<PAGE>
As filed with the Securities And Exchange Commission on May 21, 1999
Registration No. 333-76263
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
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. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Amount to be Offering Price(2) Offering Registration
Registered Registered(1) Per Share Price (2) Fee(3)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001................ 6,900,000 $12.00 $82,800,000 $23,019
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 900,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of computing the
amount of the registration fee.
(3) Includes an additional registration fee of $3,837 with respect to the
increase in the size of the offering. A registration fee of $19,182 was
previously paid.
---------------
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 MAY 21, 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 carrier-scale 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 carrier-scale Internet messaging
solutions for many of the world's largest service providers, with more than 37
million electronic mailboxes licensed to date.*"
"Software.com envisions a world where core communications services for both
consumers and businesses, including those on corporate LANs, will move rapidly
to the global network. This shift engenders a new class of communications
services that will enable universal email, unified messaging, and other
collaborative applications via the Internet. By enabling service providers to
offer premium messaging services, Software.com is helping to pioneer the shift
of communications infrastructures to the Internet."
"Electronic Mailboxes Licensed* by Software.com as of March 1999"
Beneath this statement is a graph that shows the increase in the number of
licensed mailboxes from 1995 to March 1999.
"* The number of mailboxes licensed includes mailboxes that have not yet been
activated."
"Reliable, Carrier-scale Internet Messaging"
"Software.com's mission is to make its customers successful by delivering
reliable, carrier-scale messaging solutions designed for the world of universal
communications. By providing this new breed of business and consumer messaging
services, Software.com enables its customers to increase the value of the
Internet and create new products and markets based on this added value."
"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 101 million in 2002. IDC also estimates that the number of
business email users will grow from 144 million in 1998 to 293 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
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Page
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 7
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial 20
Data................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business............................. 34
Management........................... 48
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Transactions................. 57
Principal and Selling Stockholders... 58
Description of Capital Stock......... 61
Shares Eligible for Future Sale...... 64
Underwriting......................... 66
Notice to Canadian Residents......... 68
Where You Can Find More Information.. 69
Legal Matters........................ 69
Experts.............................. 69
Change in Accountants................ 69
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. To date, we have
licensed over 37 million mailboxes 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.
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.
4
<PAGE>
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) $ (0.09) $ (0.06)
Shares used in
computing pro forma
basic and diluted net
income (loss) per
share................ 32,110 31,431 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 risks described below are not the
only ones that we face. Additional risks that we have not yet identified or
that we currently think are immaterial may also impair our business operations.
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.
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
7
<PAGE>
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.
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.
8
<PAGE>
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."
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.
9
<PAGE>
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;
. 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
10
<PAGE>
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, 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
11
<PAGE>
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 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 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.
12
<PAGE>
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 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,
13
<PAGE>
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.
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
14
<PAGE>
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."
You should not rely on forward-looking statements because they 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. You should not place undue reliance on these
forward-looking statements, which 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.
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.
15
<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.
16
<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.
17
<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."
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<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.
19
<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
calculation............ 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) $ (0.09) $ (0.06)
======= ======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 32,110 31,431 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>
20
<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. Prospective investors should not place
undue reliance on these forward-looking statements, which 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 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.
21
<PAGE>
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 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.
22
<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 in services
revenue was primarily due to an increase in professional services revenue as
our number of consulting projects increased, and, to a lesser extent, an
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.
23
<PAGE>
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 primarily due to better margins
on consulting projects and, to a lesser extent, the benefits of spreading
support and maintenance costs over greater revenue from support and maintenance
contracts.
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 primarily due to growth in our
global sales and product management groups and, to a lesser extent, an increase
in marketing programs. 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
an increase in fees for accounting and legal services and, to a lesser extent,
the one-time relocation costs for a key executive hired in February 1999.
Other (Income) Expense. Other (income) expense consists primarily of interest
expense associated with our credit facility and interest income. Total other
(income) expense increased $67,000, or 74%, from $90,000 for the three months
ended March 31, 1998 to $157,000 in the same period in 1999. The increase was
primarily related to an increase in interest expense associated with an
increase in the amount borrowed under our credit facility.
Provision for Income Taxes. For the three months ended March 31, 1999, we had
a tax provision of $68,000 related to foreign withholding taxes.
24
<PAGE>
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. The increase was primarily due to an increase in the resale of
third party software used in conjunction with our InterMail Mx product and, to
a lesser extent, the increase in the number of employees in our documentation
department.
Cost of Services Revenue. Cost of services revenue includes salaries and
related costs of our consulting services and customer support organizations,
cost of third parties contracted to provide consulting services to our
customers, and an allocation of our facilities and depreciation expenses. Cost
of services revenue increased by $4.8 million, or 179%, from $2.7 million in
1997 to $7.5 million in 1998. Cost of services during this period increased
commensurate with the increase in the number of professional services
deployments. We expect cost of services to increase in absolute dollars in
future periods primarily due to anticipated growth in the professional services
group.
Sales and Marketing. Sales and marketing expense consists primarily of
salaries and benefits of our sales, marketing, product management and business
development organizations, sales commissions, marketing programs, and an
allocation of our facilities and depreciation expenses. Sales and marketing
expense increased by $2.2 million, or 25%, from $8.6 million in 1997 to $10.8
million in 1998. The increase in sales and marketing expense was primarily due
to significant expansion in our global direct sales organization, primarily in
North America and to a lesser extent, an increase in our product management
organization. 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
25
<PAGE>
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 to increased allowances for accounts receivable,
legal fees in resolving a contract dispute with a third party technology
partner under a licensing agreement entered into in 1996, and consulting and
accounting fees related to the setup of six new overseas subsidiaries. See "--
Legal Matter." The decrease in general and administrative costs as a percentage
of total revenues was primarily due to our increase in software license
revenue. We expect general and administrative expenses to increase in absolute
dollars in future periods as we continue to build our infrastructure and due to
the costs of being a public company.
Legal Matter. We accrued in 1997 for an asserted claim related to a minimum
royalty obligation of $1 million purportedly owed by us under a licensing
agreement with a third party technology partner. In February 1999, we and the
third party entered into an agreement to settle all outstanding claims. Under
the settlement agreement, we agreed to pay the third party a minimum of
$400,000, with a contingent obligation to pay an additional $200,000 if we do
not take certain actions prior to December 31, 1999.
Other Income (Expense). Other income (expense) consists primarily of interest
expense associated with our credit facility and interest income on short-term
investments. Interest expense increased $586,000, or 993%, from $59,000 in 1997
to $645,000 in 1998. The increase in interest expense was primarily related to
an increase in interest paid for our credit facility. The credit facility was
opened in November 1997, resulting in only two months of interest expense for
1997.
Provision for Income Taxes. For the year ended December 31, 1998, we had a
tax provision of $446,000 related to foreign withholding taxes.
As of December 31, 1998, we had federal and state net operating loss
carryforwards of approximately $15.9 million and $5.8 million, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2010 through 2018 for federal and 2001 to 2003 for state, if not
utilized. On December 31, 1998, we also had federal and state research and
development tax credit carryforwards of approximately $462,000 and $150,000,
expiring in 2011 to 2013. We also have a foreign tax credit of approximately
$382,000, which will expire in 2003. As a result of changes in our equity
ownership resulting from our convertible preferred stock financings and this
offering, utilization of the net operating losses and tax credits may be
subject to substantial annual limitations. This is due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and tax credits before utilization. See Note 5 of Notes to
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.
26
<PAGE>
Comparison of Years Ended December 31, 1996 and 1997
Software Licenses. Software license revenue increased by $1.3 million, or
20%, from $6.6 million in 1996 to $7.9 million in 1997. The license of
InterMail Post.Office source code to Netscape accounted for $1.4 million of the
total $6.6 million of software license revenue in 1996. The increase in
software license revenue from 1996 to 1997 was primarily due to an increase in
sales of InterMail Post.Office into the market for smaller service providers.
Software license revenue from InterMail Post.Office increased 28% from 1996 to
1997.
Services. Services revenue increased by $1.5 million, or 112%, from $1.3
million in 1996 to $2.8 million in 1997. The Netscape agreement accounted for
$500,000 of the $1.5 million in services revenue in 1996. As a percentage of
total revenues, services revenue increased from 17% in 1996 to 26% in 1997. The
increase in services revenue was primarily due to a 170% increase in revenue
from consulting services provided by our professional services organization
formed in 1997, and, to a lesser extent, a 76% increase in support and
maintenance revenue.
Cost of Software Licenses. Cost of software license increased by $471,000, or
216%, from $218,000 in 1996 to $689,000 in 1997. The increase from 1996 to 1997
was primarily due to an increase in the number of employees in our
documentation organization supporting our expanded product line.
Cost of Services. Cost of services increased by $1.9 million, or 249%, from
$767,000 in 1996 to $2.7 million in 1997. The increase in cost of services was
primarily due to an expansion of the consulting services provided by our
professional services organization. The decrease in gross margins from 42% to
5% was primarily due to the initial growth and expense associated with the
formation of our professional services organization.
Sales and Marketing. Sales and marketing expense increased by $4.0 million,
or 89%, from $4.6 million in 1996 to $8.6 million in 1997. Sales and marketing
as a percentage of total revenues increased from 58% in 1996 to 81% in 1997.
The increase in sales and marketing expense in absolute dollars and as a
percentage of total revenues was primarily due to an increase in spending on
marketing events, and, to a lesser extent, growth in the sales and product
management organizations.
Research and Development. Research and development expense increased by $2.9
million or 82% from $3.5 million in 1996 to $6.3 million in 1997. Research and
development as a percentage of total revenues increased from 44% in 1996 to 59%
in 1998. The increase in absolute dollars and as a percentage of total revenues
was primarily due to expansion of the research and development organization to
further focus on the products and platform requirements of the service provider
market.
General and Administrative. General and administrative expense increased by
$1.0 million, or 45%, from $2.1 million in 1996 to $3.1 million in 1997. The
increase in general and administrative expense was primarily due to growth in
the executive, finance, and human resources organizations.
Legal Matter. In 1997, we expensed $1.0 million for royalties claimed by a
third party in this matter. The parties entered into a settlement agreement in
February 1999 with respect to this claim.
Other Income (Expense). Interest income increased by $211,000, or 243%, from
$87,000 in 1996 to $298,000 in 1997. The increase in interest income was
primarily due to an increase in 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.
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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 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.
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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.
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
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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 large expenditures in
1997 on leasehold improvements and furniture for one of our Santa Barbara,
California facilities and our Lexington, Massachusetts facility, and to a
lesser extent, to our investment in 1997 in network computer equipment and
software including servers, firewalls, and routers. 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.
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
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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 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
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<PAGE>
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 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.
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In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), which was amended by SOP 98-4 and
SOP 98-9, "Software Revenue Recognition." These statements provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. This guidance is effective for our transactions entered
into subsequent to January 1, 1998. The application of certain provisions were
deferred until fiscal years beginning on or after March 15, 1999. Final
adoption of these provisions is not expected to have a material impact on our
financial condition or results of operation.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and sell in North America, Asia and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As all sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Our interest expense is sensitive to changes in the
prime rate. Due to the nature of our short-term investments and debt, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
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BUSINESS
Company Overview
Software.com is a leading provider of email and other Internet messaging
applications for providers of Internet communications and services. These high
performance applications are built to run on our Internet standards-based
messaging platform that can increase capacity, or scale, to support millions of
consumer and business users. Using our software, our service provider customers
are able to deliver a variety of messaging services, including Web browser-
based email, desktop client-based email, outsourced or "managed" business
messaging, and Internet-based integrated faxmail and voicemail. In order to
deliver complete messaging solutions, we also offer our customers a broad range
of consulting and customer support services that complement our product
offerings.
