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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-26379
SOFTWARE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0392373
<CAPTION>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
525 Anacapa Street,
Santa Barbara, CA 93101
(Address of principal executive office)
(805) 882-2470
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting-stock held by non-affiliates of the
registrant, based upon the closing sale price of its common stock on March 21,
2000 as reported on The Nasdaq National Market, was approximately
$4,050,072,806. Shares of common stock held by each named executive officer
and director and by each entity that owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 21, 2000, the registrant had outstanding 43,964,627 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form 10-K
to the extent stated herein certain sections of its definitive Proxy Statement
for its 2000 Annual Meeting of Stockholders to be held on June 2, 2000.
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PART I
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify such forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements. Such risks
and uncertainties include those set forth in Part II, Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations,
under the subheading "Additional Risk Factors that Could Affect Operating
Results and Market Price of Stock." Unless required by law, we undertake no
obligation to update publicly any forward-looking statements.
Item 1. Business
Overview
Software.com develops and markets infrastructure applications for the
Internet based on open, Internet standards and protocols. We design these
applications, which we refer to as Internet infrastructure applications, to
enable service providers to transition to the Internet as the technology
foundation for worldwide communications and services. Our applications are
designed exclusively for the service provider market--traditional
telecommunications carriers; Internet service providers or ISPs and
wholesalers; cable-based, Internet access providers; application service
providers; competitive local exchange carriers; Internet destination sites or
portals; and wireless telephony carriers. We believe that a fundamental
component of the success and timing of the transition to an Internet-based
communications structure will be enabling and empowering those service
providers who possess the vision, experience, infrastructure and economies of
scale to bring next-generation communications and services to the consumer and
business mass-markets. There is significant and increasing competition for
users of these new services, especially with the expansion of the wireless
market. Therefore, we believe successful service providers must utilize
Internet infrastructure applications that have the ability to perform at
increasingly high capacities, or scale, and that have the flexibility to unite
both traditional and next-generation communication devices within a common
architecture in a cost-effective manner.
Software.com's business is focused on equipping service providers with the
highly scalable Internet infrastructure applications that enable them to offer
the most competitive, next-generation communication capabilities and services
to millions of subscribers. To accomplish this, we provide our customers with
scalable, high-performance products, as well as a broad range of consulting
and customer support services that complement these product offerings. Since
the company's founding in 1993, our vision has remained the same--supplying
Internet standards-based service provider solutions.
In the race to build user bases, service providers increasingly focus on
providing applications and services that help attract and retain customers.
Our initial Internet infrastructure applications have been designed to provide
service providers with a common platform for multiple messaging services.
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. The growth in the use of Internet email has also
attracted businesses, as email becomes a routine method of communicating among
employees and with customers, vendors, and partners. 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, wireless messaging, and new
types of unified communications services such as integrated email, faxmail and
voicemail.
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. 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
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to accommodate hundreds of thousands, or even millions, of users and the
rapidly increasing number of messages being sent by their larger user bases.
Most service providers, however, have neither the products and services in
place nor the existing internal technical and development capabilities to
address this enormous growth.
Our service provider customers deploy Software.com's scalable, high-
performance Internet infrastructure 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 in the world, including those of AT&T WorldNet(R)
Service, Excite@Home, GTE Internetworking Services, Sprint PCS and Telecom
Italia Net. As of December 31, 1999, we had licensed approximately 75 million
seats and we estimate that over 50 million of these seats had been activated.
We combine our infrastructure products and services to create advanced
solutions that provide several benefits to service providers.
Our products are designed to easily scale and enable a service provider to
offer an increasing array of services to a rapidly-growing number of
subscribers. We design our products to be highly available, meaning that a
user can access the service when needed, as well as highly reliable, meaning
that the users do not lose data that is sent or received. In addition, our
technology enables service providers to create, manage, and host multiple
offerings on the same infrastructure platform. A service provider can
therefore easily tailor feature sets to meet the different and evolving needs
of individual segments of its subscriber base. 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.
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.
Our goal is to be the leading provider of Internet infrastructure
applications designed for service providers. To this end, we intend to
continue our exclusive focus on the service provider market. We believe that
our exclusive focus on service providers enables us to better identify and
offer the feature sets and attributes that are required for our products to be
successful in the service provider marketplace. Within the service provider
marketplace, we focus our sales efforts on the world's largest service
providers. 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 infrastructure products in the service provider market. We also
intend to leverage our core technology platform to build additional service
provider applications. For example, we have integrated Web-based technology,
acquired in the Mobility.Net acquisition of April 1999, to enhance the
performance of our existing Web interface as well as to ultimately extend our
platform through additional Web-based applications. We intend to pursue a
similar strategy to leverage the wireless technologies acquired in the Telarc
acquisition of October 1999. On March 8, 2000, we entered into an agreement
and plan of merger with AtMobile.com, Inc. (also known as @mobile.com), a
wireless Internet application developer and application service provider with
Instant Messaging technology and Wireless Intelligent Network integration
expertise. We believe that if this acquisition is completed, we will be able
to use @mobile.com's technology to further expand the wireless messaging
capabilities of our platform. We may add additional applications as extensions
to the platform through internal development, partnering arrangements or the
acquisition of third party technologies. We also intend to continue to
leverage the expertise of our professional services organization to help
customers design, build, and deploy systems based on our products.
Recent Developments
Pursuant to our agreement to acquire AtMobile.com, each outstanding share of
AtMobile.com stock will be exchanged for approximately 0.06 shares of our
Common Stock, and each outstanding option or warrant of AtMobile.com will be
converted into an option or warrant to purchase our Common Stock (adjusted for
the exchange ratio). The proposed merger is expected to be accounted for as a
pooling of interests and is expected to close in the quarter ending June 30,
2000, subject to standard conditions, including regulatory approvals and
approval by AtMobile.com stockholders.
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Products and Services
We have developed a scalable, extensible technology platform that provides
the foundation for our Internet infrastructure applications. This platform is
the core technology that underlies our three current messaging product
packages: 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, for both consumers and businesses. The following
table sets forth the target customer and architecture for these product
packages:
<TABLE>
<CAPTION>
Post.Office InterMail Kx InterMail Mx
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Target Customer 25,000 to 400,000 250,000 users and
100 to 25,000 users users above
Architecture Single server Multiple servers, Multiple servers,
distributed and distributed and
modular modular
Operating System NT, UNIX UNIX UNIX
Object Store Technology Single multimedia Single, highly- Multiple, highly-
object store parallel multimedia parallel multimedia
object store object stores
</TABLE>
Post.Office
Designed to meet the messaging needs of small to medium size service
providers, 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
Post.Office to easily administer their entire email systems, while allowing
end users to manage their individual email accounts. Post.Office provides a
user-friendly administration interface featuring fill- in-the-blank forms and
pop-up options assisted by Web-based help links. Post.Office offers a broad
array of security features, including multiple password protection levels and
numerous user restriction settings. Post.Office also provides a variety of
features for preventing the sending and receiving of Internet junk mail, or
"spam." 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 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
is designed for fast-growing, medium-sized service providers with a subscriber
base of up to 400,000. 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 Standard Edition, InterMail Business Advantage
Edition and the recently developed, initial version of InterMail IP VoiceMail
Edition. 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. Additionally, we intend to sell through our existing
channels a highly scalable, Lightweight Directory Access Protocol (LDAP)
Directory, as part of InterMail Mx and upon which our service provider
customers can design and develop multiple directory applications.
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InterMail Standard Edition--Designed for service providers offering consumer
email or hosting the consumer-oriented services of another service provider,
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 the ability to access
mailboxes from any location where the Internet can be accessed through
commonly used Internet browsers such as Microsoft Internet Explorer and
Netscape Navigator. 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 or hosting the business-oriented
services of another service provider, 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 IP VoiceMail Edition--InterMail IP VoiceMail Edition is designed
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.
Wireless
We have developed and will continue to develop wireless products to enable
service providers to meet the increasing demands of both consumer and business
customers to expand mobile communications and access to Internet content and
services beyond wireline devices. For example, we have developed products
designed to enable the extraction and encoding of Internet data (typically
found in HyperText Markup Language (HTML), the document format language used
on the World Wide Web) into a document format language, such as chunks of HTML
(cHTML), or Wireless Markup Language (WML), that is readable on particular
wireless devices.
Professional and Support Services
We have designed our professional services offerings to enable our customers
to bring their 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 December 31, 1999, our professional
services staff consisted of 44 employees. In addition, we also supplement our
professional services staff with outside contractors from time to time.
Our Support Solutions group provides 24 hour global support services to meet
the demanding needs of the largest service providers. For each customer, we
designate a primary support engineer with responsibility for fielding and
addressing all support issues for that customer. We monitor support issues
internally using a variety of integrated processes, including regular customer
interaction sessions. Customers have access to a dedicated Web site where
information on past and outstanding issues is posted, and through which
updates and upgrades can be delivered for ease of implementation. We maintain
support groups in Santa Barbara, California and
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Lexington, Massachusetts for North American customers, as well as Windsor,
England and Naarden, the Netherlands for European customers, Hong Kong, PRC
for Asian customers and Tokyo, Japan for Japanese customers. As of December
31, 1999, our Support Solutions group consisted of 22 employees.
Customers
Numerous service providers around the world use our products as the platform
for their Internet messaging applications. As of December 31, 1999, over 1,000
service providers had purchased licenses for our Post.Office and 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 1999 no customer accounted for more than 10% of 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.
. Application Service Providers: These customers are comprised of companies
that host applications as a service to their end users.
. 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.
. Wireless Telephony Carriers: This group is made up of companies that
offer wireless network services (such as telephone and short messaging
services) and, increasingly, Internet access and services (such as
content delivery to mobile devices).
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 infrastructure 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 unified communications 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 has selected InterMail as its preferred
messaging application for the service provider market. Hewlett-Packard markets
solutions, including our applications, to rapidly growing service providers
that are building the infrastructure to offer unified communications and
managed messaging services and to those offering Internet services to
consumers and businesses. We also work closely with Hewlett-
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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 Kx and Post.Office on its high performance
operating systems and hardware, including bundled offerings of InterMail Kx
and Post.Office on its servers. 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.
Nortel. Nortel Networks has selected the InterMail platform as the messaging
component of its Managed Application Services Initiative, giving application
service providers (ASPs) an end-to-end solution. We will continue to partner
with Nortel to explore emerging opportunities created by the convergence of
voice and data networks, including voicemail and faxmail based on Internet
protocols in the ASP market.
We work closely with many other UNIX vendors to customize our messaging
software to run on their systems. These relationships enable us to sell our
products to service providers that use different hardware platforms. We have
relationships with Sun Microsystems (for Solaris) and Compaq/DEC (for Digital
UNIX). 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. We divide the service provider
market into three segments: Tier One, Tier Two, and Tier Three. Our sales
approach for a given customer depends upon the tier in which we categorize the
customer's account.
Tier One Accounts
Tier One accounts consist of a designated list of the largest and most well-
known service providers in the world, and are targeted by our direct sales
force. Our InterMail Mx product is specifically designed for these Tier One
accounts whose current subscriber base generally exceeds 250,000 users, and
whose projected subscriber base generally exceeds one million users. We have
Tier One direct sales force personnel located in California, Colorado, Texas,
Virginia, Massachusetts, England, Germany, France, Spain, the Netherlands,
Japan, Australia, and the People's Republic of China (PRC). The direct sales
force is organized into account teams, consisting of a sales director and a
sales engineer, or "technology consultant." 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 400,000 users. The performance and feature requirements of Tier Two
accounts are closely aligned with those of larger service providers. We offer
the InterMail Kx
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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, Colorado, Texas, Massachusetts, Virginia, England,
Italy, the Netherlands, Japan, and Singapore. 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 Post.Office product package. We target these
accounts primarily through indirect channels, including resellers, systems
integrators, and joint marketing partners. However, we also have several Tier
Three direct telephone 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. We
also work closely with the marketing departments of our strategic partners and
customers to promote new service offerings, including their messaging
initiatives, that are enabled by our products. These efforts are augmented
with the assistance of several public relations firms specializing in the
technology marketplace in an effort to further establish and define the market
for highly scalable messaging products for service providers. For the Tier Two
and Tier Three market segments, we periodically undertake direct mail programs
designed to promote brand name awareness and inform existing customers of
advances in product features. In addition, we periodically publish white
papers and industry reports to promote awareness of our technology and
advances in industry practices.
