landlord, or (iii) accept
Landlord's determination. Failure on the part of Tenant to give such
notice of either revocation or its determination shall bind Tenant to
Landlord's determination. If Tenant proposes its determination and the
parties cannot agree upon the market rate, then the market rate shall be
submitted to arbitration as follows: market rate shall be determined by
impartial arbitrators, one to be chosen and compensated by the Landlord,
one to be chosen and compensated by Tenant, and a third to be selected, if
necessary, as below provided. The unanimous written decision of the two
first chosen, without selection and participation of a third arbitrator, or
otherwise, the written decision of a majority of three arbitrators chosen
and selected as aforesaid, shall be conclusive and binding upon Landlord
and Tenant. Landlord and Tenant shall each notify the other of its chosen
arbitrator within ten (10) days following the call for arbitration and,
unless such two arbitrators shall have reached a unanimous decision within
thirty (30) days after their designation, they shall so notify the then
President of the Boston Bar Association and request him to select an
impartial third arbitrator, who shall be a real estate counselor or a
broker dealing with like types of properties, to determine market rate as
herein defined. Such third arbitrator and the first two chosen shall hear
the parties and their evidence and render their decision within thirty (30)
days following the conclusion of such hearing and notify Landlord and
Tenant thereof. Landlord and Tenant shall share equally the expense of the
third arbitrator (if any). If the dispute between the parties as to a
market rate has not been resolved before the commencement of Tenant's
obligation to pay Fixed Rent based upon such market rate, then Tenant shall
pay Fixed Rent under the Lease based upon the market rate designated by
Landlord until either the agreement of the parties as to the market rate,
or the decision of the arbitrators, as the case may be, at which time
Tenant shall pay any underpayment of Fixed Rent to Landlord, or Landlord
shall refund any overpayment of Fixed Rent to Tenant.
In any event, the Annual Fixed Rent Rate for the Extended Term shall not be
less than the Annual Fixed Rent Rate in effect immediately prior to such
Extended Term.
2.4 Termination Right. Provided that as of the date of the notice specified
-----------------
below and as of the Effective Termination Date (hereinafter defined),
Tenant is not in default of its obligations beyond any applicable grace
period under this Lease, and provided, further, that the initial Tenant
named herein shall continue to occupy all of the Premises both at the time
of the notice and as of the Effective Termination Date, Tenant shall have
the right to terminate this Lease effective as of the last day of the 3rd
Lease Year (the "Effective Termination Date"). If Tenant shall elect to
exercise such right, it shall do so by giving written notice to Landlord no
later than nine (9) months prior to the Effective Termination Date, such
notice to be accompanied by a termination payment equal to $600,000.00. It
is agreed that time is of the essence of this Section 2.4. Accordingly, if
Tenant fails timely to exercise its right to terminate the Lease on or
before the applicable exercise date specified above, Tenant shall have no
further right to terminate this Lease hereunder. This Termination Right is
personal to Software.com, Inc. and may not be assigned. For the purposes
of this provision, amortization shall be on a straight line basis over the
original term of the Lease.
ARTICLE 3
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Improvements
------------
3.1 Performance of Work and Approval of Landlord's Work. Landlord shall cause
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to be performed the base building work required by Exhibit C (the "Base
Building Work"), and the tenant improvement work to be shown in the final
construction documents developed as provided herein (the "TIW")
(collectively, the Base Building Work and the TIW are called, "Landlord's
Work"). The final construction documents, which have not been prepared as
of the date of this Lease, shall emanate from and be consistent in all
material respects with the conceptual plan attached hereto as Exhibit C-1.
Promptly after the execution hereof, Landlord shall cause to be prepared
and delivered to Tenant final construction documents for the TIW, which
shall be consistent in all material respects with Exhibit C-1. Landlord
shall use reasonable efforts to cause its contractor to give Tenant a good
faith estimate of the cost to construct the TIW as soon as possible after
delivery of such construction documents and any revisions thereto. Within
five (5) business days after receipt of such construction documents, Tenant
shall either approve such documents, which approval shall not be
unreasonably withheld so long as such documents are consistent in all
material respects with Exhibit C-1, or disapprove same in writing, setting
forth in reasonable detail Tenant's objections and Tenant's proposed
modifications to address such objections. If Tenant so disapproves such
documents, Landlord shall promptly cause same to be revised to address
Tenant's objections and shall resubmit same to Tenant for approval or
disapproval in the manner set forth above until the construction documents
have been approved or deemed approved as provided herein. The failure of
Tenant to respond in writing within five (5) business days after receipt of
any documents or revised documents, as the case may be, shall constitute
approval thereof by Tenant. Immediately after approval of such documents,
Landlord shall cause its contractor to issue a firm, written bid for the
construction of the TIW and shall deliver same to Tenant. Tenant agrees to
make a representative reasonably available to Landlord and its architect in
order to expedite the development of the construction documents.
All Landlord's Work shall be done in a good and workmanlike manner
employing good materials and so as to conform to all applicable building
laws. Tenant agrees that Landlord may make any changes in the Base
Building Work without Tenant's approval. Landlord may make changes in the
TIW which may become reasonably necessary or advisable, other than material
changes, without approval of Tenant, provided written notice is promptly
given to Tenant. Any changes which are material in nature must first be
approved in writing by Tenant, which approval shall not be unreasonably
withheld or delayed, except for changes that affect the layout, general
appearance, or functionality of the Premises. Landlord shall use diligence
to (i) complete the on-site amenities center (i.e., the cafeteria and the
exercise/shower/locker facility), and (ii) cause Landlord's Work to be
Substantially Completed, both by the Delivery Date, but subject to Tenant
Delay and the provisions of Section 10.5 hereof. Landlord agrees that
Tenant may make changes in the TIW with the approval of Landlord, which
shall not be unreasonably withheld or delayed and the execution by Landlord
and Tenant of a Work Change Order in the form attached hereto as Exhibit D.
Tenant shall pay to Landlord a sum equal to the amount by which the costs,
including permitting fees, architectural, engineering and construction
management costs, incurred by Landlord in performing the TIW exceed the
Allowance, payment to be made as follows: (a) an amount equal to fifty
(50%) percent of the anticipated cost of the excess upon execution of this
Lease, (b) forty (40%) percent of such anticipated cost on or before the
Commencement Date and (c) the balance upon Landlord's submission of the
final bill to Tenant.
If Landlord's Work has not been substantially completed by December 1, 1999
(the "Outside Date") and such failure is not the result of any Tenant
Delay, Tenant shall have the right to terminate this Lease by giving
written notice to Landlord within thirty (30) days following the Outside
Date, such termination to be effective at the expiration of thirty (30)
days from the giving of such notice, and if prior to the expiration of the
aforesaid thirty (30)-day period the work has not been substantially
completed, this Lease shall thereupon terminate.
3.2 Acceptance of the Premises. Tenant or its representatives may, at
--------------------------
reasonable times, enter upon the Premises during the progress of the work
to inspect the progress thereof and to determine if the work is being
performed in accordance with the requirements of Section 3.1. Tenant shall
promptly give to Landlord notices of any alleged failure by Landlord to
comply with those requirements. Landlord's Work shall be deemed approved
by Tenant when Tenant occupies the Premises for the conduct of its
business, except for (i) items of
4
<PAGE>
Landlord's Work which are uncompleted or do not conform to Exhibit C or
Exhibit C-1 and as to which Tenant shall, in either case, have given
written notice to Landlord prior to such occupancy, (ii) latent defects
in workmanship or materials not then discoverable by a reasonable
examination and as to which Tenant shall have given Landlord written
notice within one (1) year after the Commencement Date, and (iii) a
punchlist prepared by Tenant, subject to confirmation and verification by
Landlord, based on an inspection made by the parties prior to the date on
which Tenant occupies the Premises for the conduct of its business;
provided, however, that if the Premises are not available to Tenant for
such inspection prior to the date of Tenant's occupancy, then such
punchlist shall be prepared and signed by Tenant, and confirmed and
verified in writing by Landlord, within twenty (20) days after Tenant
first occupies the Premises. Landlord shall forthwith correct all defects
noted on such punchlist within thirty (30) days thereafter, except for
items which by their nature cannot be corrected within said 30-day
period, provided that Landlord shall use diligence to correct such items
expeditiously. A certificate of completion by a licensed architect or
registered engineer shall be conclusive evidence that Landlord's Work has
been completed except for items stated in such certificate to be
incomplete or not in conformity with Exhibit C and Exhibit C-1.
3.3 Pre-Commencement Entry by Tenant. With Landlord's prior consent, which
--------------------------------
shall not be unreasonably withheld, Tenant shall have the right to enter
the Premises, during normal business hours and without payment of rent, but
otherwise subject to all of the terms and conditions of the Lease,
including without limitation, the provisions of subsection 6.1.5, to
install Tenant's data and telecommunications wiring and equipment, so long
as such work does not interfere with the performance of Landlord's work.
ARTICLE 4
---------
Rent
----
4.1 The Fixed Rent. Commencing as of the Rent Commencement Date, Tenant
--------------
covenants and agrees to pay rent to Landlord at the Original Address of
Landlord or at such other place or to such other person or entity as
Landlord may by notice in writing to Tenant from time to time direct, at
the Annual Fixed Rent Rate, in equal installments at the Monthly Fixed Rent
Rate (which is 1/12th of the Annual Fixed Rent Rate), in advance, on the
first day of each calendar month included in the term; and for any portion
of a calendar month following the Rent Commencement Date, a prorated part
thereof at the rate for the first lease year payable in advance for such
portion.
4.2 Additional Rent. Tenant covenants and agrees to pay, as Additional Rent,
---------------
insurance costs, utility charges, personal property taxes and its pro rata
share of increases in operating costs with respect to the Premises as and
to the extent provided in this Section 4.2 as follows:
4.2.1 Real Estate Taxes. If Taxes (as hereinafter defined) for any Tax
-----------------
Year during the term shall exceed Base Taxes, Tenant shall
reimburse Landlord, as additional rent, for Tenant's Percentage of
such excess (such amount hereinafter referred to as "Tax Excess").
Tenant shall remit to Landlord, on the first day of each calendar
month included in the term, estimated payments on account of Tax
Excess, such monthly amounts to be sufficient to provide Landlord,
by the time real estate tax payments are due and payable to any
governmental authority responsible for collection of same, a sum
equal to the Tax Excess, as reasonably estimated by Landlord from
time to time on the basis of the most recent tax data available.
If the total of such monthly remittances for any Tax Year is
greater than the actual Tax Excess for such Tax year, Landlord
shall promptly pay to Tenant, or credit against the next accruing
payments to be made by Tenant pursuant to this subsection 4.2.1,
the difference; if the total of such remittances is less than the
actual Tax Excess for such Tax Year, Tenant shall pay the
difference to Landlord at least ten (10) days prior to the date or
dates within such Tax Year that any Taxes become due and payable
to the governmental authority (but in any event no earlier than
ten (10) days following a written notice to Tenant, which notice
shall set forth the manner of computation of Tax Excess).
If, after Tenant shall have made reimbursement to Landlord
pursuant to this subsection 4.2.1, Landlord shall receive a refund
of any portion of Taxes paid by Tenant with respect to any Tax
Year during the term hereof as a result of an abatement of such
Taxes by legal proceedings, settlement or otherwise (without
Landlord having any obligation to undertake any such proceedings),
Landlord shall promptly pay to Tenant, or credit against the next
accruing payments to be made by Tenant pursuant to this subsection
4.2.1, the Tenant's Percentage of the refund (less the
proportional, pro rata expenses, including attorneys' fees and
appraisers' fees, incurred in connection with obtaining any such
refund), as relates to Tax Excess paid by Tenant to Landlord with
respect to any Tax Year for which such refund is obtained.