Industry Background
People and businesses are increasingly relying on the Internet to access and
share information. International Data Corporation, or "IDC," estimates that at
the end of 1998, over 97 million people were using the Internet to communicate
with friends and family, participate in discussion forums and obtain
information about goods and services. IDC projects that this user base will
grow to 320 million worldwide 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 101 million in 2002. Internet email is also a key application for
retaining subscribers, because once a user gives out his or her unique Internet
email address to friends and colleagues, changing to a new service provider
means switching addresses and accounts and reconnecting with these people.
The growth in the use of Internet email has also attracted businesses, as
email becomes a routine method of communicating between employees and with
customers, vendors, and partners. IDC estimates that the number of business
email users will grow from 144 million in 1998 to 293 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
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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 685 million per day in 1996 to 2.1 billion
per day in 1998, and projects that the number will grow to 7.9 billion per day
in 2002.
Most service providers, however, have neither the products and services in
place nor the existing internal technical capabilities to address this enormous
growth. To date, most service providers have built their own basic email
services by making proprietary modifications to a free, public domain email
program called Sendmail. There are limitations, however, to Sendmail's ultimate
capabilities. Sendmail was originally designed to provide email for small
networks and does not readily scale to the levels needed by a service provider
seeking to leverage costs across a broad user base. Further, Sendmail provides
only basic email functions and lacks the essential attributes needed for highly
reliable and available operations, and the feature sets required to provide
business messaging, faxmail, and voicemail applications.
As an alternative to Sendmail, some service providers have deployed messaging
products designed for the individual business, or enterprise, such as Microsoft
Exchange or Lotus Notes. Enterprise products, while providing rich feature
sets, are costly and face scaling limitations similar to those of Sendmail,
typically supporting a maximum of 2,000 users on a single server. Another
alternative for a service provider is to contract with an email service
wholesaler to run its email service, while the service provider resells email
to its individual and business customers. While this approach helps to address
the service providers' lack of internal technical capabilities in the short
term, it represents a loss in control for the service provider over the quality
of the service. This approach also distances the service provider from the user
base it is trying to retain, as the service provider is forced to rely on the
wholesaler for access to and key information about its subscribers. The issues
of scalability, reliability, availability, and lack of a core competency in
offering basic email service are only exacerbated when a service provider looks
to provide enhanced services, such as managed messaging, or more advanced
features, such as faxmail and voicemail integration and sophisticated Web-based
interfaces.
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. To date, we have licensed
over 37 million mailboxes although not all of these mailboxes have 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
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hundred thousand mailboxes, and we currently support more than 10 million
mailboxes on our InterMail Mx product. We believe by spreading its operating
costs across a growing user base, a service provider not only expands its
audience and thus its revenue opportunities, but also realizes economies of
scale. Regardless of the size of the subscriber base, we allow service
providers to easily manage their user bases and messaging services. Our unique
architecture enables us to build messaging applications based on flexible and
interchangeable components. As a service provider grows in terms of number of
users, type of users and volume of messaging traffic, our InterMail Kx and
InterMail Mx architecture enables the service provider to add or upgrade
individual components as necessary without changing the other components or
adversely impacting the availability of the services.
High System Availability and Reliability
We design our products to be highly available, meaning that a user can always
access the messaging service, as well as highly reliable, meaning that the user
will not lose messages that are sent or received. As people and businesses
become more demanding with respect to Internet messaging, service providers
must continually meet increasing standards of availability and reliability. Our
component-based architecture is fault-tolerant, meaning that a service provider
can institute multiple, independent back-up procedures to protect against the
failure of individual system components. We believe that by using our products
to offer highly available and reliable messaging services, service providers
increase customer satisfaction and reduce subscriber turnover.
Single Platform with Multiple Messaging Applications
Our technology enables service providers to create, manage, and host multiple
offerings on the same messaging platform. A service provider can therefore
easily tailor feature sets to meet the different and evolving needs of
individual segments of its subscriber base. For instance, our messaging
platform allows a service provider to simultaneously host mass-market consumer
messaging services, its own branded premium consumer messaging services, and
managed messaging services for businesses. This same platform is both open and
extensible, meaning that we, as well as customers, partners, integrators, and
others, can provide additional messaging applications based on our core
technology. In addition, the technology that we recently acquired from
Mobility.Net is designed to permit multiple Web-based applications as
extensions of our messaging platform. We intend to make these and other new
services available to service providers as they become available.
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
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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 to
date. We offer the first Internet email application specifically designed
to capitalize on the growing trend for service providers to offer managed
messaging services to small, medium and large businesses and other
organizations. In addition, we have begun our first large scale deployment
of an integrated voicemail and faxmail solution with an existing InterMail
customer, marking our entry into the emerging market for Internet
standards-based unified messaging.
Leverage Our Core Platform to Build Additional Service Provider
Applications. We have expended considerable time and financial resources to
create a scalable high performance platform for building messaging and
other data-intensive Internet applications. We believe that the core
elements of this platform will allow us to offer multiple applications
which leverage the 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 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.
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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 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.
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<PAGE>
Our Support Solutions group provides 24 hour global support services to meet
the demanding needs of the largest service providers. For each customer, we
designate a primary support engineer with responsibility for fielding and
addressing all support issues for that customer. We monitor support issues
internally using a variety of integrated processes, including regular customer
interaction sessions. Customers have access to a dedicated Web site where
information on past and outstanding issues is posted, and through which updates
and upgrades can be delivered for ease of implementation. We maintain support
groups in Santa Barbara, California and Lexington, Massachusetts for North
American customers, as well as Windsor, England for European customers, and
Hong Kong for Asian customers. We plan to establish another support center in
Tokyo, Japan. As of 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.
. 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>
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Strategic Relationships
We have established a number of formal and informal relationships with
companies that provide infrastructure components and software to service
providers. We work with these companies to develop additional products and
services based on our messaging platform. In addition, we believe that these
partners offer opportunities to expand our sales channels. Set forth below are
descriptions of our relationships with several of our partners:
Cisco Systems. We have been working with Cisco Systems on a variety of
product development efforts, including voicemail based on Internet protocols,
network (hosted) applications and directory technology. Our work with Cisco has
focused on providing solutions for common customers and partners. In February
1997, Cisco made the first of two equity investments in Software.com.
Hewlett-Packard. Hewlett-Packard recently selected InterMail as its preferred
messaging application for the service provider market. Hewlett-Packard markets
these solutions to rapidly growing service providers that are building the
infrastructure to offer hosted or "managed" messaging services and to those
offering Internet services to consumers and businesses. We also work closely
with Hewlett-Packard to improve the performance and customization of our
applications on Hewlett-Packard's HP-UX operating systems. In April 1999,
Hewlett-Packard purchased a minority equity interest in Software.com.
IBM. IBM offers InterMail Mx, Kx and Post.Office on its high performance
operating systems and hardware. We work with IBM on a high availability, high
reliability, carrier-scale performance solution based on InterMail and IBM's
Serial Storage Architecture disk subsystems, and high-availability cluster
multiprocessing software. In addition, IBM integrates its Intelligent
Subscriber Management System with InterMail for IBM's service provider
customers.
Telcordia Technologies. Our Strategic Solutions and Professional Services
groups have been working with Telcordia Technologies (formerly Bellcore) on
deploying a next-generation, unified messaging platform based on standard
Internet protocols. We will continue to partner with Telcordia to explore
emerging opportunities created by the convergence of voice and data networks,
including voicemail and faxmail based on Internet protocols.
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.
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
41
<PAGE>
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, 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.
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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 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.
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<PAGE>
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-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.
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Mobility.Net Technology. The technology acquired from Mobility.Net consists
primarily of software designed to improve a user's ability to retrieve and send
electronic messages using a Web browser. This is referred to as a Web access
server and represents substantial improvements to the equivalent technology we
were developing before the Mobility.Net acquisition. Initially, we will market
the Mobility.Net technology as a stand-alone product to our existing InterMail
customers, allowing them to upgrade the performance of their existing Web
access servers. Eventually, we intend to fully incorporate the Mobility.Net
technology into our InterMail product line to improve both the performance of
our Web access server and offer additional features, such as calendaring, that
are dependent on advanced Web access server technology.
We have made substantial investments in research and development. We believe
that our future performance will depend in large part on our ability to
maintain and enhance our current platform and product families, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet an expanding range of service provider requirements. As of 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.
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
45
<PAGE>
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.
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.
46
<PAGE>
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.
47
<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.
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,
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<PAGE>
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 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.
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<PAGE>
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 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,
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<PAGE>
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.
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.
51
<PAGE>
In October 1996, we issued and sold an aggregate of 1,587,302 shares of
Series A preferred stock to funds affiliated with AT&T Ventures at a per share
price of $3.15. Upon the closing of this offering, the Series A preferred stock
will automatically convert into 1,587,302 shares of common stock. Holders of
the Series A preferred stock will be entitled to "piggyback" and demand
registration rights with respect to the shares of common stock into which the
Series A preferred stock will be converted.
In connection with the sale of the Series A preferred stock, we issued
warrants to funds affiliated with AT&T Ventures to purchase 529,101 shares of
our common stock at an exercise price of $5.00 per share and 269,841 shares of
our common stock at an exercise price of $7.00 per share. Effective July 1998,
in exchange for AT&T Ventures' agreement to extend the redemption date of
redemption rights with respect to the Series A preferred stock, we lowered the
exercise price on all outstanding warrants to $4.15 per share. These warrants
are exercisable until October 3, 2001 and are subject to, among other
provisions, net exercise rights. In addition, we received revenues from
companies affiliated with AT&T Corporation of $2,775,000, $2,687,000, and
$3,599,000 in 1996, 1997, and 1998. Mr. Douglas, one of our directors and a
member of our compensation committee, is a General Partner of AT&T Ventures.
Director Compensation
Directors do not currently receive any cash compensation for their service as
directors, but are reimbursed for reasonable expenses incurred in attending
meetings. Non-employee directors are eligible to receive options under our 1995
stock plan and have been granted the following options under 1995 stock plan:
. On January 18, 1996, Mr. Perna and Ms. Hamilton each received options to
purchase 121,318 shares of our common stock at an exercise price of $1.00
per share, with a vesting period of four years at a rate of 1/48th of the
shares underlying the options vesting each month;
. On July 11, 1997, Messrs. Listwin, Puckett and Woebker each received
options to purchase 30,000 shares of our common stock at an exercise
price of $3.65 per share, with a vesting period of one year at a rate of
1/12th of the shares underlying the options vesting each month; 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.
53
<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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 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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<PAGE>
CERTAIN TRANSACTIONS
Lease of 525 Anacapa. In February 1996, we entered into a contract with 525
Anacapa LLC for the lease of our offices at 525 Anacapa Street, Santa Barbara.
Pursuant to the lease, we agreed to pay 525 Anacapa LLC a flexible amount per
month such that it would recover its costs and expenses in relation to the
ownership and operation of the property, and a 9% return on the actual cash
invested in acquiring and improving the property, as set forth in the lease. In
1996, 1997, and 1998, we paid an aggregate of $132,000, $165,000, and $171,000,
to 525 Anacapa LLC pursuant to the lease. John MacFarlane, Chief Executive
Officer and a director of Software.com, and Frank Perna, a director of
Software.com, are members of 525 Anacapa LLC.
Accordance Merger. In May 1996, in connection with the merger of Accordance
Corporation and Software.com, we issued 3,107,344 shares of our common stock to
Valdur Koha, the former President of Accordance and our current President.
Additionally, we issued 715,219 shares of our common stock to John Poulack, a
former Principal Software Engineer of Accordance and our current Senior Vice
President, Operations.
Common Stock Registration Rights Agreement. Certain holders of our common
stock are entitled to "piggyback" and demand registration rights pursuant to a
Registration Rights Agreement dated as of June 1, 1996, as amended. Some of our
directors and executive officers, including Mr. MacFarlane, Mr. Koha, and Mr.