Through product planning, market strategy, competitive analysis, and product
program management, we continue to provide marketing and product leadership
for our customers by delivering quality products and services in a timely and
predictable manner. For example, 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
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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.
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. Our Mobility.Net technology provides additional
flexibility for service providers to customize their Web interfaces. The
number and type of access components can be optimized to meet the requirements
of particular service providers.
The platform technology used for the Post.Office product package shares many
of the underlying technology components of the InterMail Kx and InterMail Mx
platform. 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.
9
<PAGE>
Mobility.Net Technology. Our Mobility.Net technology 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. We
have integrated the Mobility.Net technology into our Post.Office and InterMail
product packages to improve the performance of our Web access server and to
enable us to offer additional features that are dependent on advanced Web
access server technology.
Unified Messaging. Our multimedia messaging platform has been integrated
with voice-over Internet protocol, or VOIP, gateway services from vendors such
as Cisco Systems. In a typical unified communications system, voice and fax
data are converted into email messages, which are then delivered to the
messaging platform for storage and retrieval. An LDAP directory provides
account and mailbox information storage. Our unified messaging platform also
provides service providers the ability to leverage their existing subscriber
bases and offer enhanced services such as unified mailbox and integrated fax
services. In addition to offering a unified communications platform for new
market entrants, our messaging platform may also allow a service provider to
replace legacy voice mail servers, thereby reducing costs, increasing
telephony bandwidth and maintaining a flexible service creation platform.
Telephony Integration. Our messaging platform is extended into existing
wireline and wireless carrier networks and is integrated with existing
telephony architectures. Our Telarc technology provides an infrastructure for
the convergence of IP-based services and telephony-based services by enabling
IP-based access directly to networks using standard telephony protocols known
as Signaling System 7 (SS7) protocols. Our Telarc technology also allows us to
offer products to service providers in the short messaging services market by
allowing direct access to the mobile switching centers of a wireless telephony
provider.
If our proposed acquisition of @mobile.com closes, we will acquire
technology which we intend to layer applications upon our Telarc
infrastructure. We plan to leverage @mobile.com's Wireless Intelligent
Networking expertise and its instant messaging technology to adapt our
intended release of an LDAP directory to address the wireless data services
needs of wireless network carriers, to produce a wireless instant messaging
product, and ultimately to enhance our multimedia messaging platform and short
messaging technology. Our goal is to enable our customers to provide end-to-
end wireless unified communications solutions to their subscribers.
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 or
acquire new products that achieve market acceptance, maintain technological
competitiveness and meet an expanding range of service provider requirements.
As of December 31, 1999, our research and development staff consisted of 111
employees.
Competition
The market for Internet standards-based messaging and infrastructure
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 and, in some instances, with outsourced messaging
providers who have either internally developed or acquired their own messaging
software. We also compete, principally on the basis of performance, features
and price, against messaging solutions based on public domain software code
that is developed and enhanced internally by service providers. We compete to
a more limited extent with providers of messaging applications designed for
the enterprise market.
Our current software competitors in the service provider market include
iPlanet E-Commerce Solutions (a SunNetscape Alliance) and Isocor, which was
recently acquired by Critical Path. We also indirectly compete with Critical
Path when it offers outsourced messaging to the service provider market and
with Microsoft, whose current messaging product was developed for the
enterprise market but is sold to some service providers. In addition, with our
intended release of a highly scalable LDAP directory with InterMail Mx, we
will become more direct competitors with Novell's NDS technology and
Microsoft's Active Directory product, to the extent that these products are
marketed to service providers. In addition, as we continue to enter the
wireless messaging
10
<PAGE>
market, a rapidly developing field, several larger companies could turn out to
be our competitors. We believe that competition will intensify as our current
competitors increase the sophistication of their offerings and as new market
participants, including additional providers of outsourced messaging services
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.
Microsoft, among other software providers, is 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 to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their
established presences as voicemail providers to the service provider market
and ownership of technologies for the conversion of voice to data. If we are
unable to cooperate or compete effectively with Microsoft, existing voicemail
solution providers, or our other existing or emerging competitors, our
business, financial condition, and operating results will suffer.
Intellectual Property and Proprietary Rights
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology, including the
entire InterMail product line. We rely on a combination of copyright, trade
secret, and trademark law to protect our technology, although we believe that
other factors such as the technological and creative skills of our personnel,
new product developments, frequent product and feature enhancements, and
reliable product support and maintenance are more essential to maintaining a
technology leadership position. As of December 31, 1999, we did not have any
patents issued or pending; however, if the proposed AtMobile.com acquisition
closes, we will acquire 1 patent and a number of patent applications,
specifically for wireless subject matter.
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
our 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
11
<PAGE>
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 and wireless fields, 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 December 31, 1999, we had 309 full-time employees, 111 of whom were in
research and development, 74 in sales and marketing, 82 in services and
support and documentation, and 42 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.
Item 2. Properties
Our corporate headquarters are located in Santa Barbara, California, where
we have two leases for approximately 36,085 square feet of space in separate
office buildings. Our East Coast headquarters are located in Lexington,
Massachusetts, where we have a lease for approximately 32,000 square feet of
space in a single office building. We lease additional space in San Mateo,
California, Bellevue, Washington and Hauppauge, New York for development
personnel. Our primary European operations are located in Naarden, the
Netherlands, with an additional office in Windsor, England. Our primary Asian
operations are located in Tokyo, Japan. In addition to these facilities, we
also lease office space for sales personnel in Dallas, Denver, Reston,
Germany, Australia and the PRC. 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.
Item 3. Legal Proceedings
From time to time we have been subject to legal proceedings and claims in
the ordinary course of business. Although we are not currently involved in any
material legal proceedings, we expect that we will in the future be subject to
legal disputes, including claims of alleged infringement of third party
patents, trademarks, and other intellectual property rights by us and our
licensees. Any claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We are not
aware of any legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
<PAGE>
PART II
Item 5. Market For The Registrant's Common Stock And Related Stockholder
Matters
Our common stock commenced trading on The Nasdaq National Market under the
trading symbol SWCM on June 23, 1999. The price for the common stock as of the
close of business on March 20, 2000 was $ 138.000 per share. As of March 20,
2000, we had approximately 317 stockholders of record.
The following table sets forth the high and low sales prices per share of
our common stock for the periods indicated:
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
1999:
Second Quarter (from June 23, 1999)...................... $ 23.188 $18.063
Third Quarter............................................ $ 53.250 $24.938
Fourth Quarter........................................... $114.000 $44.625
2000:
First Quarter (through March 20, 2000)................... $155.000 $65.000
</TABLE>
We have never paid any cash dividends on our common stock. We intend to
retain any earnings for use in our business and do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the market
prices of the stocks of many companies which may not have been directly
related to the operating performance of those companies. Such broad market
fluctuations may adversely affect the market price of our common stock. In
addition, factors such as announcements of technological innovations or new
products by us or our competitors, market conditions in the software or
Internet infrastructure industries and quarterly fluctuations in our operating
results may have a significant adverse effect on the market price of common
stock.
On October 20, 1999, we issued 211,918 shares of our common stock, along
with cash, to the former sole stockholder of Telarc, Inc., in connection with
the merger of Telarc with and into our wholly-owned subsidiary. The actual
number of shares we issue in connection with the transaction is subject to
downward adjustment to the extent that claims are made against an escrow fund
created at the time of the transaction. The transaction did not involve any
underwriters, underwriting discounts or commissions, or any public offering,
and we believe that it was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof. The recipient in the
transaction represented his 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 the transaction. The recipient had adequate access,
through his relationship with us, to information about us.
Item 6. Selected Consolidated Financial Data
In reading the selected consolidated financial data set forth on the
opposite page, you should refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and the Notes included elsewhere herein.
The statement of operations data for the years ended December 31, 1999,
1998, 1997 and 1996 and the balance sheet data at December 31, 1999, 1998,
1997 and 1996 are derived from our consolidated financial statements, which
have been audited by Ernst & Young LLP, independent auditors. The statement of
operations data for the year ended December 31, 1995 and the balance sheet
data as of December 31, 1995 are derived from unaudited consolidated financial
statements not included herein.
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."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- ------- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Software licenses.............. $ 26,847 $17,462 $ 7,859 $ 6,555 $3,185
Services....................... 17,791 8,157 2,807 1,327 1,542
-------- ------- -------- ------- ------
Total revenues................... 44,638 25,619 10,666 7,882 4,727
Cost of revenues:
Software licenses.............. 2,677 1,568 689 218 58
Services....................... 11,591 7,451 2,675 767 --
-------- ------- -------- ------- ------
Total cost of revenues........... 14,268 9,019 3,364 985 58
-------- ------- -------- ------- ------
Gross profit..................... 30,370 16,600 7,302 6,897 4,669
Operating expenses:
Sales and marketing............ 18,505 10,769 8,607 4,554 552
Research and development....... 14,080 8,716 6,309 3,457 1,263
General and administrative..... 6,101 4,036 3,093 2,136 811
Amortization of goodwill and
purchased intangible assets... 329 -- -- -- --
Purchased in-process research
and development............... 3,210 -- -- -- --
Legal matter................... (200) (400) 1,000 -- --
-------- ------- -------- ------- ------
Total operating expenses......... 42,025 23,121 19,009 10,147 2,626
-------- ------- -------- ------- ------
Income (loss) from operations.. (11,655) (6,521) (11,707) (3,250) 2,043
Other income (expense):
Interest income................ 2,060 293 298 87 --
Interest expense............... (598) (645) (59) -- --
Other.......................... (128) (84) -- -- (4)
-------- ------- -------- ------- ------
Total other income (expense)... 1,334 (436) 239 87 (4)
-------- ------- -------- ------- ------
Income (loss) before income
taxes......................... (10,321) (6,957) (11,468) (3,163) 2,039
Provision for income taxes....... 212 446 1 -- 69
-------- ------- -------- ------- ------
Net income (loss)................ (10,533) (7,403) (11,469) (3,163) 1,970
Accretion on redeemable
convertible preferred stock... (403) (825) (730) (180) --
-------- ------- -------- ------- ------
Net income (loss) applicable to
common stockholders........... $(10,936) $(8,228) $(12,199) $(3,343) $1,970
======== ======= ======== ======= ======
Basic and diluted net income
(loss) per share.............. $ (0.31) $ (0.29) $ (0.44) $ (0.13) $ 0.10
======== ======= ======== ======= ======
Weighted average shares
outstanding used in computing
per share amounts............. 35,341 28,228 27,814 25,419 20,080
======== ======= ======== ======= ======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- ------- ------ ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.... $ 41,715 $ 5,447 $ 6,083 $3,163 $2,182 $ 143
Working capital
(deficiency)................ 73,044 (115) (531) 4,446 2,271 (178)
Total assets................. 104,039 19,059 13,944 7,692 3,742 315
Long-term debt............... -- 100 340 -- -- --
Redeemable convertible
preferred stock............. -- 13,370 12,838 4,710 -- --
Total stockholders' equity
(deficit)................... 85,429 (10,061) (9,912) 1,975 2,551 (9)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-
looking statements. Factors which could cause actual results to differ
materially include those set forth in the following discussion, and, in
particular, the risks discussed below under the subheading "Additional Risk
Factors that Could Affect Operating Results and Market Price of Stock." Unless
required by law, we undertake no obligation to update publicly any forward-
looking statements.