In the event this Lease shall commence, or shall end (by reason of
expiration of the term or earlier termination pursuant to the
provisions hereof), on any date other than the first or last day of
the Tax Year, or should the Tax Year or period of assessment of real
estate taxes be changed or be more or less than one (1) year, as the
case may be, then the amount of Tax Excess which may be payable by
Tenant as provided in this subsection 4.2.1 shall be appropriately
apportioned and adjusted.
The term "Taxes" shall mean all taxes, assessments, betterments and
other charges and impositions (including, but not limited to, fire
protection service fees and similar charges) levied, assessed or
imposed at any time during the term by any governmental authority
upon or against the Property, or taxes in lieu thereof, and
additional types of taxes to supplement real estate taxes due to
legal limits imposed thereon. If, at any time during the term of
this Lease, any tax or excise on rents or other taxes, however
described, are levied or assessed against Landlord with respect to
the rent reserved hereunder, either wholly or partially in
substitution for, or in addition to, real estate taxes assessed or
levied on the Property, such tax or excise on rents shall be
included in Taxes; however, in any event Taxes shall not include
franchise, estate, gift, inheritance, succession, capital levy,
transfer, income or excess profits taxes assessed on Landlord or
with respect to the Property, or any late payment penalties or
interest, other than interest paid on assessments paid in
installments. With respect to betterment assessments and other
charges and impositions, there shall only be included in "Taxes"
amounts equal to the installments which would be payable had
Landlord paid such assessments, other charges and impositions over
the longest period permitted by law. Taxes shall include any
estimated payment made by Landlord on account of a fiscal tax
period for which the actual and final amount of taxes for such
period has not been determined by the governmental authority as of
the date of any such estimated payment, subject to adjustment upon
such final determination.
4.2.2 Personal Property Taxes. Tenant shall pay all taxes charged,
-----------------------
assessed or imposed upon the personal property of Tenant in or upon
the Premises.
4.2.3 Operating Costs. If, during the term hereof, Operating Costs (as
---------------
hereinafter defined) incurred by Landlord in any calendar year
shall exceed Base Operating Costs, Tenant shall reimburse
Landlord, as additional rent, for Tenant's Percentage of any such
excess (such amount being hereinafter referred to as the
"Operating Costs Excess"). Tenant shall remit to Landlord, on the
first day of each calendar month, estimated payments on account of
Operating Costs Excess, such monthly amounts to be sufficient to
provide Landlord, by the end of the calendar year, a sum equal to
the Operating Costs Excess, as reasonably estimated by Landlord
from time to time, but in no event more than two times in any
calendar year. If, at the expiration of the year in respect of
which monthly installments of Operating Costs Excess shall have
been made as aforesaid, the total of such monthly remittances is
greater than the actual Operating Costs Excess for such year,
Landlord shall promptly pay to Tenant, or credit against the next
accruing payments to be made by Tenant pursuant to this subsection
4.2.3, the difference; if the total of such remittances is less
than the Operating Costs Excess for such year, Tenant shall pay
the difference to Landlord within twenty (20) days from the date
Landlord shall furnish to Tenant an itemized statement of the
Operating Costs Excess, showing all Operating Costs in reasonable
detail and the computation of the Operating Costs Excess,
prepared, allocated and computed in accordance with generally
accepted accounting
5
<PAGE>
principles. Tenant shall have the right, upon reasonable notice
and during business hours, to examine at Landlord's office, within
six (6) months following receipt of a statement of Operating Costs
Excess, Landlord's books and records respecting such statement. If
such examination discloses any errors, appropriate adjustments
shall be made. Any reimbursement for Operating Costs due and
payable by Tenant with respect to periods of less than twelve (12)
months shall be equitably prorated.
The term "Operating Costs" shall mean all costs and expenses
incurred for the operation, cleaning, maintenance, repair and
upkeep of the Property, including, without limitation, all costs
of maintaining and repairing the Property (including snow removal,
landscaping and grounds maintenance, parking lot operation and
maintenance, security, operation and repair of heating and air-
conditioning equipment, elevators, lighting and any other Building
equipment or systems) and of all repairs and replacements (other
than repairs or replacements for which Landlord has received full
reimbursement from contractors, other tenants of the Building or
from others) necessary to keep the Property in good working order,
repair, appearance and condition; all costs, including material
and equipment costs, for cleaning and janitorial services to the
Building (including window cleaning of the Building); all costs of
any reasonable insurance carried by Landlord relating to the
Property; all costs related to provision of heat (including oil,
electric, steam and/or gas), air-conditioning, and water
(including sewer charges) and other utilities to the Building
(exclusive of reimbursement to Landlord for any of same received
as a result of direct billing to any tenant of the Building);
payments under all service contracts relating to the foregoing;
all compensation, fringe benefits, payroll taxes and workmen's
compensation insurance premiums related thereto with respect to
any employees of Landlord or its affiliates engaged in security
and maintenance of the Property; attorneys' fees and disbursements
(exclusive of any such fees and disbursements incurred in tax
abatement proceedings or the preparation of leases) and auditing
and other professional fees and expenses; and a management fee.
There shall not be included in such Operating Costs: (a) brokerage
fees (including rental fees) related to the operation or leasing
of the Building; (b) interest and depreciation charges incurred on
the Property; (c) expenditures made by Tenant with respect to (i)
cleaning, maintenance and upkeep of the Premises, and (ii) the
provision of electricity to the Premises;. (d) any cost or expense
to the extent to which Landlord is paid or reimbursed (other than
as a payment for Operating Costs), including but not necessarily
limited to, (1) work or service performed for any tenant
(including Tenant) at such tenant's cost, (2) the cost of any item
for which Landlord is paid or reimbursed by insurance proceeds,
warranties, service contracts, condemnation proceeds or otherwise,
(3) increased insurance or taxes assessed specifically to any
tenant of the Building, and (4) charges (including applicable
taxes) for heat, air conditioning, electricity, water or other
utilities for which Landlord is entitled to direct reimbursement
from any tenant; (e) the cost of operating and maintaining any
special facilities, such as an observatory, luncheon club,
conference center or other similar facilities except that such
costs with respect to a cafeteria, athletic club, locker room or
showers shall be includible in Operating Costs (but with any
reimbursement to Landlord by an operator thereof for such costs
excluded therefrom); (f) the cost of correcting defects in the
design or construction of the Building ; (g) salaries, bonuses and
other employment costs of any employee of Landlord above the level
of Building Manager; (h) taxes, operating costs or the cost of any
work or services performed for any facility other than the
Building; (i) any fees, costs, and commissions incurred in
procuring or attempting to procure other tenants including, but
not necessarily limited to brokerage commissions, finders fees,
attorneys' fees and expenses, entertainment costs, travel expenses
and advertising and production costs; (j) any cost included in
Operating Costs representing an amount paid to a person, firm,
corporation or other entity related to Landlord which is in excess
of the amount which would have been paid on an arms length basis
in the absence of such relationship; (k) any costs of painting or
decorating of any space for tenants or other occupants of the
Building; (l) Landlord's general overhead except as it relates
specifically to the actual management of the Building; (m)
attorneys' fees, costs and other expenditures incurred in
connection with leasing of premises in the Building, leasing
disputes with tenants or occupants of the Building or with other
third persons and/or claims by such tenants or occupants or third
parties; (n) the cost of acquiring sculptures, paintings and other
objects of art other than normally acquired for decoration of
similar buildings; (o) the cost of curing any violation of any
law, ordinance or regulation in effect as of the Commencement Date
of this Lease or any cost of remediating any environmental
condition existing as of the Commencement Date, unless such
condition was caused by Tenant; (p) any late fees, fines or
penalties incurred by Landlord; (q) costs that are capital in
nature, except for an annual charge-off for capital expenditures
(defined below); or (r) costs incurred in performing work or
furnishing services for any tenant (including Tenant), whether at
such tenant's or Landlord's expense, to the extent that such work
or service is in excess of any work or service that Landlord is
obligated to furnish to Tenant at Landlord's expense (e.g., if
Landlord agrees to provide extra cleaning to another tenant, the
cost thereof would be excluded since Landlord is not obligated to
furnish extra cleaning to Tenant).
If, during the term of this Lease, Landlord shall replace any
capital items or make any capital expenditures in order to, in
either case, comply with laws in effect after the Commencement
Date, effect savings in Operating Costs or replace worn-out items
(collectively called "capital expenditures") the total amount of
which is not properly included in Operating Costs for the calendar
year in which they were made, there shall nevertheless be included
in Operating Costs for each calendar year in which and after such
capital expenditure is made the annual charge-off of such capital
expenditure. (Annual charge-off shall be determined by (i)
dividing the original cost of the capital expenditure by the
number of years of useful life thereof [The useful life shall be
reasonably determined by Landlord in accordance with generally
accepted accounting principles and practices in effect at the time
of acquisition of the capital item.]; and (ii) adding to such
quotient an interest factor computed on the unamortized balance of
such capital expenditure based upon an interest rate reasonably
determined by Landlord as being the interest rate then being
charged for long-term mortgages by institutional lenders on like
properties within the locality in which the Building is located.)
Provided, further, that if Landlord reasonably concludes on the
basis of engineering estimates that a particular capital
expenditure will effect savings in Operating Costs and that such
annual projected savings will exceed the annual charge-off of
capital expenditure computed as aforesaid, then and in such
events, the annual charge-off shall be determined by dividing the
amount of such capital expenditure by the number of years over
which the projected amount of such savings shall fully amortize
the cost of such capital item or the amount of such capital
expenditure; and by adding the interest factor, as aforesaid.
If during any portion of any year for which Operating Costs are
being computed, the Building was not fully occupied by tenants or
if not all of such tenants were paying fixed rent or if Landlord
was not supplying all tenants with the services being supplied
hereunder, actual Operating Costs incurred shall be reasonably
extrapolated by Landlord to the estimated Operating Costs that
would have been incurred if the Building were fully occupied by
tenants and all such tenants were then paying fixed rent or if
such services were being supplied to all tenants, and such
extrapolated amount shall, for the purposes of this Section 4.2.3,
be deemed to be the Operating Costs for such year.
4.2.4 Insurance. Tenant shall, at its expense, as Additional Rent, take
---------
out and maintain throughout the term the following insurance
protecting Landlord:
4.2.4.1 Comprehensive liability insurance naming Landlord,
Tenant, and Landlord's managing agent and any mortgagee
of which Tenant has been given notice as insureds or
additional insureds and indemnifying the parties so named
against all claims and demands for death or any injury to
person or damage to property which may be claimed to have
occurred on the Premises (or the Property, insofar as
used by customers, employees, servants or invitees of the
Tenant), in amounts which shall, at the beginning of the
term, be at least equal to the limits set forth in
Section 1.1, and, which, from time to time during the
term, shall be for such higher limits, if any, as are
customarily carried in the area in which the Premises are
located on property similar to the Premises and used for
similar purposes, and uniformly required of all similarly
situated tenants of the Property; and workmen's
compensation insurance with statutory limits covering all
of Tenant's employees working on the Premises.
6
<PAGE>
4.2.4.2 Fire insurance with the usual extended coverage
endorsements covering all Tenant's furniture,
furnishings, fixtures and equipment. At Tenant's
election, Tenant shall be permitted to self-insure this
risk so long as Tenant maintains insurance coverage
protecting Tenant and Landlord, as an additional insured,
against loss of rent in an amount equal to at least all
the Fixed Rent and Additional Rent payable for one year
under Article 4.