Poulack, are parties to this registration rights agreement.
Series B and Series C Preferred Stock. On February 10, 1997, we issued and
sold an aggregate of 1,789,279 shares of Series B preferred stock to Cisco
Systems, at a per share price of $4.15, and on August 14, 1998, we issued and
sold an aggregate of 1,329,781 shares of Series C preferred stock to Cisco at a
per share price of $5.15. Upon the closing of this offering, the Series B and
Series C preferred stock will automatically convert into 1,789,279 and
1,329,781 shares of our common stock.
Holders of the Series B and Series C preferred stock will be entitled to
"piggyback" and demand registration rights with respect to the shares of common
stock into which the Series B and Series C preferred stock will be converted.
Mr. Listwin, one of our directors, is an Executive Vice President of Cisco
Systems.
Change of Control Agreements. We have entered into our standard form
severance agreement in the event of a change of control with all of our
executive officers, except for Mr. Ingalls.
We entered into a severance agreement with Mr. Ingalls, dated March 1, 1999,
which obligates us to provide certain benefits to Mr. Ingalls in connection
with a change of control of Software.com. Upon a change in control, one-half of
the unvested portion of any options held by Mr. Ingalls will vest and become
immediately exercisable. If Mr. Ingalls' employment is terminated by us for any
reason or by Mr. Ingalls as a result of "involuntary termination" during a
period beginning two months prior to, and ending twelve months after any change
in control, then Mr. Ingalls shall be paid a lump sum equal to his annual base
salary and highest possible bonus for the fiscal year in which the termination
occurs plus any "parachute payment" excise tax and the entire unvested portion
of any stock options held by Mr. Ingalls shall vest and become immediately
exercisable.
Our offer letter dated February 9, 1999 to John S. Ingalls, our Senior Vice
President and Chief Financial Officer, obligates us to pay Mr. Ingalls a lump
sum severance payment if we terminate his employment other than for cause. The
amount of the severance payment will equal three months of his then current
annual base salary plus one additional week for each month that he has been
employed by us, up to a maximum of one year. In addition, we agreed to retain
Mr. Ingalls as a consultant for the period of time as is necessary to allow
one-half of the unvested portion of his option to purchase 400,000 shares of
our common stock to vest.
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table on the following page sets forth information known to Software.com
regarding the beneficial ownership of our common stock as of 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 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(2) 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(3) 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).. 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.
59
<PAGE>
(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. Mr. Wren was formerly an employee of Software.com.
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
"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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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock and a
significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of common stock,
including shares issued upon exercise of outstanding options and warrants, in
the public market following this offering could harm market prices and could
impair our ability to raise capital through sale of our equity securities. As
described below, less than 1% of our shares currently outstanding will be
available for sale immediately after this offering because of contractual
restrictions on resale. Sales of substantial amounts of our common stock in the
public market after the restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 40,272,627 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 34,272,427
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
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.
64
<PAGE>
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.
65
<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.
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
66
<PAGE>
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.
67
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Software.com and the
selling stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of common stock are
effected. Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to Software.com, the selling stockholders and the
dealer from whom such purchase confirmation is received that (1) such purchaser
is entitled under applicable provincial securities laws to purchase such common
stock without the benefit of a prospectus qualified under such securities laws,
(2) where required by law, such purchaser is purchasing as principal and not as
agent, and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers, as well as the experts named
herein and the selling stockholders, may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from Software.com. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
68
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration statement
on Form S-1 under the Securities Act of 1933, that registers the shares of
common stock offered hereby. This prospectus does not contain all of the
information stated in the registration statement and the exhibits and schedule
filed with the registration statement. For more information about us and the
common stock offered hereby, you should review the registration statement and
the exhibits and schedule filed with the registration statement. Statements
contained in this prospectus regarding the contents of any contract or any
other document to which reference is made are not necessarily complete, and, in
each instance, you should review the copy of such contract or other documents
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedule filed with the registration statement
may be inspected and copied at the following location of the Securities and
Exchange Commission:
Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
You may also obtain copies of all or any part of the registration statement
from that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http:\\www.sec.gov.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Software.com by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters will be passed upon for the
underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our 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 report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
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.
69
<PAGE>
SOFTWARE.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</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...... $ 6,083 $ 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-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 $17,462 $ 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) $ (0.09) $ (0.06)
======= ======= =======
Shares used in computing
pro forma basic and
diluted net loss per share
(unaudited)............... 32,110 31,431 33,455
======= ======= =======
</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
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-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) $(11,469) $ (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-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. 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 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.
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)
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 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. When
the Company enters into revenue sharing arrangements with its customers, the
Company recognizes 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.
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
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)
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 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
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)
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.
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>
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)
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 $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 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.
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)
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.
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.
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)
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>
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>
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)
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.
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.
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 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 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 7,986,000 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-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)
<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 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.
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)
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.
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.
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)
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.
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>
Basic and 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.
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)
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 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-19
<PAGE>
Software.com solutions are designed to enable carrier-scale Internet
messaging.
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.
(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.
II-1
<PAGE>
(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.
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 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
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.
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.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(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.
II-3
<PAGE>
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 21st day of May, 1999.
SOFTWARE.COM, INC.
/s/ John L. MacFarlane
By: _________________________________
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 May 21, 1999
____________________________________ and Director (Principal
John L. MacFarlane Executive Officer)
* Senior Vice President, May 21, 1999
____________________________________ Chief Financial Officer
John S. Ingalls (Principal Financial
and Accounting Officer)
* Director May 21, 1999
____________________________________
Neal Douglas
* Director May 21, 1999
____________________________________
Judith Hamilton
* Director May 21, 1999
____________________________________
Don Listwin
* Director May 21, 1999
____________________________________
Frank Perna
* Director May 21, 1999
____________________________________
Bernard Puckett
* Director May 21, 1999
____________________________________
Bernhard Woebker
</TABLE>
/s/ John L. MacFarlane
*By:________________________
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.
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.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SOFTWARE.COM, INC.
Software.com, Inc., a corporation organized and existing under the laws of
the State of Delaware, does hereby certify:
1. The name of the corporation is Software.com, Inc. The original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on February 17, 1999.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the corporation's Certificate of
Incorporation as heretofore amended. The amendments and restatement herein set
forth have been duly approved by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of Delaware and by the
written consent of the stockholder of the corporation in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of Delaware.
3. The text of the Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:
FIRST: The name of the corporation is Software.com, Inc. (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The Corporation is authorized to issue two classes of shares to be
designated respectively as Common Stock and Preferred Stock. The total number of
shares of Common Stock this Corporation shall have authority to issue is
60,000,000, $0.001 par value per share, and the total number of shares of
Preferred Stock this Corporation shall have authority to issue is 6,332,378,
$0.001 par value per share. This Corporation is authorized to issue four series
of Preferred Stock, the first of which shall be designated Series A Preferred
Stock ("Series A Preferred") and shall consist of 1,587,302 shares, the second
of which shall be designated Series B Preferred Stock ("Series B Preferred,")
and shall consist of 1,789,279 shares, the third of which shall be designated
Series C Preferred Stock ("Series C Preferred,") and shall consist of 1,329,781
shares and the fourth of which shall be designated Series D Preferred Stock (the
"Series D Preferred") and shall consist of
<PAGE>
1,626,016 shares. The Series A Preferred, the Series B Preferred, the Series C
Preferred and the Series D Preferred shall be referred to herein collectively as
the "Preferred Stock."
The Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at any
time the number of shares of Common Stock remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Preferred Stock.
The relative rights, preferences, privileges and restrictions granted
to or imposed on the respective classes of the shares of capital stock or the
holders thereof are as follows:
A. Dividends. The holders of outstanding shares of Preferred Stock shall
---------
be entitled to receive, when and as declared by the Board of Directors, out of
any assets at the time legally available therefor, a pro rata portion of any
dividends paid on the Common Stock. Holders of Preferred Stock shall receive
dividends based on the number of shares of Common Stock into which such share of
Preferred Stock could be converted at the record date for determination of the
stockholders entitled to such dividend. The right to receive dividends on
shares of Preferred Stock shall not be cumulative, and no right to such
dividends shall accrue to holders of Preferred Stock by reason of the fact that
dividends on said shares are not declared or paid in any year.
B. Liquidation Preference. In the event of any liquidation, dissolution,
----------------------
or winding up of the Corporation (or the deemed occurrence of such event
pursuant to subsection B.5 below), either voluntary or involuntary,
distributions to the stockholders of the Corporation shall be made in the
following manner:
1. Series C and D Liquidation Preference. The holders of the Series
-------------------------------------
C Preferred and Series D Preferred shall be entitled to receive, prior to and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Series A Preferred, Series B Preferred or
Common Stock by reason of their ownership of such stock, the amount of $5.15 per
share for each share of Series C Preferred then held by them and the amount of
$6.15 per share (plus any declared but unpaid dividends) for each share of
Series D Preferred then held by them (in each case, the "Preferred Preferential
Amount"), adjusted for any combinations, consolidations, or stock distributions
or dividends with respect to such shares. If upon the occurrence of such
liquidation event, the assets and funds distributed among the holders of the
Series C Preferred and Series D Preferred shall be insufficient to permit the
payment to such holders of their full aforesaid Preferred Preferential Amounts,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series C
Preferred and Series D Preferred in proportion to the full aforesaid Preferred
Preferential Amount to which each holder is entitled.
2. Series A and B Liquidation Preference. After payment of the
-------------------------------------
aforesaid Preferred Preferential Amounts to the holders of the Series C
Preferred and Series D Preferred, the holders of the Series A Preferred and
Series B Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock by reason of their ownership of such stock, the
amount of $3.15 per share for
<PAGE>
each share of Series A Preferred then held by them and the amount of $4.15 per
share for each share of Series B Preferred then held by them (in each case, the
"Preferred Preferential Amount"), adjusted for any combinations, consolidations,
or stock distributions or dividends with respect to such shares. If upon the
occurrence of such liquidation event, the assets and funds distributed among the
holders of the Series A Preferred and Series B Preferred shall be insufficient
to permit the payment to such holders of their full aforesaid Preferred
Preferential Amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series A Preferred and Series B Preferred in proportion to the full aforesaid
Preferred Preferential Amount to which each holder is entitled.
3. Distribution after Payment of Preferred Liquidation Preferences.
---------------------------------------------------------------
After payment has been made to the holders of the Preferred Stock of the full
preferential amounts set forth in Sections B.1 and B.2 above, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed solely to the holders of the Common
Stock in a manner such that the remaining amount distributed to each holder of
Common Stock shall equal the amount obtained by multiplying the entire assets
and funds of the Corporation legally available for distribution hereunder by a
fraction, the numerator of which shall be the number of shares of Common Stock
then held by such holder, and the denominator of which shall be the total number
of shares of Common Stock then outstanding.
4. Shares not Treated as Both Preferred Stock and Common Stock in any
------------------------------------------------------------------
Distribution. Shares of Preferred Stock shall not be entitled to be converted
- ------------
into shares of Common Stock in order to participate in any distribution, or
series of distributions, as shares of Common Stock, without first foregoing
participation in the distribution, or series of distributions, as shares of
Preferred Stock.
5. Deemed Liquidation. For purposes of this Section B, a merger or
------------------
consolidation of the Corporation with or into any other corporation or
corporations, or the merger of any other corporation or corporations into the
Corporation, in which consolidation or merger the stockholders of the
Corporation receive distributions in cash or securities of another corporation
or corporations as a result of such consolidation or merger and the stockholders
of the Corporation receive in such consolidation or merger less than fifty
percent (50%) of the voting equity securities of the successor or surviving
corporation, or a sale or other disposition of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation.