Overview
Software.com is a leading developer and provider of scalable Internet
infrastructure software applications. Our products and services are
specifically designed to enable service providers to market Internet based
services to businesses and consumers. We have focused on developing carrier-
scale, high performance messaging software applications for providers of
Internet communications and services. We currently develop, market, sell, and
support a variety of Internet standards-based messaging software to customers
worldwide, including traditional telecommunications carriers, Internet service
providers and wholesalers, application service providers, cable-based Internet
access providers, competitive local exchange telephone carriers, Internet
destination sites or portals and wireless telephony carriers. We have
developed three product packages: Post.Office, InterMail Kx and InterMail Mx
based on our infrastructure 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 through 1995 related primarily to research and development of
our messaging software platform. In May 1996, we merged with Accordance
Corporation. 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.
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 44 by the end of 1999 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 entered into a marketing relationship with Hewlett-Packard
and, in connection with this agreement, Hewlett-Packard made an investment in
Software.com in April of 1999. In April 1999, we completed
15
<PAGE>
the acquisition of Mobility.Net Corporation, a California company incorporated
in July 1996. Mobility.Net developed an integrated Web mail and calendaring
system using a Java-based technology platform that complements our product
offerings. The acquisition of Mobility.Net has been accounted for as a
pooling. In June 1999 we released WebEdge Mail and Calendar, a Web-based email
and calendaring server from Mobility.Net, for small and medium sized service
providers. In October 1999, we completed the acquisition of Telarc, Inc.,
which currently provides carrier-scale Short Messaging Service (SMS)
technologies that complement our product offerings. The acquisition of Telarc
Inc. has been accounted for as a purchase.
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 a contract where a customer may activate up to a specified number
of mailboxes and support and maintenance fees are based on that specified
number, we recognize revenue evenly and ratably as payments become due over
the term of the arrangement. 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 significant 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 generally on a
quarterly basis. Although the majority of our 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. This
is primarily due to the ease of use of the product and the customers' ability
to purchase more economical "per-incident" support services. 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 InterMail Mx customer relationship, we receive software license
revenue, support and maintenance revenue, and 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 or "migrates" existing user mailboxes to our software platform.
After this transfer, the software license revenue primarily reflects the
growth in the number of mailboxes on the customer's system. Support and
maintenance revenue begins after installation of our software and also
primarily reflects the growth in the number of mailboxes.
In 1999, 1998 and 1997, revenues attributable to customers outside of North
America accounted for approximately 55%, 37% and 24% of our total revenues. We
are making significant expenditures on expansion in Europe and Asia, including
the translation 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 operating losses for the next
several quarters, and our expected increase in operating expenses will require
further increases in revenues before we become profitable.
16
<PAGE>
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 1999 and 1998, we do not believe
that historical growth rates are necessarily sustainable or indicative of
future growth.
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of revenues.
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Software licenses................................... 60 % 68 % 74 % 83 %
Services............................................ 40 32 26 17
--- --- ---- ---
Total Revenues.................................... 100 100 100 100
Gross margins:
Gross margin on software licenses................... 90 91 91 97
Gross margin on services............................ 35 9 5 42
--- --- ---- ---
Gross profit...................................... 68 65 68 88
Operating expenses:
Sales and marketing................................. 41 42 81 58
Research and development............................ 32 34 59 44
General and administrative.......................... 14 16 29 27
Amortization of goodwill and purchased intangible
assets............................................. 1 -- -- --
Purchased in-process research and development....... 7 -- -- --
Legal matter........................................ -- (2) 9 --
--- --- ---- ---
Total operating expenses.......................... 95 90 178 129
--- --- ---- ---
Loss from operations.................................. (27) (25) (110) (41)
Other income (expense):
Interest income..................................... 5 1 3 1
Interest expense.................................... (1) (3) (1) --
Other............................................... -- -- -- --
--- --- ---- ---
Total other income (expense).......................... 4 (2) 2 1
--- --- ---- ---
Loss before income taxes.............................. (23) (27) (108) (40)
Provision for income taxes............................ 1 2 -- --
--- --- ---- ---
Net loss.............................................. (24)% (29)% (108)% (40)%
=== === ==== ===
</TABLE>
Comparison of Years Ended December 31, 1999 and 1998
Software Licenses. Software license revenue increased $9.3 million, or 53%,
from $17.5 million in 1998 to $26.8 million in 1999. The increase in software
license revenue was primarily due to greater revenue from sales of our
InterMail product offerings, somewhat offset by a decrease in sales of our
Post.Office product. The largest contributor to software license revenue
continues to be our InterMail Mx product offering, which grew 56% in 1999 over
1998. The increase in InterMail Mx revenue was primarily a result of increased
growth from existing and new customers and to a lesser extent large migrations
of mailboxes from other existing platforms of new customers.
17
<PAGE>
Our InterMail Kx product was introduced in March of 1999 and overlaps to
some extent with our Post.Office product. Both products are targeted at small
and medium size service providers worldwide. Combined revenues from
Post.Office and InterMail Kx resulted in a 57% increase from 1998 to 1999,
however revenues from Post.Office decreased 27% from 1998 to 1999. We expect
revenues from Post.Office to continue to decrease as sales of our InterMail Kx
product offering increase.
The decrease in software license revenue as a percentage of total revenues
was primarily related to an increase in support and maintenance from ongoing
and new contracts and to a lesser extent a decrease in migrations of mailboxes
from new customers from 1998 to 1999. In 1999 we had seven migrations compared
to 13 in 1998.
Services. Services revenue is primarily derived from consulting services,
maintenance and support contracts, and training. Services revenue increased
$9.6 million, or 117%, from $8.2 million in 1998 to $17.8 million in 1999. The
increase in services revenue for 1999 as compared to 1998 was primarily due to
a $4.9 million increase in support and maintenance contracts as our customer
base grew, and a $4.8 million increase in professional services as the number
of professional services engagements increased. As a percentage of total
revenues, services revenue increased to 40% in 1999 from 32% in 1998. This
increase was primarily related to support and maintenance from ongoing and new
contracts as well as an increased number of professional services engagements
associated with new and existing contracts. In 2000 we expect services revenue
as a percentage of total revenues to decrease to some extent as a result of
continued growth in license revenue relative to growth in services revenue.
Cost of Software License Revenue. Cost of software license revenue consists
primarily of the cost of third party products integrated into our products or
resold by us and the salaries and related costs for our documentation
department and the production of documentation for our InterMail products.
Cost of software license revenue increased $1.1 million, or 69%, from $1.6
million in 1998 to $2.7 million in 1999. The increase was primarily due to an
increase in our documentation department as well as increased investment in
product translation for our international markets. Additionally, in 1999 we
resold a third party database to eight of our InterMail Mx customers, with the
cost of that software included in cost of software license revenue in 1999. In
1998, we resold a third-party database to five of our customers.
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 $4.1 million, or 55%, from $7.5 million in 1998
to $11.6 million in 1999. The increase in cost of services was primarily due
to an increase in our consulting and support organizations from 37 employees
at December 31, 1998 to 73 employees at December 31, 1999 to support our
larger customer base. The improvement in gross margin on services revenue from
9% for 1998 to 35% in 1999 was substantially attributable to improved margins
on 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 $7.7 million, or 71%, from $10.8 million in 1998 to $18.5
million in 1999. The increase in sales and marketing expense was primarily due
to an increase in sales commissions commensurate with the increase in revenues
as well as growth in our global sales organization. The total number of
employees in the sales and marketing organization increased from 53 at
December 31, 1998 to 74 at December 31, 1999. We expect our sales and
marketing expenses will increase in absolute dollars in future periods 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
organizations, and an allocation of our facilities and depreciation expenses.
Research and development expense increased by $5.4 million, or 62%, from $8.7
million in 1998 to
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$14.1 million in 1999. The increase in research and development expense was
primarily due to an increase in our development organization from 64 employees
at December 31, 1998 to 111 employees at December 31, 1999. We believe
continued investment in research and development is essential to our future
success, and we expect our research and development expenses to increase in
absolute dollars in future periods with the growth in demand of unified and
wireless messaging products.
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 $2.1 million, or 53%, from
$4.0 million in 1998 to $6.1 million in 1999. The increase in general and
administrative expense for 1999 was primarily related to fees for accounting
and legal services, increased reserves for bad debts, and an increase in our
general and administrative organization from 27 employees at December 31, 1998
to 42 employees at December 31, 1999. We expect general and administrative
expenses to decrease as a percentage of total revenues in future periods.
Acquisition costs. In April, 1999, Software.com completed the acquisition of
Mobility.Net, Inc. which offers products for Web messaging using a Java-based
technology platform that complement our product offerings. We issued 1,579,000
shares of our common stock in exchange for all of the outstanding shares of
Mobility.Net. The acquisition was accounted for as a pooling-of-interests.
Accordingly, the financial information presented reflects the combined
financial position and operations of Software.com and Mobility.Net for all
dates and periods presented.
In October, 1999, we acquired Telarc, Inc., which provides carrier-scale
Short Messaging Service (SMS) technologies that complement our product
offerings. In exchange for all of the issued and outstanding stock of Telarc,
we issued 212,000 shares of Software.com Common Stock and $1.5 million in
cash. The acquisition of Telarc was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition. Telarc's operating results
have been included in Software.com's consolidated financial statements results
from the acquisition date of October 20, 1999. The purchase price plus costs
directly attributable to the completion of the acquisition have been allocated
to the assets and liabilities acquired based on their approximate fair market
value. A significant portion of the purchase price was identified as
intangible assets in an independent appraisal using proven valuation
procedures and techniques. The appraisal of the acquired business included
$3.2 million of purchased in-process research and development (IPR&D). This
acquired technology had not yet reached technological feasibility and had no
alternative future uses. Accordingly, it was written off at the time of the
acquisition. The remainder of the purchase price was allocated as follows:
$263,000 to net intangible assets, $5.7 million to developed technology,
$125,000 to assembled workforce and other intangibles and $2.3 million to
goodwill. Goodwill and identified intangibles are being amortized on a
straightline basis over their estimated economic useful lives of three to five
years.
On the date of its acquisition, Telarc's technology was classified between
core or developed technology and IPR&D. Three principal Telarc products were
identified and their reliance on the developed technology and IPR&D was
determined. IPR&D was further analyzed to determine: (1) the estimated time
required to complete the development, (2) the estimated cost to complete and
(3) the complexity involved in overcoming technological obstacles that must be
resolved during development. The completion of in-process development at the
time of the acquisition ranged from 50% to 86%. Management estimates the cost
to complete the development effort to be approximately $1.8 million as of
December 31, 1999 and the release of the products incorporating these
technologies to occur during the fourth quarter of 2000.
These IPR&D valuations represent the five year after-tax cash flow of this
technology using a discounted rate of 40%. In valuing the developed technology
and IPR&D, the initial focus was on the revenue contribution generated by each
of the products. Revenue estimates were based on the following: (1) aggregate
revenue growth rates for the business as a whole, (2) individual product
revenues, (3) growth rates for related products, (4) anticipated product
development and introduction schedules, (5) product sales cycles and (6) the
estimated useful life of a product's underlying technology. The aggregate
product revenue amounts were estimated and
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segregated between the developed technology and IPR&D. Operating expenses were
deducted from the revenue estimates to arrive at operating income. Operating
expenses include cost of revenue, selling and marketing, and general and
administrative expenses but no non-cash charges such as depreciation and
amortization. Certain adjustments were made to operating income to derive the
after-tax cash flow. These adjustments included the calculation of an
applicable tax expense and an appropriate charge for the use of contributory
assets necessary to generate revenue and operating income associated with the
subject intangible assets.
We believe that we are positioned to complete development of the Telarc
technology and products, however there is a risk that we may not be able to
complete these projects within the estimated timeframe or cost budget.
Furthermore, there is no assurance that any product will meet with either
technological or commercial success. See "Risk Factors" for further
information.
Legal Matter. The Company was involved in a contract dispute with a third
party technology partner under a 1996 licensing agreement. The dispute related
to a minimum royalty obligation of $1,000,000 purportedly owed by the Company
to the third party. In 1997, 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. The Company paid the third party
$400,000, and as a result the related accrual was reduced to $600,000 at
December 31, 1998 to reflect the complete resolution of this matter.