4.2.4.3 All such policies shall be obtained from responsible
companies qualified to do business and in good standing
in Massachusetts, which companies and the amount of
insurance allocated thereto shall be subject to
Landlord's reasonable approval, which shall not be
unreasonably withheld or delayed. Tenant agrees to
furnish Landlord with certificates evidencing all such
insurance prior to the beginning of the term hereof and
evidencing renewal thereof at least thirty (30) days
prior to the expiration of any such policy. Each such
policy shall be non-cancelable with respect to the
interest of Landlord without at least ten (10) days'
prior written notice thereto. In the event provision for
any such insurance is to be by a blanket insurance
policy, the policy shall allocate a specific and
sufficient amount of coverage to the Premises.
4.2.4.4 All insurance which is carried by either party with
respect to the Building, Premises or to furniture,
furnishings, fixtures, or equipment therein or
alterations or improvements thereto, whether or not
required, shall include provisions which either designate
the other party as one of the insured or deny to the
insurer acquisition by subrogation of rights of recovery
against the other party to the extent such rights have
been waived by the insured party prior to occurrence of
loss or injury, insofar as, and to the extent that, such
provisions may be effective without making it impossible
to obtain insurance coverage from responsible companies
qualified to do business in the state in which the
Premises are located (even though extra premium may
result therefrom). In the event that extra premium is
payable by either party as a result of this provision,
the other party shall reimburse the party paying such
premium the amount of such extra premium. If at the
request of one party, this non-subrogation provision is
waived, then the obligation of reimbursement shall cease
for such period of time as such waiver shall be
effective, but nothing contained in this subsection shall
derogate from or otherwise affect releases elsewhere
herein contained of either party for claims. Each party
shall be entitled to have certificates of any policies
containing such provisions. Each party hereby waives all
rights of recovery against the other for loss or injury
against which the waiving party is protected, or would
have been protected if the party suffering such loss had
maintained casualty insurance in the full replacement
value of the damaged or destroyed property pursuant to
the terms of this Lease (whether or not such party
carried the requisite insurance coverages), by insurance
containing said provisions, or for loss or injury against
which such party self-insures or maintains a high
deductible, reserving, however, any rights with respect
to any excess of loss or injury over the amount recovered
by such insurance. Tenant shall not acquire as insured
under any insurance carried on the Premises any right to
participate in the adjustment of loss or to receive
insurance proceeds and agrees upon request promptly to
endorse and deliver to Landlord any checks or other
instruments in payment of loss in which Tenant is named
as payee.
4.2.5 Utilities. Tenant shall pay to Landlord all charges for electricity
---------
supplied by Landlord and separately check metered (which shall include
and be limited to electricity for lights, outlets and VAV boxes).
Except as otherwise provided in Article 5, it is understood and agreed
that Tenant shall make its own arrangements for the installation or
provision at Tenant's expense of all utilities provided to the
Premises other than utilities or services supplied by Landlord
pursuant to Subsections 5.1.1, 5.1.2, and 5.1.3, and that Landlord
shall be under no obligation to furnish any other utilities to the
Premises and shall not be liable for any interruption or failure in
the supply of any utilities to the Premises. The utilities and
services described in Subsections 5.1.1 and 5.1.3 shall be provided
without additional charge to Tenant, other than is expressly set forth
in Subsection 4.2.3.
4.3 Late Payment of Rent. If any installment of rent is paid more than three
--------------------
(3) days after the date the same was due, and if on a prior occasion in the
twelve (12) month period prior to the date such installment was due an
installment of rent was paid after the same was due, then Tenant shall pay
Landlord a late payment fee equal to five (5%) percent of the overdue
payment.
4.4 Letter of Credit. The performance of Tenant's obligations under this Lease
----------------
shall be secured by a letter of credit or a cash security deposit
throughout the term hereof in accordance with and subject to the following
terms and conditions:
4.4.1 Amount of Letter of Credit. Concurrently with Tenant's execution
--------------------------
and delivery of this Lease, Tenant shall either (i) deliver to
Landlord an irrevocable standby letter of credit (the "Original
Letter of Credit") which shall be (A) in the form of Exhibit F
attached to this Lease (the "Form LC"), (B) issued by Sanwa Bank
of California or any other bank reasonably satisfactory to
Landlord upon which presentment may be made in Boston,
Massachusetts, (C) in the amount equal to the Letter of Credit
Amount, and (D) for a term of at least 1 year, subject to the
provisions of Section 4.4.2 below, or (ii) deposit with Landlord
cash in the amount of the Letter of Credit Amount, which Landlord
shall hold in accordance with Section 4.4.5 below, and shall have
the same rights with respect thereto under said Section 4.4.5 as
if such cash were Security Proceeds (defined in said Section
4.4.5). Tenant may substitute the Original Letter of Credit for
such cash at any time, and Landlord shall promptly refund such
cash to Tenant upon receipt of the Original Letter of Credit. The
Original Letter of Credit, any Additional Letters(s) of Credit and
Substitute Letter(s) of Credit are referred to herein as the
"Letter of Credit."
4.4.1.1 Annual Reduction; Tenant's Election (a) Provided Tenant is
-----------------------------------
not in default and has not previously been in default of
any of its obligations under this Lease in each case
after notice thereof and the expiration of any applicable
cure periods more than two (2) times in any twelve-month
period (but in no event more than four (4) times during
the term) at the time of reduction hereunder, the Letter
of Credit Amount for each of the 2nd through the 5th
Lease Years shall be reduced at the beginning of each of
the 2nd through 5th Lease Years by an amount equal to the
Annual Reduction Amount, provided, however, that Tenant
shall not be entitled to reduce the Letter of Credit by
the Annual Reduction Amount if Tenant elects to reduce
the Letter of Credit Amount pursuant to the provisions of
subparagraph (b) below. For the purpose hereof, the
"Annual Reduction Amount" shall be $150,000.00.
(b) On the condition that Tenant is a publicly-traded
company at the time of the notice required by this
subparagraph (b), Tenant may elect, by written notice to
Landlord on or before the first day of the 2nd Lease
Year, to have the Letter of Credit Amount reduced to
$400,000.00, if Tenant has a net income of $1,000,000.00
for the preceding fiscal year of Tenant and Tenant
provides Landlord with an audited annual report reporting
such net income, and provided Tenant is not in default
after notice thereof and expiration of the applicable
cure period under this Lease at the time of its election
or at the time of the reduction hereunder. If Tenant
makes an election to reduce the Letter of Credit Amount
pursuant to this subparagraph (b), Tenant shall no longer
be entitled to reduce the Letter of Credit Amount by the
Annual Reduction Amount. Notwithstanding the foregoing,
if Tenant duly and timely exercises its right pursuant to
Section 2.3 hereof to extend the Original Term, the
Letter of Credit Amount shall be reduced to $200,000.00
as of the commencement of the Extended Term, provided
that Tenant is not in default of any of its obligations
under this Lease beyond all applicable notice and cure
periods as of the commencement of such Extended Term, and
provided further, that Landlord is not obligated to make
any contributions or provide any tenant improvement
allowances for the benefit of Tenant at the commencement
of the Extended Term.
4.4.2 Renewal of Letter of Credit. Each Letter of Credit shall be
---------------------------
automatically renewable in accordance with the second to last
paragraph of the Form LC; provided however, that Tenant shall be
required to deliver to Landlord a new letter of credit (a
"Substitute Letter of Credit") satisfying the requirements for the
Original Letter of Credit under Section 4.4.1 on or before
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the date 30 days prior to the expiration of the term of the Letter
of Credit then in effect, if the issuer of such Letter of Credit
gives notice of its election not to renew such Letter of Credit
for any additional period pursuant thereto.
4.4.3 Draws to Cure Defaults. If the Fixed Rent or Additional Rent
----------------------
payable hereunder shall be overdue and unpaid or should Landlord
make payments on behalf of the Tenant, or Tenant shall fail to
perform any of the terms of this Lease in all cases after notice
thereof and the expiration of all applicable cure periods, then
Landlord shall have the right, at any time thereafter to draw down
from the Letter of Credit the amount necessary to cure such
default. In the event of any such draw by the Landlord, Tenant
shall, within 30 days of written demand therefor, deliver to
Landlord an additional Letter of Credit ("Additional Letter of
Credit") satisfying the requirements for the Original Letter of
Credit, except that the amount of such Additional Letter of Credit
shall be the amount of such draw.
4.4.4 Draws to Pay Damages. In addition, if (i) this Lease shall have
--------------------
been terminated as a result of Tenant's default under this Lease
after notice thereof and the expiration of the applicable cure
period, and/or (ii) this Lease shall have been rejected in a
bankruptcy or other creditor-debtor proceeding, then Landlord
shall have the right at any time thereafter to draw down from the
Letter of Credit an amount sufficient to pay any and all damages
payable by Tenant on account of such termination or rejection, as
the case may be, pursuant to Article 8 hereof. In the event of
bankruptcy or other creditor-debtor proceeding against Tenant, all
proceeds of the Letter of Credit shall be deemed to be applied
first to the payment of rent and other charges due Landlord for
all periods prior to the filing of such proceedings.
4.4.5 Draws for Failure to Deliver Substitute Letter of Credit. If
---------------------------------------------------------
Tenant fails timely to deliver to Landlord a Substitute Letter of
Credit, then Landlord shall have the right, at any time thereafter
while such failure continues, without giving any further notice to
Tenant, to draw down the Letter of Credit and to hold the proceeds
thereof ("Security Proceeds") in a bank account in the name of
Landlord, which may be withdrawn and applied by Landlord under the
same circumstances and for the same purposes as if the Security
Proceeds were a Letter of Credit. If Tenant thereafter delivers to
Landlord such Substitute Letter of Credit, Landlord shall promptly
thereafter return such Security Proceeds to Tenant, less the
actual costs and expenses incurred by Landlord in drawing down the
Letter of Credit as aforesaid. Upon any such application of
Security Proceeds by Landlord, Tenant shall, within 30 days of
written demand therefor, deliver to Landlord an Additional Letter
of Credit in the amount of Security Proceeds so applied. Security
Proceeds paid by Tenant to Landlord pursuant to Section 4.4.7 in
substitution for the Letter of Credit shall be held by Landlord in
a bank account in Landlord's name and interest earned thereon
shall be disbursed to Tenant on a quarterly basis so long as
Tenant is not in default after notice thereof and expiration of
applicable cure periods hereunder.
4.4.6 Transferability. Landlord shall be entitled to transfer its
---------------
beneficial interest under the Letter of Credit or any Security
Proceeds only in connection with a transfer of Landlord's interest
in the Property, and the Letter of Credit shall specifically state
that it is transferable by Landlord, its successors and assigns.
Upon any transfer of Landlord's interest in the Property, Landlord
shall simultaneously transfer its interest under the Letter of
Credit and/or Security Proceeds to the transferee of the Property.
All costs and expenses incurred by Landlord to effect such
transfer shall be paid by Tenant upon demand therefor.
4.4.7 Substitution of Cash. Provided that Tenant is not in default beyond
--------------------
expiration of applicable cure periods under this Lease, Tenant
shall have the right to substitute cash in the amount of the
Letter of Credit Amount for the Letter of Credit at any time after
the Rent Commencement Date. In such event, upon receipt of cash in
the amount of the Letter of Credit Amount, Landlord shall hold
such cash in accordance with Section 4.4.5, shall have the same
rights with respect thereto thereunder as if such cash were
Security Proceeds, and shall promptly return the Letter of Credit
to Tenant.