C. Voting Rights. Except as otherwise required by law, each share of
-------------
Common Stock issued and outstanding shall have one vote and each share of
Preferred Stock issued and outstanding shall have the number of votes equal to
the number of shares of Common Stock into which such share of Preferred Stock
could be converted at the record date for determination of the stockholders
entitled to vote on such matters, or, if no such record date is established, at
the date such vote is taken or any written consent of stockholders is solicited,
such votes to be counted together with all other shares of stock of the
Corporation having general voting power and not separately as a class. Holders
of Common Stock and Preferred Stock shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation, except
as otherwise provided herein.
<PAGE>
D. Conversion. The holders of the Preferred Stock shall have the
----------
following applicable conversion rights (the "Conversion Rights"):
1. Right to Convert. Each share of Preferred Stock shall be
----------------
convertible, without the payment of any additional consideration by the holder
thereof, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for the Preferred Stock, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing (i) in the case of the Series A
Preferred, $3.15 by the Series A Conversion Price (as defined below) in effect
at the time of conversion, or (ii) in the case of the Series B Preferred, $4.15
by the Series B Conversion Price (as defined below) in effect at the time of
conversion, (iii) in the case of the Series C Preferred, $5.15 by the Series C
Conversion Price (as defined below) in effect at the time of conversion, or (iv)
in the case of the Series D Preferred, $6.15 by the Series D Conversion Price
(as defined below) in effect at the time of conversion, in each case determined
as hereinafter provided. The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Series A Preferred without the payment
of any additional consideration by the holders thereof shall initially be $3.15
per share of Common Stock (the "Series A Conversion Price"). The price at which
shares of Common Stock shall be deliverable upon conversion of shares of Series
B Preferred without the payment of any additional consideration by the holders
thereof shall initially be $4.15 per share of Common Stock (the "Series B
Conversion Price"). The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Series C Preferred without the payment
of any additional consideration by the holders thereof shall initially be $5.15
per share of Common Stock (the "Series C Conversion Price"). The price at which
shares of Common Stock shall be deliverable upon conversion of shares of Series
D Preferred without the payment of any additional consideration by the holders
thereof shall initially be $6.15 per share of Common Stock (the "Series D
Conversion Price", and together with the Series A Conversion Price, the Series B
Conversion Price and the Series C Conversion price, "Conversion Prices," and
each a "Conversion Price") Such initial Conversion Prices shall be subject to
adjustment as hereinafter provided.
2. Automatic Conversion.
--------------------
(A) Each share of Series A Preferred shall automatically be converted
into shares of Common Stock at the then effective Series A Conversion Price upon
either (i) the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock to the public
involving an aggregate offering price to the public of not less than $15,000,000
at a per share price for the Common Stock not less than $5.15 per share (subject
to adjustment for any subdivisions, combinations or consolidations of the Common
Stock from time to time) for the account of the Corporation (a "Qualifying
IPO"), or (ii) the affirmative vote or the written consent of holders of not
less than the majority of the then outstanding shares of Series A Preferred.
(B) Each share of Series B Preferred shall automatically be converted
into shares of Common Stock at the then effective Series B Conversion Price upon
either (i) the closing
<PAGE>
of a Qualifying IPO or (ii) the affirmative vote or the written consent of
holders of not less than the majority of the then outstanding shares of Series B
Preferred.
(C) Each share of Series C Preferred shall automatically be
converted into shares of Common Stock at the then effective Series C Conversion
Price upon either (i) the closing of a Qualifying IPO or (ii) the affirmative
vote or the written consent of holders of not less than the majority of the then
outstanding shares of Series C Preferred.
(D) Each share of Series D Preferred shall automatically be
converted into shares of Common Stock at the then effective Series D Conversion
Price upon either (i) the closing of a Qualifying IPO or (ii) the affirmative
vote or the written consent of holders of not less than the majority of the then
outstanding shares of Series D Preferred.
(E) In the event of the automatic conversion of any series of
Preferred Stock upon a public offering as aforesaid, the person(s) entitled to
receive the Common Stock issuable upon conversion of such Preferred Stock shall
not be deemed to have converted such Preferred Stock until immediately prior to
the closing of such sale of securities. Upon such automatic conversion, any
declared and unpaid dividend shall be paid.
3. Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of the Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation at its election shall either (i) pay cash equal to such fraction
multiplied by the then effective Conversion Price, as applicable, or (ii) issue
one whole share of Common Stock for each fractional share to which the holder
would otherwise be entitled.
Before any holder of Preferred Stock shall be entitled to convert the same
into full shares of Common Stock pursuant to Section D.1 above, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Preferred Stock, and
shall give written notice to the Corporation at such office that such holder
elects to convert the same; provided, however, that in the event of an automatic
-------- -------
conversion pursuant to Section D.2, the outstanding shares of Preferred Stock
shall be converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent, and provided further that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Preferred Stock are either delivered to
the Corporation or its transfer agent as provided above, or the holder notifies
the Corporation or its transfer agent that such certificates have been lost,
stolen or destroyed and executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates. The Corporation shall, as soon as practicable following such
delivery, issue and deliver at such office to such holder of Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid, together with a check, if
applicable, payable to the holder in the amount of any cash amount payable as
the result of any fractional share resulting from the conversion of the
Preferred Stock into Common Stock. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Preferred
<PAGE>
Stock to be converted, or in the case of automatic conversion on the date of
closing of the offering or the effective date of the applicable vote or written
consent, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
4. Adjustments to Conversion Prices for Diluting Issues.
----------------------------------------------------
(A) Special Definitions. For purposes of this subsection D.4,
-------------------
the following definitions shall apply:
(1) "Option" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Series A Original Issue Date" shall mean the date on
which the Series A Preferred was first issued.
(3) "Series B Original Issue Date" shall mean the date on
which the Series B Preferred was first issued.
(4) "Series C Original Issue Date" shall mean the date on
which the Series C Preferred was first issued.
(5) "Series D Original Issue Date" shall mean the date on
which the Series D Preferred was first issued.
(6) "Convertible Securities" shall mean any evidence of
indebtedness, shares (other than Common Stock or Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(7) "Additonal Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section D.4(C), deemed to be
issued) by the Corporation after the applicable Original Issue Date, other than
shares of Common Stock issued or issuable:
(a) upon conversion of shares of the Preferred Stock;
(b) as a dividend or distribution on the Preferred
Stock or any event for which adjustment is made pursuant to
subparagraph D.4(F) hereof;
(c) upon exercise, conversion or exchange of Options or
Convertible Securities outstanding as of the Series D Original
Issue Date;
(d) to officers or employees of, or consultants to, the
Corporation pursuant to a stock grant, option plan or purchase
plan or other
<PAGE>
employee stock incentive program (collectively, the
"Plans") approved by the Board of Directors; or
(e) by way of dividend or other distribution on shares
of Common Stock excluded from the definition of Additional Shares
of Common Stock by the foregoing clause(s) (a), (b), (c) (d) or
this clause (e).
(B) No Adjustment of Conversion Prices. No adjustment in the
----------------------------------
number of shares of Common Stock into which a series of Preferred Stock is
convertible shall be made, by adjustment in the Series A Conversion Price, the
Series B Conversion Price, the Series C Conversion Price or the Series D
Conversion Price, as the case may be, in respect of the issuance of Additional
Shares of Common Stock or otherwise, unless the consideration per share for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the respective Conversion Price in effect on the date
of, and immediately prior to, the issue of such Additional Share of Common
Stock.
(C) Deemed Issuances of Additional Shares of Common Stock.
-----------------------------------------------------
(1) Options and Convertible Securities. In the event the
----------------------------------
Corporation at any time or from time to time after the Series D Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in the case such a record date shall
have been fixed, as of the close of business on such record date, provided that
in any such case in which Additional Shares of Common Stock are deemed to be
issued:
(a) no further adjustment in the Conversion Price for
such series of Preferred Stock shall be made upon the subsequent
issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such
Convertible Securities;
(b) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any
increase or decrease in the consideration payable to the
Corporation, or decrease or increase in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price for such series of Preferred Stock
computed upon the original issue thereof (or upon the occurrence
of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible
Securities;
<PAGE>
(c) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion
Price for such series of Preferred Stock computed upon the
original issue thereof (or upon the occurrence of a record date
with respect thereto) and any subsequent adjustments based
thereon shall, upon such expiration, be recomputed as if:
1. in the case of Convertible Securities or Options
for Common Stock, only the Additional Shares of Common Stock
issued were the shares of Common Stock, if any, actually issued
upon the exercise of such Options or the conversion or exchange
of such Convertible Securities and the consideration received
therefor was the consideration actually received by the
Corporation for the issue of such exercised Options plus the
consideration actually received by the Corporation upon such
exercise or for the issue of all such Convertible Securities
which were actually converted or exchanged, plus the additional
consideration, if any, actually received by the Corporation upon
such conversion or exchange, and
2. in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue
of such Options, and the consideration received by the
Corporation for the Additional Shares of Common Stock deemed to
have been then issued was the consideration actually received by
the Corporation for the issue of such exercised Options, plus the
consideration deemed to have been received by the Corporation
(determined pursuant to subsection D.4(E)) upon the issue of the
Convertible Securities with respect to which such Options were
actually exercised;
(d) no readjustment pursuant to clause (b) or (c) above
shall have the effect of increasing the Conversion Price for a
series of Preferred Stock to an amount which exceeds the lower of
(i) the Conversion Price for such series of Preferred Stock on
the original adjustment date, or (ii) the Conversion Price for
such series of Preferred Stock that would have resulted from any
issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date;
(e) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no
adjustment of the Conversion Price for a series of Preferred
Stock shall be made until the expiration or exercise of all such
Options issued on the same date, whereupon such adjustment shall
be made in the same manner provided in clause (c) above; and
<PAGE>
(f) if such record date shall have been fixed and such
Options or Convertible Securities are not issued on the date
fixed therefor, the adjustment previously made in the Conversion
Price for such series of Preferred Stock which became effective
on such record date shall be canceled as of the close of business
on such record date, and thereafter the Conversion Price for such
series of Preferred Stock shall be adjusted pursuant to this
subsection D.4(C) as of the actual date of their issuance.
(2) Stock Dividends, Stock Distributions and Subdivisions.
-----------------------------------------------------
In the event the Corporation at any time or from time to time after the Series D
Original Issue Date shall declare or pay any dividend or make any other
distribution on the Common Stock payable in Common Stock, or effect a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then and in any such
event, Additional Shares of Common Stock shall be deemed to have been issued:
(a) in the case of any such dividend or distribution,
immediately after the close of business on the record date for
the determination of holders of any class of securities entitled
to receive such dividend or distribution; or
(b) in the case of any such subdivision, at the close
of business on the date immediately prior to the date upon which
such corporate action becomes effective.
If such record date shall have been fixed and such dividend shall not have
been paid on the date fixed therefor, the adjustment previously made in the
Conversion Price for such series of Preferred Stock which became effective on
such record date shall be canceled as of the close of business on such record
date, and thereafter the Conversion Price for such series of Preferred Stock
shall be adjusted pursuant to this subsection D.4(C) as of the time of actual
payment of such dividend.