Other Income (Expense). Other income (expense) consists primarily of
interest income from our cash and short-term investments net of interest
associated with our credit facility. Total other income (expense) increased
$1.8 million, from an expense of $436,000 for 1998 to income of $1.3 million
in 1999. The increase was primarily related to interest earned on the proceeds
of our initial public offering of common stock in June of 1999.
Provision for Income Taxes. Provision for income taxes consists mainly of
foreign withholding and income taxes. Provision for income taxes decreased
$234,000 from $446,000 in 1998 to $212,000 in 1999. The decrease was primarily
related to the completion of a large professional services engagement in
Canada in 1998 that resulted in withholding and income taxes during that
period.
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $27.9 million and $11.1 million, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2011 through 2019 for federal and 2002 to 2004 for state, if not
utilized. On December 31, 1999, we also had federal and state research and
development tax credit carryforwards of approximately $613,000 and $188,000,
expiring in 2011 to 2014. We also have a foreign tax credit of approximately
$484,000, 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 6 of
Notes to Consolidated Financial Statements.
Stock-based Compensation. We recorded deferred compensation of approximately
$1.5 million and $770,000 in 1998 and 1999, respectively, representing the
difference between the exercise prices of options granted to employees during
1998 and 1999 and the deemed fair value for accounting purposes of our common
stock on the grant dates. We amortized deferred compensation expense of
$545,000 during 1999. This compensation expense relates to options awarded to
individuals in all operating expense categories. Total deferred compensation
at December 31, 1999 of $1.67 million is being amortized over the vesting
periods of the options. The amortization of deferred compensation recorded
will approximate $600,000, $521,000, $480,000, and $47,000 for the years 2000,
2001, 2002 and 2003.
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Comparison of Years Ended December 31, 1998 and 1997
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 Post.Office increased 36%
from 1997 to 1998 as we continued to expand sales of 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 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 increased
by $879,000, or 128%, from $689,000 in 1997 to $1.6 million in 1998. This
increase was primarily due to a $433,000 increase resulting from the resale of
third party software used in conjunction with our InterMail Mx product and, to
a lesser extent, a $317,000 increase due to growth in the number of employees
in our documentation department.
Cost of Services Revenue. Cost of services revenue 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.
Sales and Marketing. Sales and marketing expense increased by $2.2 million,
or 25%, from $8.6 million in 1997 to $10.8 million in 1998. Substantially all
of this increase was due to significant expansion in our global direct sales
organization, primarily in North America. The total number of employees in the
sales and marketing organization increased from 37 at the end of 1997 to 53 at
the end of 1998. The decrease in sales and marketing expense as a percentage
of total revenues from 81% in 1997 to 42% in 1998 was primarily due to the
recognition of InterMail Mx software licenses revenue from contracts signed in
1997.
Research and Development. Research and development expense increased by $2.4
million, or 38%, from $6.3 million in 1997 to $8.7 million in 1998. The
increase in research and development expense was primarily due to costs
associated with the development and testing of our new InterMail Kx product
package, which was introduced in March 1999, and, to a lesser extent, the cost
of porting our InterMail messaging technology to the Hewlett-Packard and IBM
Unix platforms. The decrease in research and development as a percentage of
total revenues from 59% in 1997 to 34% in 1998 was primarily due to an
increase in software licenses revenue from products developed in previous
periods.
General and Administrative. General and administrative expense increased by
$943,000, or 30%, from $3.1 million in 1997 to $4.0 million in 1998. The
increase in general and administrative expense was due in significant part to
a $431,000 increase in the provision for doubtful accounts. The decrease in
general and administrative costs as a percentage of total revenues was
primarily due to our increase in software license revenue.
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 did
not take certain actions prior to December 31, 1999.
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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.
Liquidity and Capital Resources
We have funded our operations primarily through the private placement of
equity securities and the initial public offering of shares, and raised net
proceeds of approximately $79.8 million in 1999. We have also used a bank line
of credit to supplement our cash flow requirements. At December 31, 1999, our
principal sources of liquidity included approximately $41.7 million of cash
and cash equivalents and $25.7 million of marketable securities.
Net cash used in operations for 1999 and 1998 was $8.5 million and $10.1
million, respectively. Cash used in operating activities for 1999 was
primarily due to an increase in accounts receivable of $14.0 million and our
net loss of $10.5 million, partially offset by an increase in deferred revenue
and a write-off of in-process research and development related to the Telarc
acquisition of $6.7 million and $3.2 million, respectively. Cash used in
operating activities for 1998 was primarily due to our net loss of $7.4
million and an increase in accounts receivable of $7.1 million, partially
offset by an increase in depreciation and amortization of $1.7 million.
Net cash used in investing activities increased $28.7 million from $912,000
in 1998 to $29.6 million in 1999. The change from 1998 to 1999 was primarily
due to the purchase of $30.7 million in short-term investments from the
proceeds of our initial public offering in June 1999, partially offset by $5.5
million in maturities of short-term investments. The Company may use cash for
additional investments or acquisition related activities in 2000.
Net cash provided by financing activities increased $64.0 million from $10.4
million in 1998 to $74.4 million in 1999. The increase from 1998 to 1999 was
primarily due to the net proceeds from the sale of common stock of $69.7
million in June 1999 as part of our initial public offering and $10.0 million
of convertible preferred stock (Series D) in April 1999, offset by the
repayment of our note payable to a bank of $7.6 million. Cash provided by
financing activities for 1998 was primarily related to the issuance of
preferred stock and proceeds from notes payable to a bank in the amounts of
$6.8 million and $3.0 million, respectively.
Year 2000 Readiness Disclosure
In 1998, we initiated a company-wide program to ensure that our products,
date-sensitive information, and business systems, and certain other equipment
would properly recognize the Year 2000 as a result of the century change on
January 1, 2000 and the Year 2000 leap year. The program focused on our
software products, and our operational hardware and software, as well as
third-party vendors and suppliers, and third-party networks that were
associated with the identified systems. We substantially completed the program
during the fourth quarter of 1999 and neither our products nor our systems
experienced any significant disruptions as a result of the century change or
the Year 2000 leap year. In total, we have spent approximately $50,000 in
external costs on this program through December 31, 1999, and do not expect to
incur any significant additional costs related to Year 2000 compliance
subsequent to 1999.
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Additional Risk Factors That Could Affect Operating Results and Market Price
of Stock
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, including:
. the volume and timing of mailbox activation by our InterMail Mx
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 substantially 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 communications in particular;
. the growth rate and performance of wireless networks in general and of
wireless communications in particular;
. the volume of sales by our distribution partners and resellers;
. our pricing policies and those of our competitors; and
. the increase in our cost to resell, or our customers' cost to buy, the
Oracle 8i database which is currently necessary to use our InterMail Mx
product and any related price concessions on our InterMail Mx product
that our customers demand as a result.
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.
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.
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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. Additionally, at present, in order to deploy
our InterMail Mx product, a customer must have a license to use an Oracle 8i
database. Our reseller agreement with Oracle, which previously enabled us to
sublicense the database to our customers, recently expired and we are in the
process of negotiating a new agreement with Oracle. Our customers' cost for
purchasing an Oracle 8i database, whether from us if a new reseller agreement
is successfully negotiated or directly from Oracle, has increased and may
cause potential customers to decide not to buy our InterMail Mx product. If
this happens, we may be forced to absorb some of the costs of the increase in
order to sell the InterMail Mx product. In either case, unless we are able to
identify and implement a suitable alternative to the Oracle database, our
revenues from our InterMail Mx product would decrease. Although we are
actively evaluating alternative databases, there can be no assurance that we
will be able to substitute a new database for Oracle in a timely and cost-
effective manner. Even if a customer decides to purchase our InterMail Mx
product, 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 typically commit substantial resources in advance of
receiving any software license revenue.
In addition, the amount of software license revenue that we are able to
recognize in any given period depends on how quickly our customers activate
new mailboxes and report the activation of those new mailboxes to us. Under
our InterMail Mx license agreements, our customers typically pay us a fee for
each new user account, or "mailbox," they activate using InterMail Mx. We
recognize software license 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.
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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. In addition, any amortization of goodwill
or other assets, or other charges resulting from the costs of acquisitions
could significantly impact our business, financial condition, and operating
results.
We incurred net losses of approximately $32.8 million for the period from
July 1994 through December 31, 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $32.8 million. Although our revenues have
grown significantly in recent quarters, we may not be able to sustain these
growth rates or obtain sufficient revenues to achieve profitability. If we do
achieve profitability, we may not be able to sustain or increase profitability
in the future. Our failure to achieve and maintain profitability could
adversely affect our stock price.
We depend on a small number of customers for most of our revenues, and our
business, financial condition, and operating results could be harmed by a
decline or delay in revenue from these customers
We have generated a significant portion of our revenues from a limited
number of customers. We expect that a small number of customers will continue
to account for a significant portion of revenues for the foreseeable future.
Our target market is made up only of service providers, which constitute only
a small portion of all users of messaging solutions. As a result, if we lose a
major customer, or if there is a decline in usage, or if there is a downturn
in the service provider industry, our business, financial condition, and
operating results will suffer. 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.
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We must overcome significant and increasing competition in order to continue
our growth
The market for Internet standards-based messaging and infrastructure
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 and, in some instances, with outsourced messaging
providers who have either internally developed or acquired their own messaging
software. We also compete, principally on the basis of performance, features
and price, against messaging solutions based on public domain software code
that is developed and enhanced internally by service providers. We compete to
a more limited extent with providers of messaging applications designed for
the enterprise market.
Our current software competitors in the service provider market include
iPlanet E-Commerce Solutions (a SunNetscape Alliance) and Isocor, which was
recently acquired by Critical Path. We also indirectly compete with Critical
Path when it offers outsourced messaging to the service provider market and
with Microsoft, whose current messaging product was developed for the
enterprise market but is sold to some service providers. In addition, with our
intended release of a highly scalable LDAP directory with InterMail Mx, we
will become more direct competitors with Novell's NDS technology and
Microsoft's Active Directory product, to the extent that these products are
marketed to service providers. We believe that competition will intensify as
our current competitors increase the sophistication of their offerings and as
new market participants, including additional providers of outsourced
messaging services 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.
Microsoft and other competitors possess many competitive advantages over us
that present risks to the sales of our products
Microsoft, among other software providers, is 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 to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their
existing presences in service providers and ownership of technologies for the
conversion of voice to data. If we are unable to cooperate or compete
effectively with Microsoft, existing voicemail solution providers, or our
other existing or emerging competitors, our business, financial condition, and
operating results will suffer.
Our InterMail Kx product may interfere with sales of our other products
Competition from InterMail Kx has had a negative effect on our sales of
Post.Office and could have a negative impact on our sales of InterMail Mx, or
the prices we could charge for these products. Our InterMail Kx product was
introduced in March of 1999 and overlaps to some extent with our Post.Office
product as both products are targeted at small and medium size service
providers worldwide. We currently have several licenses
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for our 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. Combined revenues from Post.Office and
InterMail Kx resulted in a 66% increase from 1998 to 1999, but revenues from
Post.Office decreased 16% from 1998 to 1999. We may also divert sales and
marketing resources from Post.Office in order to successfully promote and
develop InterMail Kx. This diversion of resources could have a further
negative effect on our sales of Post.Office. If our revenues from InterMail Kx
are not sufficient to compensate for the effect of any decrease in sales or
prices of our other products, our business, financial condition, and operating
results will suffer.