4.4.8 Return of Letter of Credit or Security Proceeds at End of Term.
--------------------------------------------------------------
Within 30 days after the expiration or earlier termination of the
term, to the extent Landlord has not previously drawn upon any
Letter of Credit or Security Proceeds held by Landlord, Landlord
shall return the same to Tenant provided that Tenant is not then
in default of any of its obligations under this Lease.
ARTICLE 5
---------
Landlord's Covenants
--------------------
5.1 Affirmative Covenants. Landlord covenants with Tenant:
---------------------
5.1.1 Heat and Air-Conditioning. To furnish to the Premises heat and air-
-------------------------
conditioning (reserving the right, at any time, to change energy
or heat sources) sufficient to maintain the Premises and all
common areas of the Building at comfortable temperatures (subject
to all federal, state, and local regulations relating to the
provision of heat), during the hours of 7:00 a.m. to 6:00 p.m. on
Mondays through Fridays and 8:00 a.m. to 1:00 p.m. on Saturdays,
except for the following holidays on which the Building is closed:
New Year's Day, Washington's Birthday, Patriot's Day, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veteran's Day,
Thanksgiving, Christmas and Martin Luther King Day. If Tenant
requires heat or air-conditioning other than on the days or during
the hours listed above, Landlord shall furnish the same upon
Tenant's reasonable advance request therefor and Tenant shall pay
Landlord, as additional rent, a commercially reasonable charge for
such after-hours heat or air-conditioning, as determined by
Landlord.
5.1.2 Electricity. To furnish to the Premises, separately metered by
-----------
check meter and at the direct expense of Tenant as hereinabove
provided, reasonable electricity for Tenant's Permitted Uses,
which service shall be at least the same level of power provided
to other tenants in the Building having uses similar to Tenant. If
Tenant shall require electricity in excess of such reasonable
quantities for Tenant's Permitted Uses and if (i) in Landlord's
reasonable judgment, Landlord's facilities are inadequate for such
excess requirements, or (ii) such excess use shall result in an
additional burden on the Building utilities systems and additional
cost to Landlord on account thereof, as the case may be, (a)
Tenant shall, upon demand, reimburse Landlord for such additional
cost, as aforesaid, or (b) Landlord, upon written request, and at
the sole cost and expense of Tenant, will furnish and install such
additional wire, conduits, feeders, switchboards and appurtenances
as reasonably may be required to supply such additional
requirements of Tenant (if electricity therefor is then available
to Landlord), provided that the same shall be permitted by
applicable laws and insurance regulations and shall not cause
permanent damage or injury to the Building or cause or create a
dangerous or hazardous condition or entail excessive or
unreasonable alterations or repairs. Landlord, at Tenant's expense
and upon Tenant's request, shall purchase and install all
replacement lightbulbs and lamps of types generally commercially
available used in the Premises.
5.1.3 Cleaning; Water. To provide cleaning to the Premises and the common
---------------
areas in accordance with the cleaning and janitorial standards set
forth in Exhibit G attached hereto; and to furnish hot and cold
water for ordinary cleaning, kitchenette, lavatory and toilet
facilities. If Tenant desires additional hot water in the
Premises, Tenant, at its sole cost and expense, may install a hot
water heater in the Premises. Tenant shall be solely responsible
for maintenance and repair of any such hot water heater and for
any and all costs associated therewith .
5.1.4 Fire Alarm. To maintain fire alarm systems within the Building.
----------
5.1.5 Repairs. Except as otherwise expressly provided herein, to make
-------
such repairs and replacements to the roof, exterior walls, floor
slabs and other structural components of the Building, to the
common areas and facilities of the Building and to the plumbing,
electrical, heating, ventilating and air-conditioning systems of
the Building as may be necessary and in each
8
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case, to keep them in good repair and condition (exclusive of
equipment installed by Tenant and except for those repairs
required to be made by Tenant pursuant to Section 6.1.3 hereof and
repairs or replacements occasioned by any act or negligence of
Tenant, its servants, agents, customers, contractors, employees,
invitees, or licensees).
5.1.6 Landscaping; Snow Removal. To provide landscaping, snow and ice
-------------------------
removal and grounds maintenance services to the Property
(including parking areas and walkways) consistent with those
services provided by landlords of comparable office buildings in
the area.
5.1.7 On-site Amenities. To cause to be operated on the Property an on-
-----------------
site cafeteria in accordance with the terms and provisions of an
operating agreement entered into between Landlord and the provider
of such cafeteria services, it being expressly understood that
said provider has the sole right to determine the hours of
operation of the cafeteria pursuant to the terms of the aforesaid
operating agreement; and to operate the exercise facility during
the normal Building hours specified above.
5.1.8 Access. Tenant shall have access to the Premises twenty-four (24)
------
hours a day, seven (7) days a week, subject to Landlord's reasonable
security requirements for the Building.
5.1.9 Y2K Compliance. Landlord shall, at its expense, diligently take the
--------------
necessary actions to prevent the occurrence of any failure of
building services which Landlord is obligated by the terms of this
Lease to provide to Tenant resulting from the inability of
computer systems controlling such services to correctly recognize
dates containing the year 2000.
5.2 Interruption. Landlord shall be under no responsibility or liability for
------------
failure or interruption of any of the above-described services, repairs or
replacements caused by breakage, accident, strikes, repairs, inability to
obtain supplies, labor or materials, or for any other causes beyond the
control of the Landlord, and in no event for any indirect or consequential
damages to Tenant; and failure or omission on the part of the Landlord to
furnish any of same for any of the reasons set forth in this paragraph
shall not be construed as an eviction of Tenant, actual or constructive,
nor entitle Tenant to an abatement of rent, nor render the Landlord liable
in damages, nor release Tenant from prompt fulfillment of any of its
covenants under this Lease. However, in each instance of failure or
interruption, Landlord shall use diligent efforts in good faith to remedy
the cause thereof.
5.3 Outside Services. In the event Tenant wishes to provide outside services
----------------
for the Premises over and above those services to be provided by Landlord
as set forth herein, Tenant shall first obtain the prior written approval
of Landlord, which approval shall not be unreasonably withheld, for the
installation and/or utilization of such services ("Outside services" shall
include, but shall not be limited to, cleaning services, television, so-
called "canned music" services, security services, catering services and
the like.) In the event Landlord approves the installation and/or
utilization of such services, such installation and utilization shall be at
Tenant's sole cost, risk and expense.
5.4 Landlord's Insurance. To take out and maintain throughout the term all-
--------------------
risk casualty insurance in commercially reasonable amounts, with
endorsements for risks customarily insured against by landlords of
comparable buildings in the vicinity of the Building.
ARTICLE 6
---------
Tenant's Additional Covenants
-----------------------------
6.1 Affirmative Covenants. Tenant covenants at all times during the term and
---------------------
for such further time (prior or subsequent thereto) as Tenant occupies the
Premises or any part thereof:
6.1.1 Perform Obligations. To perform promptly all of the obligations of
-------------------
Tenant set forth in this Lease; and to pay when due the Fixed Rent
and Additional Rent and all charges, rates and other sums which by
the terms of this Lease are to be paid by Tenant.
6.1.2 Use. To use the Premises only for the Permitted Uses, and from time
---
to time to procure all licenses and permits necessary therefor, at
Tenant's sole expense (but excluding licenses and permits required
generally for the use and occupancy of the Building and the
initial certificate of occupancy for the Premises). With respect
to any licenses or permits for which Tenant may apply, pursuant to
this subsection 6.1.2 or any other provision hereof, Tenant shall
furnish Landlord copies of applications therefor on or before
their submission to the governmental authority.
6.1.3 Repair and Maintenance. To maintain the Premises in neat order and
----------------------
condition and to perform all routine and ordinary repairs to the
Premises and to any plumbing, heating, electrical, ventilating and
air-conditioning systems located within the Premises and installed
by Tenant such as are necessary to keep them in good working
order, appearance and condition, as the case may require,
reasonable use and wear thereof and damage by fire or by
unavoidable casualty only excepted; to keep all glass in windows
and doors of the Premises (except glass in the exterior walls of
the Building) whole and in good condition with glass of the same
quality as that injured or broken; and to make as and when needed
as a result of misuse by, or the negligence or intentional
misconduct of Tenant or Tenant's servants, employees, agents,
invitees or licensees, all repairs necessary, which repairs and
replacements shall be in quality and class equal to the original
work. (Landlord, upon default of Tenant hereunder after notice
thereof and, except in case of emergency, expiration of the
applicable cure period, may elect, at the expense of Tenant, to
perform all such maintenance and to make any such repairs or to
repair any damage or injury to the Building or the Premises caused
by moving property of Tenant in or out of the Building, or by
installation or removal of furniture or other property, or by
misuse by, or neglect, or improper conduct of, Tenant or Tenant's
servants, employees, agents, contractors, customers, patrons,
invitees, or licensees.)
6.1.4 Compliance with Law. To make all repairs, alterations, additions or
-------------------
replacements to the Premises required by any law or ordinance or
any order or regulation of any public authority on account of
Tenant's particular use of the Premises or because of work
performed by or on behalf of Tenant; to keep the Premises equipped
with all safety appliances so required; and to comply with the
orders and regulations of all governmental authorities with
respect to zoning, building, fire, health and other codes,
regulations, ordinances or laws applicable to the Tenant's
particular use of the Premises, except that Tenant may defer
compliance so long as the validity of any such law, ordinance,
order or regulations shall be contested by Tenant in good faith
and by appropriate legal proceedings, if Tenant first gives
Landlord appropriate assurance or security against any loss, cost
or expense on account thereof. Notwithstanding the foregoing, with
respect to any repair, alteration or replacement that is required
by any law, ordinance, order or regulation applicable to office
buildings generally and not required on account of Tenant's
particular use of the Premises, then Landlord shall make such
repair, alteration or replacement.
6.1.5 Indemnification. To save harmless, exonerate and indemnify
---------------
Landlord, its agents (including, without limitation, Landlord's
managing agent) and employees (such agents and employees being
referred to collectively as the "Landlord Related Parties") from
and against any and all claims, liabilities or penalties asserted
by or on behalf of any person, firm, corporation or public
authority on account of injury, death, damage or loss to person or
property in or upon the Premises and the Property arising out of
the use or occupancy of the Premises by Tenant or by any person
claiming by, through or under Tenant (including, without
limitation, all patrons, employees and customers of Tenant), or
arising out of any delivery to or service supplied to the
Premises, or on account of or based upon anything whatsoever done
on the Premises, except to the extent any of the same was caused
by the gross negligence or willful misconduct of Landlord or the
Landlord Related Parties. In respect of all of the foregoing,
Tenant shall indemnify Landlord and the Landlord Related Parties
from and
9
<PAGE>
against all costs, expenses (including reasonable attorneys'
fees), and liabilities incurred in or in connection with any such
claim, action or proceeding brought thereon; and, in case of any
action or proceeding brought against Landlord or the Landlord
Related Parties by reason of any such claim, Tenant, upon notice
from Landlord and at Tenant's expense, shall resist or defend such
action or proceeding and employ counsel therefor reasonably
satisfactory to Landlord.
Landlord agrees to indemnify and hold Tenant harmless from and
against any and all claims, liability, damage, expense and causes
of action arising from injury, death, damage or loss to person or
property during the term to person or property sustained in the
common areas of the Building, except if the same was caused by the
negligence, fault or misconduct of Tenant, its agents, employees
or customers.
6.1.6 Landlord's Right to Enter. To permit Landlord and its agents to
-------------------------
enter into and examine the Premises at reasonable times and to
show the Premises, and to make repairs to the Premises required or
permitted hereunder, and, during the last six (6) months prior to
the expiration of this Lease, to keep affixed in suitable places
notices of availability of the Premises. Landlord shall use
reasonable efforts to minimize disruption of Tenant's business in
the Premises whenever Landlord exercises its rights hereunder.