(D) Adjustment of Conversion Price Upon Issuance of Additional Shares
-----------------------------------------------------------------
of Common Stock. In the event the Corporation shall issue Additional Shares of
- ---------------
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to subsection D.4(C), but excluding Additional Shares of Common Stock
issued pursuant to subsection D.4(C)(2), which event is dealt with in subsection
D.4(F) hereof), without consideration or for a consideration per share less than
the Conversion Price for a series of Preferred Stock in effect on the date of
and immediately prior to such issue, then and in such event, the Conversion
Price(s) for such series of Preferred Stock shall be reduced, concurrently with
such issue, to prices (calculated to the nearest cent) determined by multiplying
the Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price or the Series D Conversion Price, as the case may be, by a
fraction (x) the numerator of which shall be (1) the number of shares of Common
Stock outstanding immediately prior to such issue, plus (2) the number of shares
of Common Stock which the aggregate consideration received by the Corporation
for the total number of Additional Shares of Common Stock so issued would
purchase at the applicable Series A Conversion Price, Series B Conversion
<PAGE>
Price, Series C Conversion Price or Series D Conversion Price, as the case may
be, and (y) the denominator of which shall be (1) the number of shares of Common
Stock outstanding immediately prior to such issue plus (2) the number of such
Additional Shares of Common Stock so issued; provided that for the purposes of
this subsection D.4(D), all shares of Common Stock issuable upon exercise,
conversion or exchange of outstanding Options or Convertible Securities, as the
case may be, shall be deemed to be outstanding, and immediately after any
Additional Shares of Common Stock are deemed issued pursuant to subsection
D.4(C) above, such Additional Shares of Common Stock shall be deemed to be
outstanding, and provided further that the Conversion Price for such series of
Preferred Stock shall not be so reduced at such time if the amount of such
reduction would be an amount less than $0.01, but any such amount shall be
carried forward and reduction with respect thereto made at the time of and
together with any subsequent reduction which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.01 or more.
(E) Determination of Consideration. For purposes of this
------------------------------
subsection D.4, the consideration received by the Corporation for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(a) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends
and except for underwriting and similar commissions, compensation
or concessions paid or allowed in connection with such sale;
(b) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue,
as determined in good faith by the Board of Directors; and
(c) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as
provided in clauses (b) and (c) above, as determined in good
faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to subsection D.4(C)(1), relating to Options
and Convertible Securities, shall be determined by dividing
(a) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable
<PAGE>
to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of
such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities, by
(b) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(F) Adjustments for Subdivisions, Combinations or Consolidation of
--------------------------------------------------------------
Common Stock. In the event the outstanding shares of Common Stock shall be
- ------------
subdivided (by stock split or otherwise) into a greater number of shares of
Common Stock, the Conversion Price for a series of Preferred Stock then in
effect shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the Conversion Price for such series of
Preferred Stock then in effect shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(G) Adjustments for Other Distributions. In the event the Corporation
-----------------------------------
at any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
payable in securities of the Corporation other than shares of Common Stock and
other than as otherwise adjusted in this Section D.4, then and in each such
event, provision shall be made so that the holders of Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Corporation which
they would have received had their Preferred Stock been converted into Common
Stock on the date of such event and had they thereafter, during the period from
the date of such event to and including the date of conversion, retained such
securities receivable by them as aforesaid during such period, subject to all
other adjustments called for during such period under this Section D.4 with
respect to the rights of the holders of the Preferred Stock.
(H) Adjustments for Reclassification, Exchange and Substitution. If
-----------------------------------------------------------
the Common Stock issuable upon conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), the Conversion Price for such series of Preferred Stock then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Preferred Stock immediately before that change.
<PAGE>
(I) Reorganization, Mergers, Consolidations, or Sales of Assets.
-----------------------------------------------------------
Subject to Section B hereof, if at any time or from time to time there shall be
a capital reorganization of the Common Stock (other than a subdivision,
combination, reclassification, or exchange of shares provided for elsewhere in
this Section D) or a merger or consolidation of this Corporation with or into
another corporation, or the sale of all or substantially all of this
Corporation's properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation, or sale, provision shall be made so that
the holders of the Preferred Stock shall thereafter be entitled to receive upon
conversion of the Preferred Stock held by them, the number of shares of stock or
other securities or property of this Corporation, or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of Common Stock deliverable upon conversion would have been entitled upon
such capital reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section D with respect to the rights of the holders of the Preferred Stock
after the reorganization, merger, consolidation, or sale to the end that the
provisions of this Section D (including adjustment of the Conversion Price for
such series of Preferred Stock then in effect and the number of shares
purchasable upon conversion of the Preferred Stock) shall be applicable after
that event as nearly equivalent as may be practicable.
5. No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of this
Section D and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
6. Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series A Conversion Price, the Series B
Conversion Price, the Series C Conversion Price or the Series D Conversion
Price, as the case may be, pursuant to this Section D, the Corporation at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to each holder of such series of Preferred
Stock a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price for such series of Preferred Stock at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of such series
of Preferred Stock.
7. Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, the Corporation shall mail to each
holder of Preferred Stock at least ten (10) days prior to the date specified
herein, a notice specifying the date on which any such record is to be taken for
the purpose of such dividend or distribution.
<PAGE>
8. No Reissuance of Preferred Stock. No share or shares of Preferred
---------------------------------
Stock acquired by the Corporation by reason of redemption, purchase, conversion
or otherwise shall be reissued.
E. Redemption.
----------
1. If a Qualifying IPO has not occurred prior to January 3, 2000,
then during the period beginning on such date and ending January 4, 2003 (the
"Redemption Period"), to the extent that shares of Series A Preferred or Series
B Preferred have not been redeemed or converted prior to such date, the holders
of a majority of the Series A Preferred may request in writing that the
Corporation redeem shares of Preferred Stock at the Redemption Price(s)
specified in section E.3 below (a "Series A Redemption Request"). Upon receipt
of a Series A Redemption Request, the Corporation shall give prompt written
notice thereof to the holders of the Series B Preferred. Within 30 days of the
receipt of such notice, the holders of a majority of the Series B Preferred may
elect to join such Series A Redemption Request by written notice to the Company.
As soon as practicable after such 30 day period has expired, the Corporation
shall redeem shares of Preferred Stock in the following manner:
(A) First Series A Redemption Request. Upon the first Series A
---------------------------------
Redemption Request, if the holders of the Series B Preferred elect to join such
Series A Redemption Request, the Corporation shall redeem (i) 1/3 of the shares
of the Series A Preferred held by all holders as of such date; and (ii) 1/3 of
the shares of the Series B Preferred held by all holders as of such date, from
any source of funds legally available therefor.
(1) If the holders of the Series B Preferred do not elect to join
the first Series A Redemption Request, (i) the Corporation shall redeem all of
the shares of the Series A Preferred held by all holders as of such date from
any source of funds legally available therefor, and (ii) the right to request a
subsequent redemption of the Series B Preferred shall become exercisable by the
holders of a majority of the Series B Preferred (a "Series B Redemption
Request") in accordance with Section E.1(D) below.
(B) Second Series A Redemption Request. After a period of one year
----------------------------------
has elapsed from the first Series A Redemption Request, and upon a second Series
A Redemption Request, the Corporation shall redeem (i) 1/2 of the remaining
shares of the Series A Preferred held by all holders as of such date; and (ii)
if the holders of the Series B Preferred elect to join the second Series A
Redemption Request, 1/2 of the shares of the Series B Preferred held by all
holders as of such date, from any source of funds legally available therefor.
If the holders of the Series B Preferred do not elect to join the second Series
A Redemption Request, the Corporation shall redeem all of the remaining shares
of the Series A Preferred held by all holders as of such date from any source of
funds legally available therefor.
(C) Third Series A Redemption Request. After a period of one year has
---------------------------------
elapsed from the second Series A Redemption Request, and upon a third Series A
Redemption Request, the Corporation shall redeem (i) the remaining shares of the
Series A Preferred held by all
<PAGE>
holders as of such date; and (ii) if the holders of the Series B Preferred elect
to join the third Series A Redemption Request, the remaining shares of the
Series B Preferred held by all holders as of such date, from any source of funds
legally available therefor.
(D) Series B Redemption Request. The Series B Redemption Request
---------------------------
shall become exercisable by the holders of a majority of Series B Preferred
beginning six (6) months after the Series A Preferred has been redeemed pursuant
to Section E.1(a)(1)(i) above. Upon a Series B Redemption Request, the
Corporation shall redeem 1/2 of the shares of the Series B Preferred held by all
holders as of such date from any source of funds legally available therefor.
After a period of six (6) months has elapsed from the first Series B Redemption
Request, and upon a second Series B Redemption Request, the Corporation shall
redeem all of the remaining shares of the Series B Preferred held by all holders
as of such date from any source of funds legally available therefor.
(E) The Corporation shall have no obligation to redeem shares of
Preferred Stock after the expiration of the Redemption Period. The Corporation
shall have no obligation to redeem any shares of Series C Preferred or Series D
Preferred at any time.
2. The Corporation shall effect all redemption(s) pro rata among
the holders of the Series A Preferred and Series B Preferred based upon the
number of shares of such series then held by each holder.
3. The redemption price (the "Series A Redemption Price") for
each share of Series A Preferred repurchased shall be equal to $3.15 plus any
declared but unpaid dividends and a redemption premium equivalent to interest at
the rate of ten percent (10%) per annum from the Series A Original Issue Date,
compounded annually. The redemption price (the "Series B Redemption Price," and
along with the Series A Redemption Price, a "Redemption Price") for each share
of Series B Preferred repurchased shall be equal to $4.15 plus any declared but
unpaid dividends.
4. In the event insufficient funds are available to redeem all
shares of Series A Preferred or Series B Preferred to be redeemed pursuant to
any Series A or Series B Redemption Request, the available funds shall be
allocated as between the redemption of Series A Preferred and Series B Preferred
such that an equal fraction of the total outstanding shares of each series is
redeemed. After such allocation has occurred, the Corporation shall effect such
redemption(s) pro rata among the holders of each series based upon the number of
shares of such series then held by each holder.
F. Protective Provisions.
---------------------
1. Unless otherwise required by applicable law, so long as any shares
of Series A Preferred are outstanding, this Corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of the Series A
Preferred, voting as a class:
<PAGE>
(A) amend or repeal any provision of, or add any provision to, this
Corporation's Certificate of Incorporation if such action would adversely alter
or change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series A Preferred;
(B) authorize or issue any shares of any class or series of stock (or
reclassify any existing class or series of stock) or any securities convertible
into shares of any class or series of stock having any preference or priority as
to dividend, redemption, voting or conversion rights, liquidation preferences,
or otherwise, on a parity with or superior to any such preference or priority to
which the Series A Preferred is entitled hereunder;
(C) increase or decrease the authorized number of shares of Preferred
Stock or the number of shares of any series of Preferred Stock;
(D) effect any transaction or series of related transactions in which
more than 50% of the Corporation's voting power is transferred or any sale or
other conveyance of all or substantially all of the assets of the Corporation
and in which transaction or series of transactions the holders of Common Stock
would receive consideration at a price per share less than the Series A
Conversion Price in effect as of such date;
(E) declare or pay any dividend with respect to any shares of
Common Stock or Preferred Stock; or
(F) do any act or thing which would result in taxation of the
holders of Preferred Stock under Section 305 of the Internal Revenue Code of
1986, as amended.
2. Unless otherwise required by applicable law, so long as any
shares of Series B Preferred or Series C Preferred are outstanding, this
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least a majority of the then
outstanding shares of the Series B Preferred and Series C Preferred voting
together as a class:
(A) amend or repeal any provision of, or add any provision to,
this Corporation's Certificate of Incorporation if such action would adversely
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series B Preferred or Series C
Preferred;
(B) authorize or issue any shares of any class or series of stock
(or reclassify any existing class or series of stock) or any securities
convertible into shares of any class or series of stock having any preference or
priority as to dividend, redemption, voting or conversion rights, liquidation
preferences, or otherwise, on a parity with or superior to any such preference
or priority to which the Series B Preferred or Series C Preferred is entitled
hereunder;
(C) increase or decrease the authorized number of shares of
Preferred Stock or the number of shares of any series of Preferred Stock;
<PAGE>
(D) effect any transaction or series of related transactions in which
more than 50% of the Corporation's voting power is transferred or any sale or
other conveyance of all or substantially all of the assets of the Corporation
and in which transaction or series of transactions the holders of Common Stock
would receive consideration at a price per share less than the Series B
Conversion Price in effect as of such date;
(E) declare or pay any dividend with respect to any shares of
Common Stock or Preferred Stock; or
(F) do any act or thing which would result in taxation of the holders
of Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended.