Our 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
acquisitions of Mobility.Net Corporation in April 1999 and of Telarc, Inc. in
October 1999, and continue to integrate these companies' products and
personnel into our organization. We intend to complete the acquisition of
AtMobile.com, Inc. in April 2000. If the acquisition closes, AtMobile.com is a
substantially larger organization than either Mobility.Net or Telarc and
therefore will present greater challenges in terms of integration of products
and employees. Integrating AtMobile.com or any other newly acquired business,
product or technology could be expensive and time-consuming, could disrupt our
ongoing business, and could distract our management. We may face competition
for acquisition targets from larger and more established companies with
greater financial resources. In addition, in order to finance any
acquisitions, we might 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 AtMobile.com 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 expanding international operations are subject to significant
uncertainties in addition to those we face in domestic markets
For 1999 and 1998, approximately 55% and 37% of our total revenues,
respectively were attributable to customers outside of North America. 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 continue
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 translation 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;
27
<PAGE>
. 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. With the exception of certain key personnel
who have joined us in connection with acquisitions, we do not have employment
agreements with any of our senior management, and their employment is at will.
The loss of the services of any of our senior management or other key
personnel could harm our business, financial condition, and operating results.
If we are unable to attract and retain highly skilled employees, our
financial and operational results may suffer
Our success depends on our ability to recruit, integrate, retain, and
motivate highly skilled sales and marketing, engineering, and quality
assurance personnel. In particular, our ability to attract and retain
qualified sales management personnel is critical to the success of our planned
expansion in Europe and Asia. Competition for these people in the Internet
messaging industry is intense, and we may not be able to successfully recruit,
train, or retain qualified personnel. If we fail to retain and recruit
necessary sales and marketing, engineering, and quality assurance personnel,
our ability to obtain new customers, develop new products and provide
acceptable levels of customer service could suffer, and this could harm our
business, financial condition, and operating results.
We must adapt to rapid changes in technology and customer preferences in
order to remain competitive
The Internet messaging industry is characterized by rapidly changing
technology, changes in customer and end user requirements and preferences, and
evolving industry standards and practices that could render our software
products obsolete. Our success depends on our ability to enhance our existing
messaging platform and products on a timely basis and to develop new products
that address the increasingly sophisticated and varied needs of our customers
and their end users. We must accurately forecast the features and
functionality required by our target customers and end users in order to
continually improve our products. For example, in response to customer and end
user demand, we have recently developed for some of our products a voicemail
feature based on Internet standards that govern data transmission and receipt,
known as Internet Protocol or "IP." In addition, in response to the rapid
development of opportunities in the wireless sector, we are aggressively
pursuing the development and/or acquisition of key technologies required by
service providers in the wireless sector. 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
IP voicemail or the wireless messaging products and technologies acquired in
the Telarc acquisition and the proposed AtMobile.com acquisition is not
favorably received and accepted by customers and end users, our business,
financial condition, and operating results will suffer.
28
<PAGE>
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 new releases or editions of
our InterMail products, the wireless messaging products acquired in the Telarc
acquisition or the wireless products intended to be developed as a result of
the proposed AtMobile.com 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, 1999 our total number of employees
increased from 144 to 309. 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 business depends on continued growth in use and improvement of the
Internet and our customers ability to operate their systems effectively
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 Internet infrastructure
applications, our future success depends on the continued expansion of, and
reliance of consumers and businesses on, the Internet for communications and
other services. 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.
In addition to problems that may affect the Internet as a whole, our
customers have in the past experienced some interruptions in providing their
Internet-related services, including services related to our software
products. We believe that these interruptions will continue to occur from time
to time. Our revenues depend substantially upon the number of end-users who
use the services provided by our customers. Our business may suffer if our
customers experience frequent or long system interruptions that result in the
unavailability or reduced performance of their systems or networks or reduce
their ability to provide services to their end users.
29
<PAGE>
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving, and we may not be
able to adequately address this market.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving and is characterized
by an increasing number of market entrants that have introduced or developed,
or are in the process of introducing or developing, products that facilitate
wireless communication and the delivery of Internet-based services through
wireless devices. We intend to devote significant efforts and resources on
developing and marketing infrastructure applications for wireless
communications and the wireless delivery of Internet-based content and
services. Our acquisition of Telarc in October 1999 and our proposed
acquisition of AtMobile.com were undertaken in part to address opportunities
in that market. If wireless devices are not widely adopted for data
communications or mobile delivery of Internet-based services, we would not
realize expected benefits from these acquisitions and our business would
suffer. In addition, the emerging nature of the market for wireless
communications and Internet-based services via wireless devices may lead
prospective customers to postpone adopting wireless devices or using wireless
technology. As a result, the life cycle of our wireless products is difficult
to estimate. We may not be able to develop and introduce new products,
services and enhancements that respond to technological changes or evolving
industry standards on a timely basis, in which case our business would suffer.
In addition, we cannot predict the rate of adoption by wireless subscribers of
these services or the price they will be willing to pay for these services. As
a result, it is extremely difficult to predict the pricing of these services
and the future size and growth rate of the wireless market.
Our service provider customers face implementation and support challenges in
expanding wireless communications and introducing Internet-based services via
wireless devices, which may slow their rate of adoption or implementation of
the services our wireless messaging products enable. Historically, service
providers have been relatively slow to implement new complex services such as
wireless messaging services and wireless delivery of Internet content. In
addition, service providers may encounter greater customer service demands to
support Internet-based services via wireless devices than they do for their
traditional Internet services. We have limited or no control over the pace at
which service providers implement these new services. The failure of service
providers to introduce and support services utilizing our products in a timely
and effective manner could harm our business.
Our intellectual property or proprietary rights could be misappropriated,
which could force us to become involved in expensive and time-consuming
litigation
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology, including the
entire InterMail product line. We rely on a combination of copyright, trade
secret, and trademark law to protect our technology, although we believe that
other factors such as the technological and creative skills of our personnel,
new product developments, frequent product and feature enhancements, and
reliable product support and maintenance are more essential to maintaining a
technology leadership position. As of December 31, 1999, we did not have any
patents issued or pending; however, if the proposed AtMobile.com acquisition
closes, we will acquire 1 patent and a number of patent applications,
specifically for wireless subject matter.
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.
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<PAGE>
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 attempt to avoid infringing known proprietary rights of third parties in
our 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.
The geographic disbursement of our senior management could impede their
ability to communicate effectively
Our senior management and key personnel are based in several different
offices, which makes coordination of projects more difficult. For example,
John MacFarlane, our Chief Executive Officer, and John Ingalls, our Chief
Financial Officer, are based at our headquarters in Santa Barbara, California,
while Valdur Koha, our President, and John Poulack, our Senior Vice President,
Operations, are based at our office in Lexington, Massachusetts. In addition,
acquisitions may have the effect of increasing geographic disbursement of
senior management and key personnel. The geographic disbursement 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.
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<PAGE>
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 failure to complete the proposed merger with AtMobile.com could adversely
affect our business
If our proposed acquisition of AtMobile.com is not completed, we may be
subject to a number of material risks, including the following:
. the price of our Common Stock may decline to the extent that the current
market price for our Common Stock reflects a market assumption that the
proposed merger will be completed and will benefit our entry into the
wireless market; and
. costs related to the proposed merger, such as legal, accounting, and
financial advisor fees, must be paid even if the merger is not
completed.
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. If market or industry-based fluctuations continue, our
stock price could decline below current levels or the initial public offering
price regardless of our actual operating performance. Furthermore, the
historical trading volume of our stock is not indicative of any future trading
volume of our stock because a substantial portion of shares were not eligible
for sale until recently. Therefore, if a large number of shares of our stock
are sold in a short period of time, our stock price will decline. 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.
Provisions of our corporate documents and Delaware law could deter takeovers
and prevent you from receiving a premium for your shares
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. For example, our certificate of
incorporation provides that our board may issue up to 5,000,000 shares of
preferred stock without stockholder approval.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We develop products in the United States and sell in North America, South
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. Due to the nature of our short-
term investments and debt, we have concluded that there is no material market
risk exposure.
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<PAGE>
Item 8. Financial Statements and Supporting Data
Reference is made to the Index to Consolidated Financial Statements which
appears on page F-1 of this report. The Report of Ernst & Young LLP,
Independent Auditors, Consolidated Financial Statements and Notes to
Consolidated Financial Statements which are listed in the Index to
Consolidated Financial Statements and which appear beginning on page F-2 of
this report are incorporated into this Item 8.
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<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to the
information set forth in the sections entitled "Election of Class I Directors"
and "Compliance with Section 16(a) of the Securities Exchange Act" contained
in the Proxy Statement for our 2000 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days of the end
of our fiscal year ended December 31, 1999.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Executive Compensation"
contained in the Proxy Statement for our 2000 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days of the
end of our fiscal year ended December 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement for our
2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the end of our fiscal year ended
December 31, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Certain Transactions" contained
in the Proxy Statement for our 2000 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the end of our
fiscal year ended December 31, 1999.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements and the Report of Ernst & Young LLP,
Independent Auditors therein are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998......... F-3
Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997............................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1999, 1998 and 1997........................ F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997............................................. F-6
Notes to Consolidated Financial Statements........................... F-7
</TABLE>
(a)(2) Financial Statement Schedule
The following financial statement schedule for the years ended December 31,
1997, 1998 and 1999 filed as part of this Form 10-K should be read in
conjunction with the consolidated financial statements and related notes
thereto and report of independent auditors filed herewith:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Schedule II Valuation and Qualifying Accounts.......................... S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not required, not applicable or the
information is otherwise included elsewhere in this Form 10-K.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-76263) as declared effective in the
Securities and Exchange Commission on June 22, 1999).
3.3 Bylaws of the Registrant (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
4.1 Specimen Common Stock Certificate (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
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 (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
4.3 Amended and Restated Registration Rights Agreement, dated February 10,
1997, as amended, by and among the Registrant and the purchasers of
the Registrant's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock (incorporated
by reference to the Registrant's Registration Statement on Form S-1
(File No. 333-76263) as declared effective in the Securities and
Exchange Commission on June 22, 1999).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
4.4 Warrant to purchase Common Stock dated August 10, 1998 issued by the
Registrant to Coast Business Credit (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
4.5 Share Purchase Agreement between the Registrant, Mobility.Net
Corporation and Michael Machado dated April 3, 1999 (incorporated by
reference to the Registrant's Registration Statement on Form S-1
(File No. 333-76263) as declared effective in the Securities and
Exchange Commission on June 22, 1999).
4.6 Agreement and Plan of Reorganization among the Registrant,
Software.com Acquisition, Inc., Telarc, Inc. and Thomas Gleason dated
October 20, 1999 (incorporated by reference to the Registrant's
Current Report on Form 8-K dated November 1, 1999).
4.7 Agreement and Plan of Merger among the Registrant, Software.com
Wireless, Inc., and AtMobile.com, Inc. dated March 8, 2000.
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers. (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
10.2* 1995 Stock Plan, as amended and restated (incorporated by reference to
the Registrant's Registration Statement on Form S-1 (File No. 333-
76263) as declared effective in the Securities and Exchange
Commission on June 22, 1999).
10.3* 1999 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
10.4* Mobility.Net Corporation 1999 Stock Option Plan, and form of
agreements thereunder (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.5* Form of Severance Agreement in the Event of a Change of Control
entered into between the Registrant and certain executive officers
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-76263) as declared effective in the
Securities and Exchange Commission on June 22, 1999).
10.6* Severance Agreement in the Event of a Change of Control, dated
February 3, 1999 between the Registrant and John S. Ingalls
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-76263) as declared effective in the
Securities and Exchange Commission on June 22, 1999).
10.7 Lease Agreement dated February 21, 1996 between the Registrant and 525
Anacapa LLC (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.8 Lease Agreement dated November 22, 1996 between the Registrant and
Cito Corporation (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.9 Lease Agreement dated September 11, 1996 between the Registrant and 91
Hartwell Avenue Trust (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.10 Lease Agreement dated May 24, 1999 between the Registrant and 10
Maguire Road LLC (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.11* 2000 Nonstatutory Stock Option Plan.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 38).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Indicates management compensatory plan, contract or arrangement.
(b) Reports on Form 8-K
On November 1, 1999, we filed a Current Report on Form 8-K to announce that
we had completed the acquisition of Telarc, Inc. On December 30, 1999, we
filed a Form 8-K/A with the required financial statements for Telarc, Inc.