6.1.7 Personal Property at Tenant's Risk. All of the furnishings,
----------------------------------
fixtures, equipment, effects and personal property of every kind,
nature and description of Tenant and of all persons claiming by,
through or under Tenant which, during the continuance of this
Lease or any occupancy of the Premises by Tenant or anyone
claiming under Tenant, may be on the Premises, shall be at the
sole risk and hazard of Tenant and if the whole or any part
thereof shall be destroyed or damaged by fire, water or otherwise,
or by the leakage or bursting of water pipes, steam pipes, or
other pipes, by theft or from any other cause, no part of said
loss or damage is to be charged to or to be borne by Landlord,
except that Landlord shall in no event be indemnified or held
harmless or exonerated from any liability to Tenant or to any
other person, for any injury, loss, damage or liability to the
extent prohibited by law.
6.1.8 Payment of Landlord's Cost of Enforcement. To pay on demand
-----------------------------------------
Landlord's expenses, including reasonable attorneys' fees,
incurred in successfully enforcing any obligation of Tenant under
this Lease or in curing any default by Tenant under this Lease as
provided in Section 8.4. Landlord shall pay on demand Tenant's
expenses, including reasonable attorney's fees, incurred in
successfully enforcing any obligation of Landlord under this
Lease.
6.1.9 Yield Up. At the expiration of the term or earlier termination of
--------
this Lease: to surrender all keys to the Premises; to remove all
of its trade fixtures and personal property in the Premises; to
deliver to Landlord stamped architectural plans showing any
changes or alterations (other than wall and floor covering
replacement) made by Tenant to the Premises after the Commencement
Date; to remove such installations made by it as Landlord may
request (Landlord hereby agreeing that Tenant shall not be
required to remove the TIW) (including computer and
telecommunications wiring and cabling, it being understood that if
Tenant leaves such wiring and cabling in a useable condition,
Tenant shall not be obligated to so remove the same) and all
Tenant's signs wherever located; to repair all damage caused by
such removal and to yield up the Premises (including all
installations and improvements made by Tenant except for trade
fixtures and such of said installations or improvements as
Landlord shall request Tenant to remove), broom-clean and in the
same good order and repair in which Tenant is obliged to keep and
maintain the Premises by the provisions of this Lease. Tenant, at
the time of making any installation, may request in writing
Landlord's permission to leave such installation in the Premises
at the expiration or earlier termination of this Lease. If
Landlord grants permission, then, notwithstanding the foregoing
provisions of this subsection 6.1.9, Landlord may not later
request removal of such installation at the end of the term. Any
property not so removed shall be deemed abandoned and, if Landlord
so elects, deemed to be Landlord's property, and may be retained
or removed and disposed of by Landlord in such manner as Landlord
shall determine and Tenant shall pay Landlord the entire cost and
expense incurred by it in effecting such removal and disposition
and in making any repairs reasonably resulting from such removal.
Tenant shall further indemnify Landlord against all loss, cost and
damage resulting from Tenant's failure and delay in surrendering
the Premises as above provided.
If the Tenant remains in the Premises beyond the expiration or
earlier termination of this Lease, such holding over shall be
without right and shall not be deemed to create any tenancy, but
the Tenant shall be a tenant at sufferance only at a daily rate of
rent equal to two (2) times the rent and other charges in effect
under this Lease as of the day prior to the date of expiration of
this Lease.
6.1.10 Rules and Regulations. To comply with the Rules and Regulations
---------------------
set forth in Exhibit E, and with all reasonable Rules and
Regulations of general applicability to all tenants of the
Building hereafter made by Landlord, of which Tenant has been
given notice; Landlord shall not be liable to Tenant for the
failure of other tenants of the Building to conform to such Rules
and Regulations, but shall use reasonable efforts to enforce the
Rules and Regulations uniformly against all tenants of the
Building.
6.1.11 Estoppel Certificate. Upon not less than fifteen (15) days' prior
--------------------
written request by Landlord, to execute, acknowledge and deliver
to Landlord a statement in writing, certifying all or any of the
following, to the extent true: that this Lease is unmodified and
in full force and effect and that Tenant has no defenses, offsets
or counterclaims against its obligations to pay the Fixed Rent
and Additional Rent and any other charges and to perform its
other covenants under this Lease (or, if there have been any
modifications, that the Lease is in full force and effect as
modified and stating the modifications and, if there are any
defenses, offsets or counterclaims, setting them forth in
reasonable detail), and the dates to which the Fixed Rent and
Additional Rent and other charges have been paid, whether or not
Landlord is in default in performance of any of the terms of this
Lease, and such further information with respect to the Lease or
the Premises as Landlord may reasonably request. Any such
statement delivered pursuant to this subsection 6.1.11 may be
relied upon by any prospective purchaser or mortgagee of the
Premises, or any prospective assignee of such mortgage. Tenant
shall also deliver to Landlord copies of Tenant's most recent
annual reports as may be reasonably required by Landlord to be
provided to any mortgagee or prospective purchaser of the
Premises.
6.1.12 Landlord's Expenses Re Consents. To reimburse Landlord promptly on
-------------------------------
demand for all reasonable legal expenses incurred by Landlord in
connection with all requests by Tenant for consent or approval
hereunder.
6.2 Negative Covenants. Tenant covenants at all times during the term and such
------------------
further time (prior or subsequent thereto) as Tenant occupies the Premises
or any part thereof:
6.2.1 Assignment and Subletting. Except as provided for in the next
-------------------------
paragraph below, not to assign, transfer, mortgage or pledge this
Lease or to sublease (which term shall be deemed to include the
granting of concessions and licenses and the like) all or any part
of the Premises or suffer or permit this Lease or the leasehold
estate hereby created or any other rights arising under this Lease
to be assigned, transferred or encumbered, in whole or in part,
whether voluntarily, involuntarily or by operation of law, or
permit the occupancy of the Premises by anyone other than Tenant
without the prior written consent of Landlord. In the event Tenant
desires to assign this Lease or sublet any portion or all of the
Premises, Tenant shall notify Landlord in writing of Tenant's
intent to so assign this Lease or sublet the Premises and the
proposed effective date of such subletting or assignment, and
shall request in such notification that Landlord consent thereto.
Landlord may terminate this Lease in the case of a proposed
assignment, or suspend this Lease pro tanto for the period and
with respect to the space involved in the case of a proposed
subletting, by giving written notice of termination or suspension
to Tenant, with such termination or suspension to be effective as
of the effective date of such assignment or subletting. If
Landlord does not so terminate or suspend, Landlord's consent
shall not be unreasonably withheld to an assignment during the
term or to a subletting during the Original Term, provided that
the assignee or subtenant shall use the Premises only for the
Permitted Uses. Tenant shall, as Additional Rent, reimburse
Landlord promptly for Landlord's reasonable legal expenses
incurred in
10
<PAGE>
connection with any request by Tenant for such consent. If
Landlord consents thereto, no such subletting or assignment shall
in any way impair the continuing primary liability of Tenant
hereunder, and no consent to any subletting or assignment in a
particular instance shall be deemed to be a waiver of the
obligation to obtain the Landlord's written approval in the case
of any other subletting or assignment. With respect to any
assignment or sublease during the Original Term of this Lease,
such assignment shall not include the right under Section 2.3
hereof granted to the initial Tenant named herein to extend the
term or the right under Section 2.4 granted to the initial Tenant
named herein to terminate this Lease, and such sublease shall be
for a term expiring no later than the Expiration Date.
The provisions of the preceding paragraph shall not apply to, and
Landlord's prior consent shall not be required for, (i) transfers
with an entity into or with which Tenant is merged or consolidated
or (ii) transfers with an entity to which all of Tenant's stock or
all or substantially all of Tenant's assets are transferred or
(iii) transfers to any entity (a "Related Entity") which controls,
is controlled by, or is under common control with Tenant, provided
that in any of such events (A) such entity or successor to Tenant
(specifically excluding a Related Entity) has a net worth computed
in accordance with generally accepted accounting principles at
least equal to the net worth of Tenant immediately prior to such
merger, consolidation or transfer, (B) proof reasonably
satisfactory to Landlord of such net worth shall have been
delivered to Landlord at least ten (10) days prior to the
effective date of any such transaction (except in connection with
a transfer to a Related Entity), (C) in the case of an assignment,
the assignee agrees directly with Landlord, by written instrument
in form reasonably satisfactory to Landlord, to perform all the
obligations of Tenant; (D) in the case of a sublease, the
sublessee agrees, in a written sublease instrument in form
reasonably satisfactory to Landlord, to abide by all of the terms
and covenants of this Lease and the sublessee occupies the
Premises for the Permitted Uses and no other use; and (E) nothing
shall impair the continuing primary liability of Tenant hereunder.
If for any assignment or sublease consented to by Landlord
hereunder or permitted by the preceding paragraph Tenant receives
rent or other consideration, either initially or over the term of
the assignment or sublease, in excess of the rent called for
hereunder, or in case of sublease of part, in excess of such rent
fairly allocable to the part, after appropriate adjustments in
either such case to assure that all other payments called for
hereunder are appropriately taken into account and after deduction
for reasonable expenses of Tenant in connection with the
assignment or sublease, to pay to Landlord as additional rent
fifty (50%) percent of the excess of each such payment of rent or
other consideration received by Tenant promptly after its receipt.
Whenever Tenant lists with a broker or brokers or otherwise
advertises, holds out or markets the Premises or any part thereof
for sublease or assignment, Tenant shall give Nordblom Company, as
brokers, a non-exclusive listing with respect to such sublease or
assignment.
If, at any time during the term of this Lease, there is a transfer
of a controlling interest in the stock, membership or general
partnership interests of Tenant, Tenant shall so notify Landlord
and (whether or not Tenant so notifies Landlord), such transfer
shall be deemed an assignment by Tenant subject to the first
paragraph and the following provisions of this subsection 6.2.1,
provided, however, the foregoing shall not apply to, and
Landlord's prior consent shall not be required in the event of,
any public offering and the public trading of shares of stock in
Tenant after any public offering.
6.2.2 Nuisance. Not to injure, deface or otherwise harm the Premises; nor
--------
commit any nuisance; nor permit in the Premises any vending
machine (except such as is used for the sale of merchandise to
employees of Tenant) or inflammable fluids or chemicals (except
such as are customarily used in connection with standard office
equipment); nor permit any cooking to such extent as requires
special exhaust venting; nor permit the emission of any
objectionable noise or odor; nor make, allow or suffer any waste;
nor make any use of the Premises which is contrary to any law or
ordinance or which will invalidate any of Landlord's insurance or
interfere with the quiet enjoyment of other tenants of the
Building; nor conduct any auction, fire, "going out of business"
or bankruptcy sales.
6.2.3 Hazardous Wastes and Materials. Not to dispose of any hazardous
------------------------------
wastes, hazardous materials or oil on the Premises or the
Property, or into any of the plumbing, sewage, or drainage systems
thereon, and to indemnify and save Landlord harmless from all
claims, liability, loss or damage arising on account of the use or
disposal of hazardous wastes, hazardous materials or oil by
Tenant, its agents, contractors, or employees, including, without
limitation, liability under any federal, state, or local laws,
requirements and regulations, or damage to any of the aforesaid
systems. Tenant shall comply with all governmental reporting
requirements with respect to hazardous wastes, hazardous materials
and oil, and shall deliver to Landlord copies of all reports filed
with governmental authorities by or on behalf of Tenant with
respect to the Premises or the Property. Landlord warrants to
Tenant that as of the date hereof, to the best of Landlord's
knowledge, no asbestos is present in the Premises or in the common
areas of the Building, and in the event any asbestos is present in
the Premises, Landlord, shall at its sole expense, remove or
encapsulate any asbestos not introduced into the Premises or
Building by Tenant in accordance with applicable laws.