3. Unless otherwise required by applicable law, so long as any
shares of Series D Preferred are outstanding, this Corporation shall not,
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least 2/3 of the then outstanding shares of the Series
D Preferred, voting as a class.
(A) amend or repeal any provision of, or add any provision to, this
Corporation's Certificate of Incorporation if such action would adversely alter
or change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series D Preferred;
(B) authorize or issue any shares of any class or series of stock (or
reclassify any existing class or series of stock) or any securities convertible
into shares of any class or series of stock having any preference or priority as
to dividend, redemption, voting or conversion rights, liquidation preferences,
or otherwise, on a parity with or superior to any such preference or priority to
which the Series D Preferred is entitled hereunder;
(C) increase or decrease the authorized number of shares of Preferred
Stock or the number of shares of any series of Preferred Stock;
(D) effect any transaction or series of related transactions in which
more than 50% of this Corporation's voting power is transferred or any sale or
other conveyance of all or substantially all of the assets of the Corporation
and in which transaction or series of transactions the holders of Common Stock
would receive consideration at a price per share less than the Series D
Conversion Price in effect as of such date;
(E) declare or pay any dividend with respect to any shares of Common
Stock or Preferred Stock; or
(F) do any act or thing which would result in taxation of the holders
of Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended."
FIFTH: The Corporation is to have perpetual existence.
<PAGE>
SIXTH: The election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
SEVENTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized to adopt, alter, amend or repeal the Bylaws of the Corporation.
EIGHTH: To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, no
director of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Corporation may indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer, employee or
agent of the Corporation or any predecessor of the Corporation or serves or
served at any other enterprise as a director, officer, employee or agent at the
request of the Corporation or any predecessor to the Corporation.
Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article, in respect of any
matter occurring, or any action or proceeding accruing or arising or that, but
for this Article, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
NINTH: Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the laws of the State of Delaware)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the Corporation.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by the laws of the State of Delaware, and all
rights conferred herein are granted subject to this reservation.
4. The foregoing amendment of the Certificate of Incorporation was duly
approved as of April 23, 1999 by a vote of the holder of the outstanding shares
of the Company's Common Stock in accordance with Section 242(b) of the Delaware
General Corporation Law.
<PAGE>
THE UNDERSIGNED, being the Chief Executive Officer of the Company,
does hereby declare and certify that this is his act and deed and the facts
herein stated are true, and accordingly, has hereunto set his hand this 14th day
of May, 1999.
SOFTWARE.COM, INC.
/s/ John L. MacFarlane,
______________________________
John L. MacFarlane,
Chief Executive Officer
Attest:
/s/ Craig Shelburne
___________________________________
Craig Shelburne, Secretary
<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SOFTWARE.COM, INC.
Software.com, Inc., a corporation organized and existing under the laws of
the State of Delaware, does hereby certify:
1. The name of the corporation is Software.com, Inc. The original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on February 17, 1999 and the Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
May 17, 1999.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the corporation's Certificate of
Incorporation as heretofore amended. The amendments and restatement herein set
forth have been duly approved by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of Delaware and by the
written consent of a majority of the stockholders of the corporation and a
majority of the holders of each class entitled to a class vote thereon in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of Delaware.
3. The text of the Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:
FIRST: The name of the corporation is Software.com, Inc. (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The Corporation is authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of all classes of stock which the Corporation has authority to issue is
one hundred and fifty-five million (155,000,000), consisting of one hundred and
fifty million (150,000,000) shares of Common Stock, $0.001 par value per share
(the "Common Stock"), and five million (5,000,000) shares of Preferred Stock,
$0.001 par value per share (the "Preferred Stock").
<PAGE>
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized subject to limitations prescribed by
law, to fix by resolution or resolutions the designations, powers, preferences
and rights, and the qualifications, limitations or restrictions thereof, of each
such series of Preferred Stock, including without limitation authority to fix by
resolution or resolutions, the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and liquidation preferences of any
wholly unissued series of Preferred Stock, and the number of shares constituting
any such series and the designation thereof, or any of the foregoing.
The Board of Directors is further authorized to increase (but not above the
total number of authorized shares of the class) or decrease (but not below the
number of shares of any such series then outstanding) the number of shares of
any series, the number of which was fixed by it, subsequent to the issue of
shares of such series then outstanding, subject to the powers, preferences and
rights, and the qualifications, limitations and restrictions thereof stated in
the resolution of the Board of Directors originally fixing the number of shares
of such series. If the number of shares of any series is so decreased, then the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
SEVENTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized to adopt, alter, amend or repeal the Bylaws of the Corporation.
EIGHTH: To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, no
director of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Corporation may indemnify to the fullest extent permitted by law any
person made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he,
his testator or intestate is or was a director, officer, employee or agent of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer, employee or agent at the request of the
Corporation or any predecessor to the Corporation.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article, in respect of any matter
occurring, or any action or proceeding accruing or arising or that, but for this
Article, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
-2-
<PAGE>
NINTH: Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the laws of the State of Delaware)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the Corporation.
TENTH: The number of directors which constitute the entire Board of
Directors of the Corporation shall be as specified in the Bylaws of the
Corporation. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term of
which they are elected and until their successors have been duly elected and
qualified; except that if any such election shall not be so held, such election
shall take place at a stockholders' meeting called and held in accordance with
the General Corporation Law of Delaware.
Effective as of the date of the filing of this Amended and Restated
Certificate of Incorporation, (the "Filing Date"), the directors of the
Corporation shall be divided into three classes as nearly equal in size as is
practicable, hereby designated Class I, Class II and Class III. The term of
office of the initial Class I directors shall expire at the first annual meeting
of the stockholders following the Filing Date, the term of office of the initial
Class II directors shall expire at the second annual meeting of the stockholders
following the Filing Date and the term of office of the initial Class III
directors shall expire at the third annual meeting of the stockholders following
the Filing Date. At each annual meeting of stockholders, commencing with the
first regularly-scheduled annual meeting of stockholders following the Filing
Date, each of the successors elected to replace the directors of a Class whose
term shall have expired at such annual meeting shall be elected to hold office
until the third annual meeting next succeeding his or her election and until his
or her respective successor shall have been duly elected and qualified.
If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable,
provided that no decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Any director may be removed from office by the stockholders of the
corporation only for cause.
Vacancies occurring on the Board of Directors for any reason and newly
created directorships resulting from an increase in the authorized number of
directors may be filled only by vote of a majority of the remaining members of
the Board of Directors, although less than a quorum, at any meeting of the Board
of Directors. A person so elected by the Board of Directors to fill a vacancy
or newly created directorship shall hold office until the next election of the
Class for which such director shall have been chosen and until his or her
successor shall have been duly elected and qualified.
ELEVENTH: Stockholders of the corporation may not take action by written
consent in lieu of a meeting but must take any actions at a duly called annual
or special meeting.
-3-
<PAGE>
TWELFTH: Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of the capital stock required by law or this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
two-thirds (2/3) of the combined voting power of all of the then-outstanding
shares of the corporation entitled to vote shall be required to alter, amend or
repeal Articles SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH and TWELTH.
THIRTEENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by the laws of the State of Delaware, and all
rights conferred herein are granted subject to this reservation.
4. The foregoing amendment of the Certificate of Incorporation was duly
approved as of _______________, 1999 by a vote of the holders of a majority of
the outstanding shares of the Corporation's Series A Preferred Stock voting as a
separate series, a majority of the outstanding shares of the Corporation's
Series B Preferred Stock voting as a separate series, a majority of the
outstanding shares of the Corporation's Series C Preferred Stock voting as a
separate series, a majority of the outstanding shares of the Corporation's
Series D Preferred Stock voting as a separate series, a majority of the
outstanding shares of the Corporation's Preferred Stock voting as a separate
class, and a majority of the outstanding shares of the Corporation's Common
Stock in accordance with Section 242(b) of the Delaware General Corporation Law.
-4-
<PAGE>
THE UNDERSIGNED, being the Chief Executive Officer of the Company, does
hereby declare and certify that this is his act and deed and the facts herein
stated are true, and accordingly, has hereunto set his hand this ____ day of
______, 1999.
SOFTWARE.COM, INC.
--------------------------------
John L. MacFarlane,
Chief Executive Officer
Attest:
- -------------------------------
Craig Shelburne, Secretary
-5-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
SOFTWARE.COM, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I CORPORATE OFFICES................................................... 1
1.1 REGISTERED OFFICE............................................. 1
-----------------
1.2 OTHER OFFICES................................................. 1
-------------
ARTICLE II MEETINGS OF STOCKHOLDERS........................................... 1
2.1 PLACE OF MEETINGS............................................. 1
-----------------
2.2 ANNUAL MEETING................................................ 1
--------------
2.3 SPECIAL MEETING............................................... 3
---------------
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 4
--------------------------------
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 4
--------------------------------------------
2.6 QUORUM........................................................ 4
------
2.7 ADJOURNED MEETING; NOTICE..................................... 4
-------------------------
2.8 VOTING........................................................ 5
------
2.9 WAIVER OF NOTICE.............................................. 5
----------------
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....... 5
-------------------------------------------------------
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS... 6
-----------------------------------------------------------
2.12 PROXIES....................................................... 6
-------
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 7
-------------------------------------
ARTICLE III DIRECTORS......................................................... 7
3.1 POWERS........................................................ 7
------
3.2 NUMBER OF DIRECTORS........................................... 7
-------------------
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS....... 7
-------------------------------------------------------
3.4 RESIGNATION AND VACANCIES..................................... 8
-------------------------
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 9
----------------------------------------
3.6 FIRST MEETINGS................................................ 9
--------------
3.7 REGULAR MEETINGS.............................................. 9
----------------
3.8 SPECIAL MEETINGS; NOTICE...................................... 9
------------------------
3.9 QUORUM........................................................ 10
------
3.10 WAIVER OF NOTICE.............................................. 10
----------------
3.11 ADJOURNED MEETING; NOTICE..................................... 10
-------------------------
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 11
-------------------------------------------------
3.13 FEES AND COMPENSATION OF DIRECTORS............................ 11
----------------------------------
3.14 APPROVAL OF LOANS TO OFFICERS................................. 11
-----------------------------
ARTICLE IV COMMITTEES......................................................... 11
4.1 COMMITTEES OF DIRECTORS....................................... 11
-----------------------
4.2 MEETINGS AND ACTION OF COMMITTEES............................. 12
---------------------------------
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE V OFFICERS............................................................ 12
5.1 OFFICERS...................................................... 12
--------
5.2 ELECTION OF OFFICERS.......................................... 13
--------------------
5.3 SUBORDINATE OFFICERS.......................................... 13
--------------------
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................... 13
-----------------------------------
5.5 VACANCIES IN OFFICES.......................................... 13
--------------------
5.6 CHAIRMAN OF THE BOARD......................................... 13
---------------------
5.7 CHIEF EXECUTIVE OFFICER....................................... 14
-----------------------
5.8 PRESIDENT..................................................... 14
---------
5.9 VICE PRESIDENTS............................................... 14
---------------
5.10 SECRETARY..................................................... 14
---------
5.11 CHIEF FINANCIAL OFFICER....................................... 15
-----------------------
5.12 ASSISTANT SECRETARY........................................... 15
-------------------
5.13 AUTHORITY AND DUTIES OF OFFICERS.............................. 15
--------------------------------
ARTICLE VI INDEMNITY.......................................................... 16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... 16
-----------------------------------------
6.2 INDEMNIFICATION OF OTHERS..................................... 16
-------------------------
6.3 INSURANCE..................................................... 16
---------
6.4 EXPENSES...................................................... 17
--------
6.5 SURVIVAL OF RIGHTS............................................ 18
------------------
6.6 AMENDMENTS.................................................... 18
----------
ARTICLE VII RECORDS AND REPORTS............................................... 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS......................... 18
-------------------------------------
7.2 INSPECTION BY DIRECTORS....................................... 19
-----------------------
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................ 19
----------------------------------------------
ARTICLE VIII GENERAL MATTERS.................................................. 19
8.1 CHECKS........................................................ 19
------
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.............. 20
------------------------------------------------
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................ 20
--------------------------------------------------------------
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................... 20
-----------------------------------
8.5 LOST CERTIFICATES............................................. 21
-----------------
8.6 CONSTRUCTION; DEFINITIONS..................................... 21
-------------------------
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE IX AMENDMENTS......................................................... 21
ARTICLE X DISSOLUTION......................................................... 22
ARTICLE XI CUSTODIAN.......................................................... 23
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES................... 23
-------------------------------------------
11.2 DUTIES OF CUSTODIAN........................................... 23
-------------------
Adoption by Incorporator...................................................... 24
Certificate by Secretary of Adoption by Incorporator.......................... 24
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
SOFTWARE.COM, INC.