(c) Exhibits
See item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
this 27th day of March 2000.
SOFTWARE.COM, INC.
/s/ John L. MacFarlane
By: _________________________________
John L. MacFarlane
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints John L. MacFarlane and John S. Ingalls,
and each of them, his or her true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, to sign any and all
amendments (including post-effective amendments) to this Report and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact, or
their substitute or substitutes, or any of them, shall do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ John L. MacFarlane Chief Executive Officer March 27, 2000
______________________________________ and Director (Principal
John L. MacFarlane Executive Officer)
/s/ John S. Ingalls Senior Vice President, March 27, 2000
______________________________________ Chief Financial Officer
John S. Ingalls (Principal Financial
Officer)
/s/ Mark A. Root Corporate Controller March 27, 2000
______________________________________ (Principal Accounting
Mark A. Root Officer)
/s/ Neal Douglas Director March 27, 2000
______________________________________
Neal Douglas
/s/ Judith Hamilton Director March 27, 2000
______________________________________
Judith Hamilton
/s/ Donald Listwin Director March 27, 2000
______________________________________
Donald Listwin
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Frank Perna Director March 27, 2000
______________________________________
Frank Perna
/s/ Bernard Puckett Director March 27, 2000
______________________________________
Bernard Puckett
/s/ Bernhard Woebker Director March 27, 2000
______________________________________
Bernhard Woebker
</TABLE>
39
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<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, 1999 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, 1999.
Our audits also included the financial statement schedule listed in the Index
at Item 14a. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, 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
January 24, 2000
F-2
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 41,715 $ 5,447
Marketable securities.................................... 25,748 496
Accounts receivable, less allowance of $1,024 and $481
for December 31, 1999 and 1998.......................... 22,268 9,091
Prepaid expenses and other current assets................ 1,923 501
-------- --------
Total current assets................................... 91,654 15,535
Property and equipment, net................................ 3,936 3,275
Goodwill and intangibles, net.............................. 8,048 --
Deposits and other assets.................................. 401 249
-------- --------
$104,039 $ 19,059
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable......................................... $ 2,708 $ 1,129
Accrued payroll and related liabilities.................. 3,399 1,291
Other accrued liabilities................................ 2,015 1,848
Deferred revenue......................................... 10,488 3,747
Note payable to bank..................................... -- 7,395
Current portion of long-term debt........................ -- 240
-------- --------
Total current liabilities.............................. 18,610 15,650
Long term debt............................................. -- 100
Commitments and contingencies
Redeemable convertible preferred stock--Series A, no par
value, 0 and 1,587,000 shares authorized, issued and
outstanding in 1999 and 1998.............................. -- 5,972
Redeemable convertible preferred stock--Series B, no par
value, 0 and 1,789,000 shares authorized, issued and
outstanding in 1999 and 1998.............................. -- 7,398
Shareholder's equity (deficit):
Convertible preferred stock--Series C, no par value, 0
and 1,329,000 shares authorized, issued and outstanding
in 1999 and 1998........................................ -- 6,848
Common stock, no par value, authorized--150,000,000
shares in 1999 and 50,000,000 in 1998, issued and
outstanding 42,205,000 and 28,632,000 shares at December
31, 1999 and 1998, respectively......................... 119,902 6,396
Deferred compensation.................................... (1,673) (1,447)
Accumulated other comprehensive loss..................... (6) --
Accumulated deficit...................................... (32,794) (21,858)
-------- --------
Total shareholders' equity (deficit)................... 85,429 (10,061)
-------- --------
Total liabilities and shareholders' equity (deficit)... $104,039 $ 19,059
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Revenues:
Software licenses.............................. $ 26,847 $17,462 $ 7,859
Services....................................... 17,791 8,157 2,807
-------- ------- --------
Total revenues............................... 44,638 25,619 10,666
Cost of revenues:
Software licenses.............................. 2,677 1,568 689
Services....................................... 11,591 7,451 2,675
-------- ------- --------
Total cost of revenues....................... 14,268 9,019 3,364
-------- ------- --------
Gross profit..................................... 30,370 16,600 7,302
Operating expenses:
Sales & marketing.............................. 18,505 10,769 8,607
Research & development......................... 14,080 8,716 6,309
General & administrative....................... 6,101 4,036 3,093
Amortization of goodwill and purchased
intangible assets............................. 329 -- --
Purchased in-process research and development.. 3,210 -- --
Legal matter................................... (200) (400) 1,000
-------- ------- --------
Total operating expenses..................... 42,025 23,121 19,009
-------- ------- --------
Loss from operations............................. (11,655) (6,521) (11,707)
Other income (expense):
Interest income................................ 2,060 293 298
Interest expense............................... (598) (645) (59)
Other.......................................... (128) (84) --
-------- ------- --------
Total other income (expense)................. 1,334 (436) 239
-------- ------- --------
Loss before income taxes....................... (10,321) (6,957) (11,468)
-------- ------- --------
Provision for income taxes..................... 212 446 1
-------- ------- --------
Net loss....................................... (10,533) (7,403) (11,469)
Accretion on redeemable convertible preferred
stock......................................... (403) (825) (730)
-------- ------- --------
Net loss applicable to common stockholders... $(10,936) $(8,228) $(12,199)
======== ======= ========
Basic and diluted net loss per share......... $ (0.31) $ (0.29) $ (0.44)
======== ======= ========
Weighted average shares of common stock
outstanding used in computing basic and diluted
net loss per share.............................. 35,341 28,228 27,814
======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
SOFTWARE.COM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Other
---------------- --------------- Accumulated Deferred Comprehensive
Shares Amount Shares Amount Deficit Compensation Loss Total
------ -------- ------ -------- ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... -- $ -- 26,163 $ 3,406 $ (1,431) $ -- $ -- $ 1,975
Net loss............... -- -- -- -- (11,469) -- -- (11,469)
Issuance of common
stock................. -- -- 1,579 24 -- -- -- 24
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (730) -- -- (730)
Stock option
exercises............. -- -- 273 288 -- -- -- 288
------ -------- ------ -------- -------- ------- ---- --------
Balance at December 31,
1997................... -- -- 28,015 3,718 (13,630) -- -- (9,912)
Net loss............... -- -- -- -- (7,403) -- -- (7,403)
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
------ -------- ------ -------- -------- ------- ---- --------
Balance at December 31,
1998................... 1,330 6,848 28,632 6,396 (21,858) (1,447) -- (10,061)
Comprehensive loss:
Net loss............... -- -- -- -- (10,533) -- -- (10,533)
Other comprehensive
loss, net of tax:
Unrealized loss on
securities........... -- -- -- -- -- -- (6) (6)
------ -------- ------ -------- -------- ------- ---- --------
Comprehensive loss..... -- -- -- -- (10,533) -- (6) (10,539)
Issuance of preferred
Series D.............. 1,626 10,000 -- -- -- -- -- 10,000
Capital contribution... -- -- -- 12 -- -- -- 12
Accretion of mandatory
redemption value of
preferred stock....... -- -- -- -- (403) -- -- (403)
Stock option
exercises............. -- -- 1,200 3,301 -- -- -- 3,301
Issuance of common
stock in connection
with employee stock
purchase plan......... -- -- 76 968 -- -- -- 968
Deferred compensation
related to stock
options............... -- -- -- 770 -- (770) -- --
Amortization of
deferred compensation
in connection with
stock options......... -- -- -- -- -- 544 -- 544
Conversion into common
stock of redeemable
convertible preferred
Series A and B........ -- -- 3,376 13,840 -- -- -- 13,840
Conversion into common
stock of convertible
preferred Series C
and D................. (2,956) (16,848) 2,956 16,848 -- -- -- --
Issuance of common
stock in initial
public offering, net
of offering costs of
$1,983................ -- -- 5,000 67,767 -- -- -- 67,767
Issuance of common
stock in connection
with Telarc, Inc.
acquisition........... -- -- 212 10,000 -- -- -- 10,000
Exercise of warrants... -- -- 753 -- -- -- -- --
------ -------- ------ -------- -------- ------- ---- --------
Balance at December 31,
1999................... -- $ -- 42,205 $119,902 $(32,794) $(1,673) $ (6) $ 85,429
====== ======== ====== ======== ======== ======= ==== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SOFTWARE.COM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net loss........................................ $(10,533) $ (7,403) $(11,469)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 2,265 1,652 1,204
Deferred compensation......................... 544 48 --
Write-off of in-process R&D................... 3,210 -- --
Provision for doubtful accounts............... 790 554 123
Changes in operating assets and liabilities:
Accounts receivable......................... (13,974) (7,102) (1,246)
Prepaid expenses and other current assets... (1,415) 128 (17)
Deferred income taxes....................... -- -- 258
Accounts payable............................ 1,579 519 51
Accrued payroll and related liabilities..... 2,107 759 291
Other accrued liabilities................... 175 506 1,249
Deferred revenue............................ 6,740 182 3,452
Other....................................... -- 23 --
-------- -------- --------
Net cash used in operating activities..... (8,512) (10,134) (6,104)
-------- -------- --------
Investing activities
Acquisition of property and equipment........... (2,597) (1,385) (2,555)
Acquisition of Telarc, Inc...................... (1,601) -- --
Purchase of marketable securities............... (30,752) (504) (892)
Maturities of marketable securities............. 5,500 900 --
Increase (decrease) in other assets............. (151) 77 (197)
-------- -------- --------
Net cash used in investing activities..... (29,601) (912) (3,644)
-------- -------- --------
Financing activities
Proceeds from long-term debt.................... -- -- 600
Repayments of long-term debt.................... (100) (240) (20)
Proceeds (repayments) of note payable to bank,
net............................................ (7,635) 3,007 4,388
Issuance of convertible preferred stock......... 10,000 6,848 7,398
Issuance of common stock related to ESPP........ 968 -- --
Exercise of stock options....................... 3,301 759 288
Issuance of common stock........................ 69,762 36 14
Costs related to issuance of common stock....... (1,914) -- --
-------- -------- --------
Net cash provided by financing
activities............................... 74,382 10,410 12,668
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... 36,269 (636) 2,920
Cash and cash equivalents at beginning of
period......................................... 5,447 6,083 3,163
-------- -------- --------
Cash and cash equivalents at end of period...... $ 41,715 $ 5,447 $ 6,083
======== ======== ========
Supplemental cash flow information:
Interest and income taxes paid during the year:
Income taxes paid............................. $ 87 $ 383 $ 1
-------- -------- --------
Interest paid................................. $ 504 $ 625 $ 59
-------- -------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Business
Software.com, Inc. (the Company) develops, markets, sells, and supports a
variety of Internet infrastructure applications to service providers
worldwide, including telecommunications companies, Internet Service Providers,
application service providers, cable-based Internet access providers, wireless
telephony carriers, Internet portals, competitive local exchange carriers, 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 consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within three
months from date of purchase. Cash and cash equivalents include commercial
paper, money market accounts and auction rate securities at December 31, 1999
and 1998.
Marketable Securities
Marketable securities consist of investments in commercial paper, government
securities, corporate notes and certificates of deposit that have maturities
greater than three months but less than one year from date of purchase.
The Company considers its investment portfolio available-for-sale as defined
in Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board ("FASB"). Accordingly, these investments are
recorded at fair value. Unrealized losses for the year ended December 31, 1999
were $6,000 and have been recorded as comprehensive income (loss). There were
no material unrealized gains or losses nor any material differences between
the estimated fair values and costs of securities at December 31, 1998 and
1997. There were no material realized gains and losses for the years ended
December 31, 1999, 1998 and 1997. The cost of securities sold is based on the
specific identification method. The fair value of available-for-sale
marketable securities by type of security are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------- ------------
<S> <C> <C>
Type of security:
Commercial paper...................................... $15,842 $496
U.S. Treasury securities and obligations of U.S.
government agencies.................................. 5,927 --
Corporate notes....................................... 2,979
Other interest bearing securities..................... 1,000 --
------- ----
$25,748 $496
======= ====
</TABLE>
Concentration of Credit Risk, Other Risks and Significant Customers
The Company's business is extremely competitive and is characterized by
rapid technology change, new product development and product obsolescence, and
evolving industry standards.