6.2.4 Floor Load; Heavy Equipment. Not to place a load upon any floor of
---------------------------
the Premises exceeding the floor load per square foot area which
such floor was designed to carry and which is allowed by law.
Landlord reserves the right to prescribe the weight and position
of all heavy business machines and equipment, including safes,
which shall be placed so as to distribute the weight. Business
machines and mechanical equipment which cause vibration or noise
shall be placed and maintained by Tenant at Tenant's expense in
settings sufficient to absorb and prevent vibration, noise and
annoyance outside of the Premises. Tenant shall not move any safe,
heavy machinery, heavy equipment, freight or fixtures into or out
of the Premises except in such manner and at such time as Landlord
shall in each instance authorize.
6.2.5 Installation, Alterations or Additions. Not to make any
--------------------------------------
installations, alterations or additions in, to or on the Premises
nor to permit the making of any holes in the walls, partitions,
ceilings or floors nor the installation or modification of any
locks or security devices without on each occasion obtaining the
prior written consent of Landlord (which consent shall not be
required for any painting or carpeting performed by or on behalf
of Tenant, and which consent shall not be unreasonably withheld
with respect to nonstructural alterations that do not affect the
structural integrity of the Building, reduce its value or involve
penetrations of the roof or structural walls and which consent
shall not be required for nonstructural alterations costing less
than $25,000.00 in each instance), and then only pursuant to plans
and specifications approved by Landlord in advance in each
instance; Tenant shall pay promptly when due the entire cost of
any work to the Premises undertaken by Tenant so that the Premises
shall at all times be free of liens for labor and materials, and
at Landlord's request Tenant shall furnish to Landlord a bond or
other security reasonably acceptable to Landlord assuring that any
work commenced by Tenant in excess of $25,000.00 in any one
instance (exclusive of painting or carpeting) will be completed in
accordance with the plans and specifications theretofore approved
by Landlord and assuring that the Premises will remain free of any
mechanics' lien or other encumbrance arising out of such work. In
any event, Tenant shall forthwith bond against or discharge any
mechanics' liens or other encumbrances that may arise out of such
work. Tenant shall procure all necessary licenses and permits at
Tenant's sole expense before undertaking such work. All such work
shall be done in a good and workmanlike manner employing materials
of good quality and so as to conform with all applicable zoning,
building, fire, health and other codes, regulations, ordinances
and laws. Tenant shall save Landlord harmless and indemnified from
all injury, loss, claims or damage to any person or property
occasioned by or arising out of such work.
Without waiver of any of the provisions of this subsection 6.2.5
as it relates to the performance of the work in connection with
such installation and with subsection 6.1.5 deemed to be
applicable to such installation, Landlord hereby consents to
Tenant installing one satellite dish antenna (no larger than 1.5
meters in diameter) on the roof of the Building at a
technologically sufficient location thereon specified by Landlord
(called the "Antenna Area"), provided that such installation meets
Landlord's reasonable design criteria (including visual shielding
such that it cannot be seen by the public) and does not void any
roof bonds or affect the integrity of the roof (and therefore
shall include appropriate pavers
11
<PAGE>
to protect the roof from traffic thereto), and that Tenant has
obtained all required approvals of applicable governmental
authorities. The installation, operation, maintenance and removal
of such satellite dish shall be at Tenant's sole cost and expense
and shall be performed in accordance with all applicable laws and
requirements of governmental authorities. Tenant shall operate
such satellite dish so as not to cause material interference with
any other equipment on the roof of, or in, the Building at the
time of Tenant's installation. The Antenna Area shall be deemed a
part of the Premises for all purposes under this Lease, including
without limitation, the provisions of subsection 6.1.5.
Not to grant a security interest in, or to lease, any personal
property being installed in the Premises (including, without
limitation, demountable partitions) without first obtaining an
agreement, for the benefit of Landlord, from the secured party or
lessor that such property will be removed within ten (10) business
days after the expiration or earlier termination of this Lease and
that a failure to so remove will subject such property to the
provisions of subsection 6.1.9 of the Lease.
6.2.6 Abandonment. Not to abandon the Premises during the term, it being
-----------
understood and agreed that vacancy of the Premises shall not be
construed as abandonment so long as all of Tenant's other
obligations under this Lease, including without limitation the
payment of rent, continue to be timely performed and reasonable
measures are taken to manage the vacant space on a daily basis,
including maintaining the appearance of a lighted reception area
during the Building's normal business hours.
6.2.7 Signs. Not without Landlord's prior written approval to paint or
-----
place any signs or place any curtains, blinds, shades, awnings,
aerials, or the like, visible from outside the Premises. Within a
reasonable time after the Commencement Date, Landlord shall, at
Landlord's cost, install Landlord's standard signage displaying
Tenant's name on a monument sign at the entrance of the portion of
the Building known as "Area 4" and also on the directory that
Landlord shall erect near the main entrance for the Property.
6.2.8 Parking and Storage. Not to permit any storage of materials outside
-------------------
of the Premises; nor to permit the use of the parking areas for
either temporary or permanent storage of trucks; nor permit the
use of the Premises for any use for which heavy trucking would be
customary.
ARTICLE 7
---------
Casualty or Taking
------------------
7.1 Termination. In the event that the Premises or the Building, or any
-----------
material part thereof, shall be taken by any public authority or for any
public use, or shall be destroyed or damaged by fire or casualty, or by the
action of any public authority, then this Lease may be terminated at the
election of Landlord, provided that Landlord simultaneously terminates the
leases of all other tenants which are similarly situated. Such election,
which may be made notwithstanding the fact that Landlord's entire interest
may have been divested, shall be made by the giving of notice by Landlord
to Tenant within sixty (60) days after the date of the taking or casualty.
In the event that the Premises are destroyed or damaged by fire or
casualty, or by the action of public authority, and, in the reasonable
opinion of an independent architect or engineer selected by Landlord,
cannot be repaired or restored within nine (9) months after the date of the
casualty or taking, then this Lease may be terminated at the election of
Landlord or Tenant, which election shall be made by the giving of notice to
the other party within ten (10) days after the date the opinion of the
architect or engineer is made available to the parties. In the event a
taking results in a permanent loss of more than 20% of the parking on the
Property (and Landlord does not elect to furnish reasonable substitute
parking in a convenient location on or in close proximity to the Property)
or a permanent deprivation of convenient access to the Premises or the
Property, then this Lease may be terminated at the election of Tenant,
which election shall be made by giving of notice by Tenant to Landlord
within thirty (30) days after the date of the taking.
7.2 Restoration. If neither Landlord nor Tenant elects to so terminate, this
-----------
Lease shall continue in force and a just proportion of the rent reserved,
according to the nature and extent of the damages sustained by the
Premises, shall be suspended or abated until the Premises, or what may
remain thereof, shall be put by Landlord in proper condition for use, which
Landlord covenants to do with reasonable diligence to the extent permitted
by the net proceeds of insurance recovered or damages awarded for such
taking, destruction or damage and subject to zoning and building laws or
ordinances then in existence. "Net proceeds of insurance recovered or
damages awarded" refers to the gross amount of such insurance or damages
less the reasonable expenses of Landlord incurred in connection with the
collection of the same, including without limitation, fees and expenses for
legal and appraisal services. If Landlord shall not have restored the
Premises within nine (9) months from the taking or casualty, Tenant shall
have the right to terminate this Lease by giving notice of such termination
to Landlord, effective at the expiration of thirty (30) days from the
giving of such notice; provided however, that such termination will be
rendered ineffective if, prior to the expiration of said 30-day period,
Landlord shall have completed such restoration.
7.3 Award. Irrespective of the form in which recovery may be had by law, all
-----
rights to damages or compensation shall belong to Landlord in all cases
except for awards or damages specifically made to for Tenant's personal
property, trade fixtures, equipment and moving expenses, which shall belong
to Tenant, provided Landlord's award is not reduced thereby. Except for
such, Tenant hereby grants to Landlord all of Tenant's rights to such
damages and covenants to deliver such further assignments thereof as
Landlord may from time to time request.
ARTICLE 8
---------
Defaults
--------
8.1 Events of Default. (a) If Tenant shall default in the performance of any
-----------------
of its obligations to pay the Fixed Rent or Additional Rent hereunder and
if such default shall continue for ten (10) days after written notice from
Landlord designating such default or if within thirty (30) days after
written notice from Landlord to Tenant specifying any other default or
defaults Tenant has not commenced diligently to correct the default or
defaults so specified or has not thereafter diligently pursued such
correction to completion, or (b) if any assignment shall be made by Tenant
or any guarantor of Tenant for the benefit of creditors, or (c) if
Tenant's leasehold interest shall be taken on execution, or (d) if a lien
or other involuntary encumbrance is filed against Tenant's leasehold
interest or Tenant's other property, including said leasehold interest, and
is not discharged within thirty (30) days thereafter, or (e) if a petition
is filed by Tenant or any guarantor of Tenant for liquidation, or for
reorganization or an arrangement under any provision of any bankruptcy law
or code as then in force and effect, or (f) if an involuntary petition
under any of the provisions of any bankruptcy law or code is filed against
Tenant or any guarantor of Tenant and such involuntary petition is not
dismissed within forty-five (45) days thereafter, then, and in any of such
cases, Landlord and the agents and servants of Landlord lawfully may, in
addition to and not in derogation of any remedies for any preceding breach
of covenant, immediately or at any time thereafter without demand or notice
and with process of law enter into and upon the Premises or any part
thereof in the name of the whole or mail a notice of termination addressed
to Tenant, and repossess the same as of landlord's former estate and expel
Tenant and those claiming through or under Tenant and remove its and their
effects without being deemed guilty of any manner of trespass and without
prejudice to any remedies which might otherwise be used for arrears of rent
or prior breach of covenants, and upon such entry or mailing as aforesaid
this Lease shall terminate, Tenant hereby waiving all statutory rights to
the Premises (including without limitation rights of redemption, if any, to
the extent such rights may be lawfully waived) and Landlord, without notice
to Tenant, may store Tenant's effects, and those of any person claiming
through or under Tenant, at the expense and risk of Tenant, and, if
Landlord so elects, may sell such effects at public auction or private sale
and apply the net proceeds to the payment of all sums due to Landlord from
Tenant, if any, and pay over the balance, if any, to Tenant.
12
<PAGE>
8.2 Remedies. In the event that this Lease is terminated under any of the
--------
provisions contained in Section 8.1 or shall be otherwise terminated for
breach of any obligation of Tenant, Tenant covenants to pay forthwith to
Landlord, as compensation, the present value (discounted at the then
applicable federal discount rate) the excess of the total rent reserved for
the residue of the term over the rental value of the Premises for said
residue of the term. In calculating the rent reserved there shall be
included, in addition to the Fixed Rent and Additional Rent, the value of
all other considerations agreed to be paid or performed by Tenant for said
residue. Tenant further covenants as additional and cumulative obligations
after any such termination, to pay punctually to Landlord all the sums and
to perform all the obligations which Tenant covenants in this Lease to pay
and to perform in the same manner and to the same extent and at the same
time as if this Lease had not been terminated. In calculating the amounts
to be paid by Tenant pursuant to the next preceding sentence Tenant shall
be credited with any amount paid to Landlord as compensation as in this
Section 8.2 provided and also with the net proceeds of any rent obtained by
Landlord by reletting the Premises, after deducting all Landlord's expense
in connection with such reletting, including, without limitation, all
repossession costs, brokerage commissions, fees for legal services and
expenses of preparing the Premises for such reletting, it being agreed by
Tenant that Landlord may (i) relet the Premises or any part or parts
thereof, for a term or terms which may at Landlord's option be equal to or
less than or exceed the period which would otherwise have constituted the
balance of the term and may grant such concessions and free rent as
Landlord in its sole judgment considers advisable or necessary to relet the
same and (ii) make such alterations and repairs in the Premises as Landlord
in its sole judgment considers advisable or necessary to relet the same,
and no action of Landlord in accordance with the foregoing or failure to
relet or to collect rent under reletting shall operate or be construed to
release or reduce Tenant's liability as aforesaid.