------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Wednesday of May in each year at 10 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting directors shall be elected and any
other proper business may be transacted.
<PAGE>
(a) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the board of directors, (B) otherwise properly brought before the meeting by
or at the direction of the board of directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given notice
thereof in writing to the secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days in advance of the date specified in the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received not later than the close of business on the later of one hundred
twenty (120) calendar days in advance of such annual meeting or ten (10)
calendar days following the date on which public announcement of the date of the
meeting is first made. A stockholder's notice to the secretary shall set forth
as to each matter the stockholder proposes to bring before the annual meeting:
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, (iii) the class and number of shares of the
corporation which are beneficially owned by the stockholder, (iv) any material
interest of the stockholder in such business, and (v) any other information that
is required to be provided by the stockholder pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at any annual meeting except in accordance with
the procedures set forth in this paragraph (a). The chairman of the annual
meeting shall, if the facts warrant, determine and declare at the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this paragraph (a), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(b) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (b) shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the corporation
may be made at a meeting of stockholders by or at the direction of the board of
directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (b). Such nominations, other than those made by or at
the direction of the board of directors, shall be made pursuant to timely notice
in writing to the secretary of the corporation in accordance with the provisions
of paragraph (a) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each
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person, if any, whom the stockholder proposes to nominate for election or re-
election as a director: (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the 1934 Act (including without limitation such person's
written consent to being named in the proxy statement, if any, as a nominee and
to serving as a director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (a) of
this Section 2.2. At the request of the board of directors, any person nominated
by a stockholder for election as a director shall furnish to the secretary of
the corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph (b). The chairman of the meeting
shall, if the facts warrants, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called, at any time for any
purpose or purposes by the board of directors, or by the chairman of the board,
or by the chief executive officer, or by the president, or by one or more
stockholders holding shares in the aggregate entitled to cast not less than
fifty-one percent (51%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the chief
executive officer, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified is such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of these bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time is not less than
ten (10) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after receipt of the request, then
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of the stockholders called by action
of the board of directors may be held.
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2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
Except as set forth in Section 2.3, all notices of meetings with
stockholders shall be in writing and shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder entitled to
vote at such meeting. The notice shall specify the place, date, and hour of the
meeting and (i) in the case of a special meeting, the purpose or purposes for
which the meeting is called (no business other than that specified in the notice
may be transacted) or (ii) in the case of the annual meeting, those matters
which the board of directors, at the time of giving the notice, intends to
present for action by the stockholders (but any matter properly brought before
the meeting may be presented at the meeting for such action). The notice of any
meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
The stockholders present at a duly called or held meeting at which a quorum
is present may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
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2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting in
accordance with the provisions of Sections 2.4 and 2.5 of these bylaws.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgers and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action
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which is consented to is such as would have required the filing of a certificate
under any section of the General Corporation Law of Delaware if such action had
been voted on by stockholders at a meeting thereof, then the certificate filed
under such section shall state, in lieu of any statement required by such
section concerning any vote of stockholders, that written notice and written
consent have been given as provided in Section 228 of the General Corporation
Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face
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that it is irrevocable shall be governed by the provisions of Section 212(c) of
the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be seven (7). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors hold office
until expiration of the term for which elected. Directors need not be
stockholders unless so required by the certificate of
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incorporation or these bylaws, wherein other qualifications for directors may be
prescribed. Each director, including a director elected to fill a vacancy, shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
(a) Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office as
provided in this section in the filling of other vacancies.
(b) Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of
the stockholders having the right to vote as a single class may
be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and
newly created directorships of such class or classes or series
may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole
remaining director so elected.
(c) If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
(d) If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors
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then in office as aforesaid, which election shall be governed by the provisions
of Section 211 of the General Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the chief executive officer,
the president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered to each
director personally or by telephone (including a voice messaging system or other
system or technology designed to record and communicate messages), telegram,
facsimile, electronic mail or other electronic means. Alternatively, notice may
be sent by first-class mail, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone (including a voice messaging system or
other system or technology designed to record and communicate messages),
telegram, facsimile,
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electronic mail or other electronic means, it shall be delivered at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
A majority of the directors present, whether or not constituting a quorum,
may adjourn the meeting to another time and place.
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
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3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors. This Section 3.13 shall not be construed to preclude any director
from serving the corporation in any other capacity as an officer, agent,
employee or otherwise and receiving compensation for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of two
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of
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directors or in the bylaws of the corporation, shall have and may exercise all
the powers and authority of the board of directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a
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chairman of the board, a chief executive officer, one or more assistant vice
presidents, assistant secretaries, assistant treasurers, and any such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 of these bylaws, shall be
chosen by the board of directors, subject to the rights, if any, of an officer
under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board (if there be such an officer appointed) shall,
when present, preside at all meetings of the board of directors and shall
perform all the duties commonly incident to that office. The chairman of the
board shall have authority to execute in the name of the corporation bonds,
contracts, deeds, leases and other written instruments to be executed by the
corporation
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<PAGE>
(except where by law the signature of the president is required), and shall
perform such other duties as the board of directors may from time to time
determine.
5.7 CHIEF EXECUTIVE OFFICER
-----------------------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the chief
executive officer of the corporation shall, subject to the control of the board
of directors, have general supervision, direction, and control of the business
and the officers of the corporation. He shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the chief executive officer of a
corporation, and shall have such other powers and duties as may be prescribed by
the board of directors or these bylaws.
5.8 PRESIDENT
---------
The president of the corporation shall exercise and perform such powers and
duties as may from time to time be assigned to him by the board of directors or
as may be prescribed by these bylaws. In the absence of the chief executive
officer, he shall preside at all meetings of the stockholders and, in the
absence or nonexistence of a chairman of the board or the chief executive
officer, at all meetings of the board of directors.
5.9 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.10 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date
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<PAGE>
of certificates evidencing such shares, and the number and date of cancellation
of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall also be the treasurer of the corporation
and shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings, and shares.
The books of account shall at all reasonable times be open to inspection by any
director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as treasurer and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or these bylaws.
5.12 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
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<PAGE>
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
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<PAGE>
6.4 EXPENSES
--------
The corporation shall advance to any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, prior to the final disposition of the proceeding, promptly
following request therefor, all expenses incurred by any director or officer in
connection with such proceeding, upon receipt of an undertaking by or on behalf
of such person to repay said amounts if it should be determined ultimately that
such person is not entitled to be indemnified under this bylaw or otherwise;
provided, however, that the corporation shall not be required to advance
expenses to any director or officer in connection with any proceeding (or part
thereof) initiated by such person unless the proceeding was authorized in
advance by the board of directors of the corporation.
The corporation may advance to any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was an employee or agent (other than
directors or officers) of the corporation prior to the final disposition of the
proceeding, promptly following request therefor, all expenses incurred by any
employee or agent (other than directors or officers) in connection with such
proceeding, upon receipt of an undertaking by or on behalf of such person to
repay said amounts if it should be determined ultimately that such person is not
entitled to be indemnified under this bylaw or otherwise; provided, however,
that the corporation shall not advance expenses to any employee or agent (other
than directors or officers) in connection with any proceeding (or part thereof)
initiated by such person unless the proceeding was authorized in advance by the
board of directors of the corporation.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 6.5, no advance shall be made by the corporation to an employee, agent
or officer of the corporation (except by reason of the fact that such person is
or was a director of the corporation in which event this paragraph shall not
apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
6.5 NON-EXCLUSIVITY OF RIGHTS
-------------------------
The rights conferred on any person by this bylaw shall not be exclusive of
any other right which such person may have or hereafter acquire under any
statute, provision of the certificate of
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<PAGE>
incorporation, bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the General Corporation Law of Delaware.
6.5 SURVIVAL OF RIGHTS
------------------
The rights conferred on any person by this bylaw shall continue as to a
person who has ceased to be a director, officer, employee or other agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
6.6 AMENDMENTS
----------
Any repeal or modification of this bylaw shall only be prospective and
shall not affect the rights under this bylaw in effect at the time of the
alleged occurrence of any action or omission to act that is the cause of any
proceeding against any agent of the corporation.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder
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<PAGE>
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, chief executive officer, the president, any vice
president, the chief financial officer, the secretary or assistant secretary of
this corporation, or any other person authorized by the board of directors or
the president or a vice president, is authorized to vote, represent, and
exercise on behalf of this corporation all rights incident to any and all shares
of any other corporation or corporations standing in the name of this
corporation. The authority granted herein may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
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<PAGE>
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General
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<PAGE>
Corporation Law of Delaware, in lieu of the foregoing requirements there may be
set forth on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
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ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
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ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the stockholders are
so divided that they have failed to elect successors to directors whose terms
have expired or would have expired upon qualification of their successors; or
(ii) the business of the corporation is suffering or is threatened with
irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within a
reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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EXHIBIT 10.1
SOFTWARE.COM, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
_________________, 1999 by and between Software.com, Inc., a Delaware
corporation (the "Company"), and __________________________________,
("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in connection with the Company's reincorporation, the Company and
Indemnitee desire to continue to have in place the additional protection
provided by an indemnification agreement to provide indemnification and
advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) (the "Exchange Act"), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the
<PAGE>
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing more than 50% of the
total voting power represented by the Company's then outstanding Voting
Securities (as defined below), (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.
(b) "Claim" shall mean with respect to a Covered Event (as defined
below): any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing, inquiry or
investigation that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other.
(c) References to the "Company" shall include, in addition to
Software.com, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Software.com, Inc.
(or any of its wholly-owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
2
<PAGE>
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld), actually and reasonably incurred,
of any Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of
Section 2(d), any person or body appointed by the Board of Directors in
accordance with applicable law to review the Company's obligations hereunder and
under applicable law, which may include a member or members of the Company's
Board of Directors, Independent Legal Counsel or any other person or body not a
party to the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. Indemnification.
---------------
3
<PAGE>
(a) Indemnification of Expenses. Subject to the provisions of
---------------------------
Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the
fullest extent permitted by law if Indemnitee was or is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, any Claim (whether by reason of or arising in
part out of a Covered Event), including all interest, assessments and other
charges paid or payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid in indemnifying Indemnitee; provided, however, that if
-------- -------
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee is entitled to
be indemnified hereunder under applicable law, any determination made by any
Reviewing Party that Indemnitee is not entitled to be indemnified hereunder
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any Expenses theretofore paid in indemnifying
Indemnitee until a final judicial determination is made with respect thereto (as
to which all rights of appeal therefrom have been exhausted or lapsed).