F-7
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
There were no customers that accounted for greater than 10% of total
revenues for the year ended December 31, 1999. Revenues from the Company's two
largest customers in each of the years ended December 31, 1998 and 1997,
accounted for 12% and 10% and 17% and 11% of total revenues, respectively. At
December 31, 1999 and 1998, accounts receivable from one and two customers,
respectively, was 18% and 26% of total accounts receivable.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense as incurred. Expenditures for
additions and major improvements are capitalized.
Depreciation and 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>
Goodwill and Intangible Assets
Goodwill recognized in business combinations accounted for as a purchase is
being amortized on a straight-line basis over five years. Goodwill
amortization expense was $100,000 for the year ended December 31, 1999.
Intangible assets resulting from business combinations consists of
core/alternative use technology, a covenant not to compete and assembled
workforce and are being amortized on a straight-line basis over three to five
years. Intangible asset amortization expense was $229,000 for the year ended
December 31, 1999.
Long-Lived Assets
The Company assesses on an ongoing basis the recoverability of long-lived
assets, including goodwill and other intangible assets, based on estimates of
future undiscounted cash flows for the applicable business compared to net
book value. If the future undiscounted cash flows estimate were less than net
book value, net book value would then be reduced to fair value based on an
estimate of discounted cash flows. The Company also evaluates the amortization
periods of all assets to determine whether events or circumstances warrant
revised estimates of useful lives.
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 FASB (see Note 6). 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.
F-8
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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).
Other Comprehensive Income (Loss)
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). Under FAS 130, the
Company is required to report unrealized gains (losses) on its marketable
securities and any other foreign currency translation adjustments within other
comprehensive income (loss). In 1999, other comprehensive loss consists of
unrealized gains (losses) on marketable securities.
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, 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, the Company recognizes revenue as the customer
activates mailboxes on their system. When the Company enters into a contract
where a customer may activate up to a specified number of mailboxes and
support and maintenance fees are based on that specified number, the Company
recognizes revenue evenly and ratably as payments become due over the term of
the arrangement. When the Company enters into license agreements under which
our revenues are based on a percentage of our customer's revenues, the Company
recognizes revenue as earned and reported by the customer. To date, revenues
and expenses related to these revenue sharing arrangements have not been
significant. Revenues from sales to significant resellers are not recognized
until the end user has been identified and the license key is issued.
Revenue from Services. Support and maintenance contracts generally call for
the Company to provide technical support and software updates and upgrades to
customers. Support and maintenance revenue is recognized ratably over the
support or maintenance period. Other services revenue, primarily consulting
and training, is recognized under the percentage of completion method and is
billed monthly on a time and materials basis.
When software and services are billed prior to the time the related revenue
is recognized under the foregoing policy, deferred revenue is recorded. There
were no unbilled accounts receivable at December 31, 1999 and 1998.
F-9
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $589,000, $296,000 and $528,000 for 1999, 1998 and 1997, respectively.
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.
For the year ended December 31, 1999 options to purchase 239,400 shares with
exercise prices greater than the average market prices of common stock were
outstanding. The Company has excluded all stock options from the calculation
of diluted loss per share for the year ended December 31, 1999 because all
such securities are anti-dilutive.
Similarly the Company excluded all redeemable convertible preferred stock,
convertible preferred stock, warrants and outstanding stock options from the
calculation of diluted loss per share for the year ended December 31, 1998 and
1997 because all such securities are also anti-dilutive.
Segment Information
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers, presented in Notes 1 and 9. 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, marketable securities, accounts receivable and accounts payable
approximate their fair values due to the short term nature of these financial
instruments. The carrying values of the note payable to bank and the long term
debt outstanding as of December 31, 1998 approximate their fair values. The
fair values of these instruments were estimated based on current interest
rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities.
F-10
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
2. Acquisitions
In April, 1999, the Company completed its acquisition of Mobility.Net, Inc.
which offers products for Web messaging using a Java-based technology platform
that complement the Company's product offerings. The Company issued 1,579,000
shares of its common stock in exchange for all of the outstanding shares of
Mobility.Net. 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.
In October, 1999, the Company completed its acquisition of Telarc, Inc.
(Telarc), which currently provides carrier-scale Short Messaging Service (SMS)
technologies that complement the Company's product offerings. In exchange for
all of the issued and outstanding stock of Telarc, the Company issued 212,000
shares of the Company's common stock with a value of $10.0 million and $1.5
million in cash. The acquisition of Telarc was accounted for as a purchase
and, accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition. Telarc's operating results
have been included in the Company's consolidated financial statements results
from the acquisition date of October 20, 1999. The purchase price plus costs
directly attributable to the completion of the acquisition of approximately
$101,000 have been allocated to the assets and liabilities acquired based on
their approximate fair value as determined through an independent appraisal
using proven valuation procedures and techniques. The purchase price of $11.6
million was allocated as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets................................................... $ 263
Developed technology.............................................. 5,700
Assembled workforce and other intangibles......................... 125
In-process research and development............................... 3,210
Goodwill.......................................................... 2,303
-------
Total purchase price.............................................. $11,601
=======
</TABLE>
The appraisal of the acquired business included $3.2 million of in-process
research and development, which was primarily related to three products under
development. The valuation represents the five-year after tax cash flow of the
in-process technology using a discount rate of 40%. This acquired technology
had not yet reached technological feasibility and had no future alternative
uses. Accordingly, it was written off at the time of the acquisition. Goodwill
and identified intangibles are being amortized on a straight-line basis over
their estimated economic useful lives of three to five years. The pro-forma
effect of the Telarc acquisition as if it has occurred on January 1, 1999 and
1998, is not significant to the financial statements presented herein.
In addition, in conjunction with the Company's acquisition of Telarc, the
Company entered into an employment agreement with an executive of Telarc which
the Company will pay a total of $3.5 million in cash to be paid out and
expensed in equal quarterly installments over ten quarters beginning March
2000.
F-11
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
The major components of property and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------ ------------
<S> <C> <C>
Computer equipment and software........................ $6,389 $4,615
Furniture and fixtures................................. 1,593 987
Leasehold improvements................................. 1,260 1,043
------ ------
9,242 6,645
Less accumulated depreciation.......................... 5,306 3,370
------ ------
$3,936 $3,275
====== ======
</TABLE>
4. Note Payable to Bank, Long-Term Debt and Credit Facilities
The Company had an arrangement with a financial institution which provided
for a total line of credit not to exceed the lesser of $15.0 million (of which
the Company could draw down up to $2.5 million as an equipment acquisition
loan), or an amount based on certain receivables collection criteria. As of
December 31, 1999, the Company had repaid all borrowings using proceeds of the
initial public offering of its common stock in June 1999, and has terminated
this arrangement. At December 31, 1998, borrowings under the line of credit
and the equipment acquisition loan totaled $7,395,000 and $340,000,
respectively. The interest rates for borrowing under the line of credit and
the equipment acquisition loan were prime rate plus 1.5% (9.25% at December
31, 1998) and prime rate plus 1.75% (9.5% at December 31, 1998), respectively.
In connection with a renegotiation of the credit facility in 1998, the
Company issued a warrant to the financial institution to purchase 68,000
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 was amortized as interest expense over the term of the credit
facility agreement.
In August, 1999, the Company obtained an $800,000 letter of credit with a
bank to secure a long-term facilities operating lease.
5. Stockholders Equity
Preferred Stock
The following table summarizes the Company's convertible preferred stock
issuances:
<TABLE>
<CAPTION>
Net
Date Issued Series Shares Proceeds
----------- ------ --------- -----------
<S> <C> <C> <C>
October 1996.................................. A 1,587,302 $ 4,960,000
February 1997................................. B 1,789,279 7,398,000
August 1998................................... C 1,329,781 6,848,000
April 1999.................................... D 1,626,016 10,000,000
--------- -----------
6,332,378 $29,206,000
========= ===========
</TABLE>
Upon completion of the Company's initial public offering on June 29, 1999,
all series of preferred stock automatically converted into common stock at a
1:1 ratio.
F-12
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the issuance of the Series A Preferred stock, 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
279,841 shares of common stock at an exercise price of $7.00 per share (the
Common Stock Purchase Warrants). The warrants were exercisable for a period of
five years from the date of issuance. At issuance, the fair value of the
warrants, approximately $430,000, was recorded as common stock on the
Company's balance sheet. The fair value of the warrants was determined using
the Black-Scholes option pricing model using an expected volatility factor of
30%, risk free interest rate of 6%, no dividend yield, and a 5-year life. In
November, 1999, the warrant holders exercised the warrants which resulted in
the issuance of 753,379 shares of common stock.
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 of the Series A
Preferred Stock 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.
Prior to the conversion of all outstanding preferred stock into common stock
upon completion of the Company's initial public offering, the Series A
Preferred Stock redemption price included a redemption premium of 10% per year
compounded annually. Accordingly, the initial fair value of the Preferred
Stock A was increased by periodic accretions, using the interest method, so
that the carrying amount would equal the mandatory redemption amount at the
redemption date. For the years ended December 31, 1999, 1998 and 1997, such
periodic accretions totaled $403,000, $825,000 and $730,000 respectively, and
are reflected as charges against the Company's accumulated deficit for each
year.
Authorization To Issue Common Stock
In June 1999, the Company's Board of Directors increased the number of
authorized common shares from 50,000,000 to 150,000,000.
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $-- $-- $--
State....................................................... 1 1 1
Foreign..................................................... 211 445 --
---- ---- ---
212 446 1
Deferred...................................................... -- -- --
---- ---- ---
Total....................................................... $212 $446 $ 1
==== ==== ===
</TABLE>
The provision for foreign income taxes in 1999 and 1998 relates primarily to
foreign withholding and foreign income taxes.
F-13
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Year Ended
December 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate............. (34)% (34)% (34)%
State income tax benefits............................... -- (2) (4)
Research and development credits........................ -- (6) (2)
Non qualified stock options............................. -- (7) --
Deferred compensation................................... 2 -- --
Foreign taxes........................................... 2 7 --
In process research and development..................... 10 -- --
Changes in valuation allowance.......................... 20 47 41
Non deductible expenses................................. 2 -- --
Other................................................... -- 2 (1)
--- --- ---
2 % 7 % -- %
=== === ===
</TABLE>
The components of the Company's deferred tax assets and liabilities as of
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $ 10,460 $ 5,923
Tax credit carryforwards.................................. 1,339 996
Deferred revenue.......................................... 3,947 1,232
Accruals and reserves..................................... 973 317
-------- -------
Total deferred tax assets............................... 16,719 8,468
Less valuation allowance.................................. (14,306) (8,468)
-------- -------
Net deferred tax assets................................... $ 2,413 $ --
Deferred tax liabilities
Basis difference in assets................................ (2,413) --
-------- -------
Net deferred taxes...................................... $ -- $ --
======== =======
</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, 1999, the Company had net operating loss carryforwards
available to reduce future federal and state income of $27.9 million and $11.1
million respectively, which expire from 2011 to 2019 for federal and 2002 to
2004 for state.
The Company has federal and state research and development credits of
approximately $613,000 and $188,000, respectively, expiring in 2011 to 2014,
which may be used to offset future tax liabilities. The Company also has
foreign tax credits of approximately $484,000, which will expire in the years
2003 to 2004.
Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss and tax credit carryforwards may be limited based on changes in
the percentage of ownership of the Company.
F-14
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in the valuation allowance balance is $5.8 million 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.
No provision has been made for federal, state, or additional foreign income
taxes related to approximately $506,000 of undistributed earnings of foreign
subsidiaries which have been or are intended to be permanently reinvested.