Nothing contained in this Lease shall, however, limit or prejudice the
right of Landlord to prove for and obtain in proceedings for bankruptcy
or insolvency by reason of the termination of this Lease, an amount equal
to the maximum allowed by any statute or rule of law in effect at the
time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater than, equal to, or less than
the amount of the loss or damages referred to above.
8.3 Remedies Cumulative. Any and all rights and remedies which Landlord or
-------------------
Tenant may have under this Lease, and at law and equity, shall be
cumulative and shall not be deemed inconsistent with each other, and any
two or more of all such rights and remedies may be exercised at the same
time insofar as permitted by law.
8.4 Landlord's Right to Cure Defaults. Landlord may, but shall not be
---------------------------------
obligated to, cure, at any time, without additional notice, any default by
Tenant under this Lease that continues after notice thereof and expiration
of the applicable cure period; and whenever Landlord so elects, all out-of-
pocket costs and expenses incurred by Landlord, including reasonable
attorneys' fees, in curing a default shall be paid, as Additional Rent, by
Tenant to Landlord on demand, together with lawful interest thereon from
the date of payment by Landlord to the date of payment by Tenant.
8.5 Effect of Waivers of Default. Any consent or permission by Landlord or
----------------------------
Tenant to any act or omission which otherwise would be a breach of any
covenant or condition herein, shall not in any way be held or construed
(unless expressly so declared) to operate so as to impair the continuing
obligation of any covenant or condition herein, or otherwise, except as to
the specific instance, operate to permit similar acts or omissions.
8.6 No Waiver, etc. The failure of either party to seek redress for violation
--------------
of, or to insist upon the strict performance of, any covenant or condition
of this Lease shall not be deemed a waiver of such violation nor prevent a
subsequent act, which would have originally constituted a violation, from
having all the force and effect of an original violation. The payment by
Tenant or receipt by Landlord of rent with knowledge of the breach of any
covenant of this Lease shall not be deemed to have been a waiver of such
breach by either party. No consent or waiver, express or implied, by
either party to or of any breach of any agreement or duty shall be
construed as a waiver or consent to or of any other breach of the same or
any other agreement or duty.
8.7 No Accord and Satisfaction. No acceptance by Landlord of a lesser sum than
--------------------------
the Fixed Rent, Additional Rent or any other charge then due shall be
deemed to be other than on account of the earliest installment of such rent
or charge due, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent or other charge be deemed
an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such
installment or pursue any other remedy in this Lease provided.
ARTICLE 9
---------
Rights of Mortgage Holders
--------------------------
9.1 Rights of Mortgage Holders. The word "mortgage" as used herein includes
--------------------------
mortgages, deeds of trust or other similar instruments evidencing other
voluntary liens or encumbrances, and modifications, consolidations,
extensions, renewals, replacements and substitutes thereof. The word
"holder" shall mean a mortgagee, and any subsequent holder or holders of a
mortgage. Until the holder of a mortgage shall enter and take possession
of the Property for the purpose of foreclosure or otherwise, such holder
shall have only such rights of Landlord as are necessary to preserve the
integrity of this Lease as security. Upon entry and taking possession of
the Property for the purpose of foreclosure, such holder shall have all the
rights of Landlord. No such holder of a mortgage shall be liable either as
mortgagee or as assignee, to perform, or be liable in damages for failure
to perform, any of the obligations of Landlord unless and until such holder
shall enter and take possession of the Property. Upon entry and taking
possession, such holder shall be liable to perform all of the obligations
of Landlord, subject to and with the benefit of the provisions of Section
10.4, provided that a surrender of possession shall be deemed a conveyance
under said provisions to the owner of the equity of the Property.
The covenants and agreements contained in this Lease with respect to the
rights, powers and benefits of a holder of a mortgage (particularly,
without limitation thereby, the covenants and agreements contained in
this Section 9.1) constitute a continuing offer to any person,
corporation or other entity, which by accepting a mortgage subject to
this Lease, assumes the obligations herein set forth with respect to such
holder; such holder is hereby constituted a party of this Lease as an
obligee hereunder to the same extent as though its name were written
hereon as such; and such holder shall be entitled to enforce such
provisions in its own name. Tenant agrees on request of Landlord to
execute and deliver from time to time any agreement to the extent
reasonably necessary to implement the provisions of this Section 9.1.
9.2 Lease Superior or Subordinate to Mortgages. It is agreed that the rights
------------------------------------------
and interest of Tenant under this Lease shall be (i) subject or
subordinate to any present or future mortgage or mortgages and to any and
all advances to be made thereunder, and to the interest of the holder
thereof in the Premises or any property of which the Premises are a part if
Landlord shall elect by notice to Tenant to subject or subordinate the
rights and interest of Tenant under this Lease to such mortgage or (ii)
prior to any present or future mortgage or mortgages, if Landlord shall
elect, by notice to Tenant, to give the rights and interest of Tenant under
this Lease priority to such mortgage; in the event of either of such
elections and upon notification by Landlord to that effect, the rights and
interest of Tenant under this Lease should be deemed to be subordinate to,
or have priority over, as the case may be, said mortgage or mortgages,
irrespective of the time of execution or time of recording of any such
mortgage or mortgages. In confirmation of such subordination, Tenant
agrees it will, upon request of Landlord, execute, acknowledge and deliver
any and all commercially reasonable instruments necessary or desirable to
give effect to or notice of such subordination or priority, provided that
any subordination agreement provides, among other things, that Tenant's use
and occupancy of the Premises shall not be disturbed so long as Tenant is
not in default beyond the expiration of applicable cure periods hereunder.
Any Mortgage to which this Lease shall be subordinated may contain such
terms, provisions and conditions as the holder deems usual or customary.
13
<PAGE>
ARTICLE 10
----------
Miscellaneous Provisions
------------------------
10.1 Notices from One Party to the Other. All notices required or permitted
-----------------------------------
hereunder shall be in writing and addressed, if to the Tenant, at the
Original Notice Address of Tenant or such other address as Tenant shall
have last designated by notice in writing to Landlord and, if to Landlord,
at the Original Notice Address of Landlord or such other address as
Landlord shall have last designated by notice in writing to Tenant. Any
notice shall be deemed duly given upon receipt or rejection by the
addressee after having been mailed to such address postage prepaid, by
registered or certified mail, return receipt requested, or when delivered
to such address by hand, or when sent to such address by nationally
recognized overnight courier.
10.2 Quiet Enjoyment. Landlord agrees that upon Tenant's paying the rent and
---------------
performing and observing the agreements, conditions and other provisions on
its part to be performed and observed, Tenant shall and may peaceably and
quietly have, hold and enjoy the Premises during the term hereof without
any manner of hindrance or molestation from Landlord or anyone claiming
under Landlord, subject, however, to the terms of this Lease.
10.3 Lease not to be Recorded. Tenant agrees that it will not record this
------------------------
Lease. Both parties shall, upon the request of either, execute and deliver
a notice or short form of this Lease in such form, if any, as may be
permitted by applicable statute.
10.4 Limitation of Landlord's Liability. The term "Landlord" as used in this
----------------------------------
Lease, so far as covenants or obligations to be performed by Landlord are
concerned, shall be limited to mean and include only the owner or owners at
the time in question of the Property, and in the event of any transfer or
transfers of title to said property, the Landlord (and in case of any
subsequent transfers or conveyances, the then grantor) shall be
concurrently freed and relieved from and after the date of such transfer or
conveyance, without any further instrument or agreement of all liability as
respects the performance of any covenants or obligations on the part of the
Landlord contained in this Lease thereafter to be performed, it being
intended hereby that the covenants and obligations contained in this Lease
on the part of Landlord, shall, subject as aforesaid, be binding on the
Landlord, its successors and assigns, only during and in respect of their
respective successive periods of ownership of said leasehold interest or
fee, as the case may be. Tenant, its successors and assigns, shall not
assert nor seek to enforce any claim for breach of this Lease against any
of Landlord's assets other than Landlord's interest in the Property and in
the rents, issues and profits thereof, and Tenant agrees to look solely to
such interest for the satisfaction of any liability or claim against
Landlord under this Lease, it being specifically agreed that in no event
whatsoever shall Landlord (which term shall include, without limitation,
any general or limited partner, trustees, beneficiaries, officers,
directors, or stockholders of Landlord) ever be personally liable for any
such liability.
10.5 Acts of God. In any case where either party hereto is required to do any
-----------
act, delays caused by or resulting from Acts of God, war, civil commotion,
fire, flood or other casualty, labor difficulties, shortages of labor,
materials or equipment, government regulations, unusually severe weather,
or other causes beyond such party's reasonable control (but financial
inability shall never constitute a cause beyond either party's control)
shall not be counted in determining the time during which work shall be
completed, whether such time be designated by a fixed date, a fixed time or
a "reasonable time," and such time shall be deemed to be extended by the
period of such delay.
10.6 Landlord's Default. Landlord shall not be deemed to be in default in the
------------------
performance of any of its obligations hereunder unless it shall fail to
perform such obligations and such failure shall continue for a period of
thirty (30) days or such additional time as is reasonably required
(provided that Landlord shall have commenced to correct such default within
such thirty-day period and thereafter diligently pursues such correction to
completion) to correct any such default after written notice has been given
by Tenant to Landlord specifying the nature of Landlord's alleged default.
Landlord shall not be liable in any event for incidental or consequential
damages to Tenant by reason of Landlord's default, whether or not notice is
given. Tenant shall have no right to terminate this Lease for any default
by Landlord hereunder and no right, for any such default, to offset or
counterclaim against any rent due hereunder, except as provided for herein.
10.7 Brokerage. Tenant warrants and represents that it has dealt with no
---------
broker in connection with the consummation of this Lease, other than
Nordblom Company, CB Richard Ellis, and Grubb & Ellis, and in the event of
any brokerage claims, other than by Nordblom Company, CB Richard Ellis, or
Grubb & Ellis, against Landlord predicated upon prior dealings with Tenant,
Tenant agrees to defend the same and indemnify and hold Landlord harmless
against any such claim.
10.8 Applicable Law and Construction. This Lease shall be governed by and
-------------------------------
construed in accordance with the laws of the Commonwealth of Massachusetts
and, if any provisions of this Lease shall to any extent be invalid, the
remainder of this Lease shall not be affected thereby. There are no oral
or written agreements between Landlord and Tenant affecting this Lease.
This Lease may be amended, and the provisions hereof may be waived or
modified, only by instruments in writing executed by Landlord and Tenant.
The titles of the several Articles and Sections contained herein are for
convenience only and shall not be considered in construing this Lease.
Unless repugnant to the context, the words "Landlord" and "Tenant"
appearing in this Lease shall be construed to mean those named above and
their respective heirs, executors, administrators, successors and assigns,
and those claiming through or under them respectively. If there be more
than one tenant, the obligations imposed by this Lease upon Tenant shall be
joint and several.