Indemnitee's obligation to reimburse the Company for any Expenses shall be
unsecured and no interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 14, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has
-----------------------------------------------
not been a Change in Control, any Reviewing Party shall be selected by the Board
of Directors, and if there has been such a Change in Control (other than a
Change in Control which has been approved by a majority of the Company's Board
of Directors who were directors immediately prior to such Change in Control),
any Reviewing Party with respect to all matters thereafter arising concerning
the rights of Indemnitee to indemnification of Expenses under this Agreement or
any other agreement or under the Company's certificate of incorporation or
bylaws as now or hereafter in effect, or under any other applicable law, if
desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee
and approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees
4
<PAGE>
of the Independent Legal Counsel referred to above and to indemnify fully such
counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto. Notwithstanding any other provision of this
Agreement, the Company shall not be required to pay Expenses of more than one
Independent Legal Counsel in connection with all matters concerning a single
Indemnitee, and such Independent Legal Counsel shall be the Independent Legal
Counsel for any or all other Indemnitees unless (i) the employment of separate
counsel by one or more Indemnitees has been previously authorized by the Company
in writing, or (ii) an Indemnitee shall have provided to the Company a written
statement that such Indemnitee has reasonably concluded that there may be a
conflict of interest between such Indemnitee and the other Indemnitees with
respect to the matters arising under this Agreement.
(e) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. Expense Advances.
----------------
(a) Obligation to Make Expense Advances. The Company shall make
-----------------------------------
Expense Advances to Indemnitee upon receipt of a written undertaking by or on
behalf of the Indemnitee to repay such amounts if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified therefore by
the Company.
(b) Form of Undertaking. Any obligation to repay any Expense
-------------------
Advances hereunder pursuant to a written undertaking by the Indemnitee shall be
unsecured and no interest shall be charged thereon.
(c) Determination of Reasonable Expense Advances. The parties
--------------------------------------------
agree that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
(a) Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than forty-five (45) business
days after such written demand by Indemnitee is presented to the Company.
5
<PAGE>
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that Indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by this
Agreement or applicable law. In addition, neither the failure of any Reviewing
Party to have made a determination as to whether Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
determination by any Reviewing Party that Indemnitee has not met such standard
of conduct or did not have such belief, prior to the commencement of legal
proceedings by Indemnitee to secure a judicial determination that Indemnitee
should be indemnified under this Agreement or applicable law, shall be a defense
to Indemnitee's claim or create a presumption that Indemnitee has not met any
particular standard of conduct or did not have any particular belief. In
connection with any determination by any Reviewing Party or otherwise as to
whether the Indemnitee is entitled to be indemnified hereunder the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to provide indemnification for or make any Expense Advances
with respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently retained by
or on behalf of Indemnitee with respect to the same Claim; provided, however,
that, (i) Indemnitee shall have the right to employ Indemnitee's separate
counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment
of separate counsel by Indemnitee has been previously authorized by the Company,
(B) Indemnitee shall have
6
<PAGE>
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not continue to retain such counsel to defend such Claim, then the fees
and expenses of Indemnitee's separate counsel shall be Expenses for which
Indemnitee may receive indemnification or Expense Advances hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's certificate of incorporation, the Company's bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's certificate of incorporation, its
bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's certificate of
incorporation, bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
7
<PAGE>
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement, the
----------
Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
----------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law, provided, however, that notwithstanding any limitation set forth in this
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's certificate of incorporation or bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, or insurance recovery, as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of
8
<PAGE>
Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar
successor statute; provided, however, that notwithstanding any limitation set
forth in this Section 10(d) regarding the Company's obligation to provide
indemnification, Indemnitee shall be entitled under Section 3 to receive Expense
Advances hereunder with respect to any such Claim unless and until a court
having jurisdiction over the Claim shall have made a final judicial
determination (as to which all rights of appeal therefrom have been exhausted or
lapsed) that Indemnitee has violated said statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until such final judicial determination is made,
Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action.
9
<PAGE>
14. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts of laws.
18. Subrogation. In the event of payment under this Agreement, the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the entire
--------------------------------
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
10
<PAGE>
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
SOFTWARE.COM, INC.
By: ________________________
Print Name:_______________________
Title: _______________________
Address: 525 Anacapa Street
Santa Barbara, CA 93101
AGREED TO AND ACCEPTED
INDEMNITEE:
__________________________________
Name:
Title:
Address:__________________________
__________________________________
__________________________________
12
<PAGE>
EXHIBIT 10.2
SOFTWARE.COM, INC.
1995 STOCK PLAN
(as amended and restated effective as of May 4, 1999)
1. Purposes of the Plan. The purposes of this 1995 Stock Plan, as amended,
--------------------
are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board in
---------
accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Software.com, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(m) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding Options
-----------------------
are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or Stock
--------------
Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock Purchase
--------
Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1995 Stock Plan, as amended.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant to a
----------------
grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(bb) "Section 16(b) " means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in accordance
-----
with Section 13 of the Plan.
-3-
<PAGE>
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 10,500,000 Shares, plus an annual increase to be added on July
1 of each year beginning in 2000, equal to a lesser of (i) 5,000,000 shares,
(ii) 4% of the outstanding shares on such date or (iii) a lesser amount
determined by the Board. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
-4-
<PAGE>
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable;
-5-
<PAGE>
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 1,500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 1,500,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For
-6-
<PAGE>
this purpose, if the exercise price of an Option is reduced, the transaction
will be treated as a cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
-7-
<PAGE>
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock,
-8-
<PAGE>
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such Shares promptly after the Option is exercised. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
-------------------------------------------------
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
-----------------
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
-9-
<PAGE>
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by
-------------------------
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and
-10-
<PAGE>
Stock Purchase Right, and the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right, as well as
the price per share of Common Stock covered by each such outstanding Option or
Stock Purchase Right, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. If, in such
event, the Option or right is not assumed or substituted, the Option or right
shall terminate as of the date of the closing of the merger. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or
-11-
<PAGE>
Stock Purchase Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
--------------------------
an Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
-12-
<PAGE>
18. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
EXHIBIT 10.3
SOFTWARE.COM, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Software.com, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Software.com, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
------------
earnings, sales commissions, incentive compensation, incentive payments,
bonuses, shift premium, payments for overtime and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has
---------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
--------
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each
-------------
Purchase Period.
<PAGE>
(j) "Fair Market Value" shall mean, as of any date, the value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock prior to the date of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable;
(iii)In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board; or
(iv) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before April 30,
2001. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month
---------------
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first Purchase Period of any Offering Period shall
commence on the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of
--------------
a share of Common Stock on the Enrollment Date or on the Exercise Date,
whichever is lower; provided however, that the Purchase Price may be adjusted by
the Board pursuant to Section 20.
-2-
<PAGE>
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign,
----------
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
-----------
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a
given Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 of each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
April 30, 2001. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced [at
least five (5) days] prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
---------
prior to the applicable Enrollment Date.
-3-
<PAGE>
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the rate
of his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each
-4-
<PAGE>
Exercise Date during such Offering Period (at the applicable Purchase Price) up
to a number of shares of the Company's Common Stock determined by dividing such
Employee's payroll deductions accumulated prior to such Exercise Date and
retained in the Participant's account as of the Exercise Date by the applicable
Purchase Price; provided that in no event shall an Employee be permitted to
purchase during each Purchase Period more than 10,000 shares of the Company's
Common Stock (subject to any adjustment pursuant to Section 19), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12 hereof. The Board may, for future Offering Periods,
increase or decrease, in its absolute discretion, the maximum number of shares
of the Company's Common Stock an Employee may purchase during each Purchase
Period of such Offering Period. Exercise of the option shall occur as provided
in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The option shall expire on the last day of the Offering Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. Any money left over in a participant's account after the Exercise Date
shall be returned to the participant. During a participant's lifetime, a
participant's option to purchase shares hereunder is exercisable only by him or
her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on which
--------
a purchase of shares occurs, the Company shall, in its discretion, either (i)
arrange the delivery to each participant,
-5-
<PAGE>
as appropriate, of a certificate representing the shares purchased upon exercise
of his or her option, or (ii) credit the shares purchased to an account for the
participant's benefit with a brokerage firm selected by the Board to hold the
shares in street name.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
---------
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason,
he or she shall be deemed to have elected to withdraw from the Plan and the
payroll deductions credited to such participant's account during the Offering
Period but not yet used to exercise the option shall be returned to such
participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 15 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 1,000,000 shares, plus an annual increase to be added on the first day
of the Company's fiscal year beginning in 2001 equal to the lesser of (i)
500,000 shares, (ii) 2% of the outstanding shares on such date, or (iii) a
lesser amount determined by the Board
-6-
<PAGE>
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
-7-
<PAGE>
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action
-------------------------
by the shareholders of the Company, the Reserves, the maximum number of shares
each participant may purchase each Purchase Period (pursuant to Section 7), as
well as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of
--------------------
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, any
Purchase Periods then in progress shall be shortened by setting a new Exercise
Date (the "New Exercise Date") and any Offering Periods then in progress shall
end on the New Exercise Date. The New Exercise Date shall be before the date of
the Company's proposed sale or merger. The Board shall notify each participant
in writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised
-8-
<PAGE>
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Offering Period or the
Plan is in the best interests of the Company and its shareholders. Except as
provided in Section 19 and this Section 20 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant. To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law, regulation or
stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing
operation of the Plan may result in unfavorable financial accounting
consequences, the Board may, in its discretion and, to the extent necessary or
desirable, modify or amend the Plan to reduce or eliminate such accounting
consequence including, but not limited to:
(i) altering the Purchase Price for any Offering
Period including an Offering Period underway at the time of the change in
Purchase Price;
(ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
-9-
<PAGE>
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
SOFTWARE.COM, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the Software.com, Inc.
1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me
<PAGE>
over the price which I paid for the shares. I hereby agree to notify the
----------------------------
Company in writing within 30 days after the date of any disposition of my
-------------------------------------------------------------------------
shares and I will make adequate provision for Federal, state or other tax
-------------------------------------------------------------------------
withholding obligations, if any, which arise upon the disposition of the
------------------------------------------------------------------------
Common Stock. The Company may, but will not be obligated to, withhold from
------------
my compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year and 1-year holding periods, I understand
that I will be treated for federal income tax purposes as having received
income only at the time of such disposition, and that such income will be
taxed as ordinary income only to the extent of an amount equal to the
lesser of (1) the excess of the fair market value of the shares at the time
of such disposition over the purchase price which I paid for the shares, or
(2) 15% of the fair market value of the shares on the first day of the
Offering Period. The remainder of the gain, if any, recognized on such
disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)______________________________________________
(First) (Middle) (Last)
__________________________________ ___________________________________
Relationship
___________________________________
(Address)
-2-
<PAGE>
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ___________________________________
Signature of Employee
___________________________________
Spouse's Signature
(If beneficiary other than spouse)
-3-
<PAGE>
EXHIBIT B
---------
SOFTWARE.COM, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Software.com,
Inc. 1999 Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:____________________________
<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 report dated April
12, 1999, in the Registration Statement on Form S-1 (No. 333-76263) and related
Prospectus of Software.com, Inc. dated May 21, 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
May 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,366
<SECURITIES> 0
<RECEIVABLES> 8,645
<ALLOWANCES> 788
<INVENTORY> 0
<CURRENT-ASSETS> 13,853
<PP&E> 6,952
<DEPRECIATION> 3,846
<TOTAL-ASSETS> 17,243
<CURRENT-LIABILITIES> 15,415
<BONDS> 40
13,580
6,848
<COMMON> 6,824
<OTHER-SE> 1,343
<TOTAL-LIABILITY-AND-EQUITY> 17,243
<SALES> 0
<TOTAL-REVENUES> 8,071
<CGS> 0
<TOTAL-COSTS> 2,420
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 308
<INTEREST-EXPENSE> 205
<INCOME-PRETAX> (1,985)
<INCOME-TAX> 68
<INCOME-CONTINUING> (2,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,053)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