WITNESS the execution hereof under seal on the day and year first above
written:
Landlord:
10 MAGUIRE ROAD LLC
By: Nordic Holdings I LLC, as manager
By:________________________________
Peter C. Nordblom, as manager
By:________________________________
Ogden Hunnewell, as manager
Tenant:
SOFTWARE.COM, INC.
By:_________________________________
Its:________________________________
By:_________________________________
Its:________________________________
14
<PAGE>
EXHIBIT B
---------
COMMENCEMENT DATE NOTIFICATION
------------------------------
To:___________________________
(Tenant)
_______________ ("Landlord") and _______________ ("Tenant") are parties to a
lease ("Lease") dated _____________ of premises in a building known as
______________________, Massachusetts. Landlord hereby notifies Tenant that the
term of the Lease commenced on _____________ and will end on ______________ and
that the first lease year commenced on __________ and will end on ____________.
Although not required for this notification to be effective, we would appreciate
your confirming the foregoing by signing the enclosed copy of this letter and
returning it to us.
___________________________________
(Landlord)
By_________________________________
Confirmed:
___________________________________
(Tenant)
By:________________________________
<PAGE>
EXHIBIT C
---------
BASE BUILDING WORK
------------------
Building Entrances: Three handicapped accessible, aluminum and glass, two-
story, curtain-wall entrances are provided to access
Areas 1, 2, & 3. Area 4 is accessed at grade via, a
single-story, curtain-wall entrance with an inside
vestibule. Numerous secondary entrances are provided for
the Building.
Windows: Aluminum frames with thermopane, Low-E, tinted glass is
provided throughout. Area 4 has two six (6') foot wide
window units installed in each bay of the northwest wall,
and three storefront-type windows will be installed in
the southwest wall.
Roof: Single-ply, EPDM membrane roofing systems with 2 1/2"
insulation providing an R16 level are provided at Areas
1, 2 & 3. Area 4 has a built-up roof.
Common Areas: Two-story atrium lobbies are provided in Areas 1, 2, & 3,
which include elevators, monumental stairs, and bathroom
cores. Area 4 has a new bathroom core.
Interior drywall partitions for the lobbies, bathroom
cores, electrical and mechanical rooms are constructed
using steel studs, 16" on center with 1/2" gypsum wall
board to the underside of the deck.
The bathroom and utility room doors are 3'-0" x 7'-0"
solid-core, maple veneer in hollow metal frames with
standard lever hardware.
Two coats of latex paint is provided on all drywall and
door frames. Doors and window sills receive stain and/or
clear sealed.
A combination of drywall soffits and suspended ceilings
is provided in the lobbies and all other common areas.
Bathrooms have 2' X 2' suspended ceilings.
A combination of tile and carpet is provided in the
lobbies. All common hallways have carpet. Ceramic tile is
provided in the bathrooms and shower rooms on the floors
and wet walls.
Common areas in Areas 1, 2, & 3 have semi-recessed chrome
sprinkler heads located in the suspended or drywall
ceilings.
Tenant Entrances: The entrance from the lobby into each tenant space has 3'-
6"X 7'-10" solid core maple veneer door with tempered
glass and 3'- 6" tempered-glass sidelight.
Partitions: The inside of the exterior walls are steel studs 16" on
center with bat insulation and 5/8" gypsum wall board to
10 feet above the finished floor. Hardwood veneer window
sills are provided at all windows.
HVAC: All Areas are serviced by a variable air volume (VAV)
system consisting of rooftop (Areas 1, 2 & 4) and
interior (Area 3) air handler units.
Flooring: The existing, unfinished floors in Tenant spaces will be
leveled to receive new flooring.
Electrical: 13.8kv primary main service and 480/277 and 110/208,
three phase, secondary. Distribution panels and feeders
are provided for the HVAC system, lighting and utility
power. Tenant spaces are serviced by sub-panels located
in common electrical rooms on each floor. An emergency
light and exit sign system is provided to meet code
requirements for the common areas and unfinished tenant
spaces.
Sprinkler: A sprinkler system is provided throughout the Building.
Tenant spaces have the proper coverage required by code
for open, unfinished space, with heads facing up at the
underside of the exposed deck.
Fire Alarm: An addressable fire alarm system is provided throughout
the Building in conformance with all State and municipal
code requirements. Tenant spaces have the proper coverage
required by code for open, unfinished space.
<PAGE>
EXHIBIT D
---------
WORK CHANGE ORDER
-----------------
Lease Date:_____________________________ Date:_____________________________
Landlord:_______________________________ Work Change Order No.:____________
Tenant:_________________________________ Building Address:_________________
Premises:_________________________
================================================================================
Tenant directs Landlord to make the following additions to Landlord's work:
Description of additional work:
Work Change Order Amount:
================================================================================
Amount of Previous Work Change Orders:__________________________________
This Work Change Order:_________________________________________________
Total Amount of Work Change Orders:_____________________________________
Landlord approves this Work Change Order and Tenant agrees to pay to Landlord
the Total Amount of Work Change Orders at the earlier of ten days following
receipt of the Certificate of Occupancy of the premises or occupancy of the
premises by Tenant.
Tenant: Landlord:
By: _____________________________ By: _____________________________
Title: ___________________________ Title: ___________________________
<PAGE>
EXHIBIT E
---------
RULES AND REGULATIONS
---------------------
1. The sidewalks, entrances, passages, corridors, vestibules, halls,
elevators, or stairways in or about the Building shall not be obstructed by
Tenant.
2. Tenant shall not place objects against glass partitions, doors or windows
which would be unsightly from the Building corridor or from the exterior of
the Building.
3. Tenant shall not waste electricity or water in the Building premises and
shall cooperate fully with Landlord to assure the most effective operation
of the Building heating and air conditioning systems. All regulating and
adjusting of heating and air-conditioning apparatus shall be done by the
Landlord's agents or employees.
4. Tenant shall not use the Premises so as to cause any increase above normal
insurance premiums on the Building.
5. No vehicles or animals of any kind shall be brought into or kept in or
about the Premises. No space in the Building shall be used for
manufacturing or for the sale of merchandise of any kind at auction or for
storage thereof preliminary to such sale.
6. Tenant shall cooperate with Landlord in minimizing loss and risk thereof
from fire and associated perils.
7. The water and wash closets and other plumbing fixtures shall not be used
for any purposes other than those for which they were designed and
constructed and no sweepings, rubbish, rags, acid or like substance shall
be deposited therein. All damages resulting from any misuse of the
fixtures shall be borne by the Tenant.
8. Tenant acknowledges that the Building has been designated a non-smoking
building. At no time shall Tenant permit its agents, employees,
contractors, guests or invitees to smoke in the Building or, except in
specified locations, directly outside the Building.
9. Landlord reserves the right to establish, modify, and enforce reasonable
parking rules and regulations, provided such rules and obligations do not
diminish Tenant's rights under the Lease.
10. Landlord reserves the right at any time to rescind, alter or waive any rule
or regulation at any time prescribed for the Building and to impose
additional reasonable rules and regulations when in its judgment deems it
necessary, desirable or proper for its best interest and for the best
interest of the tenants and no alteration or waiver of any rule or
regulation in favor of one tenant shall operate as an alteration or waiver
in favor of any other tenant, provided such rules and regulations do not
diminish Tenant's rights under the Lease. Landlord shall not be
responsible to any tenant for the nonobservance or violation by any other
tenant however resulting of any rules or regulations at any time prescribed
for the Building.
<PAGE>
EXHIBIT F
---------
FORM OF LETTER OF CREDIT
------------------------
BENEFICIARY: ISSUANCE DATE: ________________, _____
10 Maguire Road LLC IRREVOCABLE STANDBY
LETTER OF CREDIT NO. _______
ACCOUNTEE/APPLICANT: MAXIMUM/AGGREGATE
CREDIT AMOUNT:
USD $
GENTLEMEN:
We hereby establish our irrevocable letter of credit in your favor for account
of the applicant up to an aggregate amount not to exceed _________ US Dollars
($________) available by your draft(s) drawn on ourselves at sight accompanied
by:
Your statement, signed by a purportedly authorized officer/official certifying
that the Beneficiary is entitled to draw upon this Letter of Credit (in the
amount of the draft submitted herewith) pursuant to Section 4.4 of the lease
(the "Lease") dated _____, 1999 by and between 10 Maguire Road LLC, as Landlord,
and ______________, as Tenant, relating to the premises at 10 Maguire Road,
Lexington, Massachusetts.
Draft(s) must indicate name and issuing bank and credit number and must be
presented at this office.
You shall have the right to make partial draws against this Letter of Credit,
from time to time.
Except as otherwise expressly stated herein, this Letter of Credit is subject to
the "Uniform Customs and practice for Documentary Credits, International Chamber
of Commerce, Publication No. 500 (1993 Revision)."
This Letter of Credit shall expire at our office on ________________, ____ (the
"Stated Expiration Date"). It is a condition of this Letter of Credit that the
Stated Expiration Date shall be deemed automatically extended without amendment
for successive one (1) year periods from such Stated Expiration Date, unless at
least forty-five (45) days prior to such Stated Expiration Date) or any
anniversary thereof) we shall notify the Beneficiary and the Accountee/Applicant
in writing by registered mail (return receipt) that we elect not to consider
this Letter of Credit extended for any such additional one (1) year period.
We engage with you that all drafts drawn under and in compliance with the terms
of this letter of credit will be duly honored on presentation to us.
Very truly yours,
Authorized Signatory
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports dated
April 12, 1999, in the Registration Statement on Form S-1 (No. 333-76263) and
related Prospectus of Software.com, Inc. dated June 4, 1999.
Our audits also included the financial statement schedule of Software.com, Inc.
listed in Item 16(b). The schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the schedule based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Woodland Hills, California
June 4, 1999
<PAGE>
Exhibit 99.1
INTERNATIONAL DATA CORPORATION
- --------------------------------------------------------------------------------
May 25, 1999
Mr. Bob Martin
Software.com
525 Anacapa Street
Santa Barbara, CA 93101
John Hinrichs
Credit Suisse First Boston
2400 Hanover Street
Palo Alto, CA 94304
Dear Mr. Martin and Mr. Hinrichs
Per our discussion, you have approval to use the following statistics as
stated below:
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.
The numbers are the most recent update as of May 1999 to last year's report
(#16569), The Global Market Forecast for Internet Usage and Commerce. Below
are the actual IDC estimates:
<TABLE>
<CAPTION>
Total WW Internet Users (Adjusted)
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 1-Dec 2-Dec 3-Dec
<S> <C> <C> <C> <C> <C> <C> <C> <C>
20,818,117 47,750,243 101,725,855 159,334,165 212,083,759 271,614,694 340,886,126 410,436,167 509,834,435
</TABLE>
Per our discussion, you also have approval to use the following statements that
are based on our most recent unpublished data as of May 1999.
IDC estimates that the number of email messages sent by users 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.
IDC estimates that the number of consumer mailboxes hosted by service providers
in the United States will grow from 18 million to 1996 to 109 million 2002.
IDC estimates that the number of business email users worldwide will grow from
142 million in 1998 to 281 million in 2002.
The undersigned hereby consents to the references to the Undersigned included in
the Registration Statements on Form S-1 filed by Software.com and any amendment
thereto and the filing of this consent as an exhibit to such Registration
Statement.
Sincerely,
/s/ Alexa McCloughan
- -------------------------------
Sr. Vice President
5 Speen Street . Framingham, MA 01701
---------------------------------------
(508) 872-8200 . Fax (508) 935-4015
[LOGO OF IDC]
http://www.idc.com