7. Commitments and Contingencies
The Company leases its facilities and other equipment under non-cancelable
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>
2000.............................................................. $1,226
2001.............................................................. 1,043
2002.............................................................. 108
2003.............................................................. 73
2004.............................................................. 43
------
$2,493
======
</TABLE>
Rent expense totaled $2,157,000, $1,378,000 and $955,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Company leases one of its facilities from a related party (see Note 10).
The lease expires in February 2002.
The Company was involved in a contract dispute with a third party technology
partner under a 1996 licensing agreement. The dispute related to a minimum
royalty obligation of $1,000,000 purportedly owed by the Company to the third
party. In 1997, 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. The Company paid the third party $400,000, and
as a result the related accrual was reduced to $600,000 at December 31, 1998
to reflect the complete resolution of this matter.
8. Employee Stock Option, Stock Purchase and Defined Contribution Plans
Employee Stock Option Plans
In October 1995, the Company adopted a stock option plan (the "1995 Plan")
which provides for the issuance of incentive and nonqualified stock options.
Options under the 1995 Plan are granted for a term of five and ten 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 1995 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, 1999, 362,000 shares remain
available for grant under this plan and 8,011,000 shares are reserved for
issuance upon the exercise of outstanding options.
In addition to the options granted under the 1995 Plan, the Company has
granted options outside of the 1995 Plan to purchase an aggregate of 1,074,000
shares of common stock. These options contain the same
F-15
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
vesting provisions as those granted under the 1995 Plan except that an option
to purchase 250,000 shares is subject to accelerated vesting in certain
circumstances. At December 31, 1999, 38,000 shares remained authorized and
available for grant and 1,020,000 shares were reserved for issuance upon the
exercise of outstanding options.
Subsequent to year end, in January 2000, the Company adopted a stock option
plan (the "2000 Plan") which provides for the issuance of nonqualified stock
options. Options under the 2000 Plan are granted for a term of ten 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 2000 Plan authorizes a total
of up to 750,000 shares of common stock for issuances as nonqualified options.
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...................................... 3,177 0.63 96.50 16.59
Exercised.................................... (1,200) 0.63 11.00 2.75
Canceled..................................... (457) 0.63 11.00 4.13
------ ----- ------ -----
Outstanding at December 31, 1999............... 9,031 $0.63 $96.50 $7.84
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable
December 31, 1999 at December 31, 1999
------------------------------------- --------------------
Weighted Weighted
Number of Weighted Average Average Number of Average
Exercise Shares Remaining Exercise Shares Exercise
Price Range Outstanding Contractual Life Price Exercisable Price
----------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.63-$1.50...... 1,049 1.52 $ 1.19 901 $ 1.19
$3.00-$3.65...... 5,001 4.15 3.62 2,273 3.59
$5.50-$6.15...... 1,377 5.93 5.71 65 5.50
$9.00-$32.13..... 1,163 9.40 12.58 112 10.88
$41.00-$96.50.... 441 9.83 65.66 1 43.62
----- ---- ------ ----- ------
9,031 5.07 $ 7.84 3,352 $ 3.24
===== ==== ====== ===== ======
</TABLE>
Prior to the Company's initial public offering in June 1999, the fair value
of each option grant was determined on the date of the grant using the minimum
value method. Subsequent to the offering, the fair value was of each option
grant was determined using the Black-Scholes method. The weighted average fair
value of an option granted during 1999, 1998 and 1997 was $8.65, $0.65 and
$0.65, respectively. Except for the volatility assumption, which was only used
under the Black-Scholes method, the following assumptions were used for 1999,
1998 and 1997, respectively, to perform the calculations: risk-free interest
rate of 5.8%, 6% and 6%, a
F-16
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
weighted-average expected life of the options of 4.3, 3.3 and 3.4 years, 90%
volatility in 1999 only and no assumed dividend yield for all years.
If the Company recognized employee stock option-related compensation expense
in accordance with FAS 123 and used the combined Black-Scholes and minimum
value methods for 1999 and the minimum value method for 1998 and 1997 for
determining the weighted average fair value of options granted, the Company's
pro forma net loss applicable to common shareholders would have been
$14,866,000, $8,999,000 and $12,749,000, respectively. The 1999, 1998 and 1997
pro forma basic and diluted loss per share would have been $0.42, $0.32 and
$0.46.
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 1999, 1998 and 1997 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.
As of December 31, 1999, the Company's stock options had a weighted-average
remaining contractual life of 5.1 years.
In connection with the grant of certain share options to employees during
1999 and 1998, the Company recorded deferred compensation of approximately
$770,000 and $1,495,000, respectively 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 amounts are being amortized over the vesting period of the related
options. Amortization expense recognized for the years ended December 31, 1999
and 1998 totaled $545,000 and $48,000, respectively.
Employee Stock Purchase Plan
In May 1999, the Company adopted an employee stock purchase plan (the
"ESPP"). A total of 1,000,000 shares of common stock have been reserved for
issuance under the ESPP. The number of common shares reserved under the ESPP
may be increased annually on July 1 of each year beginning in 2000. Such
increases are limited to the lesser of 500,000 shares or 2% of the shares
outstanding on that date or can be further limited by the Board of Directors.
The ESPP, which is intended to qualify under Section 423 of the Internal
Revenue Code, contains four six month purchase periods within 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. Eligible
participants may purchase common stock through payroll deductions of up to 15%
of each participants compensation. The maximum number of shares a participant
may purchase is 10,000 shares. Amounts deducted and accumulated by the
participant are used to purchase common shares at the end of each purchase
period. The price of stock purchased under the ESPP 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 ESPP will terminate in 2009.
For the year ended December 31, 1999, employees purchased 75,948 shares at
$12.75. At December 31, 1999, 924,000 shares remained available for future
issuance under the ESPP.
Defined Contribution 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
F-17
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in the Company's contributions after a specified number of years of service,
as defined under the plan. No Company contributions have been made to date
under the plan.
9. 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>
Year Ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
United States.................................... $17,781 $13,378 $ 7,403
Europe........................................... 14,171 5,130 1,034
Asia............................................. 9,964 3,884 1,232
Canada........................................... 2,347 2,754 701
Other............................................ 375 473 296
------- ------- -------
Total Revenues................................. $44,638 $25,619 $10,666
======= ======= =======
</TABLE>
The geographic classification of revenues is based upon the location of the
customer.
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Long-lived Assets:
United States...................................... $3,723 $3,188 $3,543
Europe............................................. 160 53 --
Asia............................................... 53 34 --
------ ------ ------
Total long-lived assets.......................... $3,936 $3,275 $3,543
====== ====== ======
</TABLE>
10. 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 $418,000 at December 31, 1999. Rent
expense under this lease for the years ended December 31, 1999, 1998, and 1997
totaled $193,000, $171,000, and $165,000, respectively.
For the years ended December 31, 1999, 1998, and 1997, revenues from
companies affiliated with AT&T Corporation, which is considered a related
party due to its involvement with AT&T Ventures, a preferred/common
shareholder, totaled approximately $1,962,000, $3,599,000 and $2,687,000,
respectively. At December 31, 1999 and 1998, accounts receivable from such
companies totaled approximately $532,000 and $948,000, respectively.
11. Initial Public Offering Registration
In June 1999, the Company completed an initial public offering in which it
sold 5,000,000 shares of common stock at $15.00 per share, resulting in
proceeds to the Company of approximately $68.0 million, net of issuance costs
of approximately $1.9 million.
F-18
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Subsequent Event (unaudited)
In March 2000, the Company announced that it had signed a definitive
agreement to acquire AtMobile.com, Inc. a leading wireless Internet
application service provider with wireless Instant Messaging technology and
Wireless Intelligent Network integration expertise. The acquisition is
expected to be accounted for as a pooling of interests.
13. Quarterly Results of Operations (unaudited)
<TABLE>
<CAPTION>
1999 Quarters Ended
-------------------------------
June Sept.
March 31 30 30 Dec. 31
-------- ------ ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Total revenues............................. $8,071 $9,048 $12,006 $15,513
Gross profit............................... 5,651 5,594 7,740 11,385
Net loss applicable to common
shareholders.............................. 2,263 3,066 1,704 3,903
Basic and diluted loss per share........... 0.08 0.10 0.04 0.09
<CAPTION>
1998 Quarters Ended
-------------------------------
June Sept.
March 31 30 30 Dec. 31
-------- ------ ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Total revenues............................. $4,898 $6,140 $ 6,877 $ 7,704
Gross profit............................... 2,766 4,281 4,579 4,974
Net loss applicable to common
shareholders.............................. 2,914 1,378 1,683 2,253
Basic and diluted loss per share........... 0.10 0.05 0.06 0.08
</TABLE>
F-19
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998 and 1997
<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, 1999................... $481,000 $794,000 $251,000 $1,024,000
December 31, 1998................... 114,000 554,000 187,000 481,000
December 31, 1997................... 21,000 123,000 30,000 114,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-76263) as declared effective in the
Securities and Exchange Commission on June 22, 1999).
3.3 Bylaws of the Registrant (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
4.1 Specimen Common Stock Certificate (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
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 (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
4.3 Amended and Restated Registration Rights Agreement, dated February 10,
1997, as amended, by and among the Registrant and the purchasers of
the Registrant's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock (incorporated
by reference to the Registrant's Registration Statement on Form S-1
(File No. 333-76263) as declared effective in the Securities and
Exchange Commission on June 22, 1999).
4.4 Warrant to purchase Common Stock dated August 10, 1998 issued by the
Registrant to Coast Business Credit (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
4.5 Share Purchase Agreement between the Registrant, Mobility.Net
Corporation and Michael Machado dated April 3, 1999 (incorporated by
reference to the Registrant's Registration Statement on Form S-1
(File No. 333-76263) as declared effective in the Securities and
Exchange Commission on June 22, 1999).
4.6 Agreement and Plan of Reorganization among the Registrant,
Software.com Acquisition, Inc., Telarc, Inc. and Thomas Gleason dated
October 20, 1999 (incorporated by reference to the Registrant's
Current Report on Form 8-K dated November 1, 1999).
4.7 Agreement and Plan of Merger among the Registrant, Software.com
Wireless, Inc., and AtMobile.com, Inc. dated March 8, 2000.
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers. (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
10.2* 1995 Stock Plan, as amended and restated (incorporated by reference to
the Registrant's Registration Statement on Form S-1 (File No. 333-
76263) as declared effective in the Securities and Exchange
Commission on June 22, 1999).
10.3* 1999 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-76263)
as declared effective in the Securities and Exchange Commission on
June 22, 1999).
10.4* Mobility.Net Corporation 1999 Stock Option Plan, and form of
agreements thereunder (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.5* Form of Severance Agreement in the Event of a Change of Control
entered into between the Registrant and certain executive officers
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-76263) as declared effective in the
Securities and Exchange Commission on June 22, 1999).
10.6* Severance Agreement in the Event of a Change of Control, dated
February 3, 1999 between the Registrant and John S. Ingalls
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-76263) as declared effective in the
Securities and Exchange Commission on June 22, 1999).
10.7 Lease Agreement dated February 21, 1996 between the Registrant and 525
Anacapa LLC (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.8 Lease Agreement dated November 22, 1996 between the Registrant and
Cito Corporation (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.9 Lease Agreement dated September 11, 1996 between the Registrant and 91
Hartwell Avenue Trust (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.10 Lease Agreement dated May 24, 1999 between the Registrant and 10
Maguire Road LLC (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-76263) as declared
effective in the Securities and Exchange Commission on June 22,
1999).
10.11* 2000 Nonstatutory Stock Option Plan.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 38).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Indicates management compensatory plan, contract or arrangement.
<PAGE>
EXHIBIT 4.7
MERGER AGREEMENT
BY AND AMONG
SOFTWARE.COM, INC.
SOFTWARE.COM WIRELESS, INC.
AND
AT MOBILE.COM, INC.
DATED MARCH 8, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I THE MERGER..................................................... 2
1.1 The Merger..................................................... 2
----------
1.2 Effective Time................................................. 2
--------------
1.3 Effect of the Merger........................................... 2
--------------------
1.4 Certificate of Incorporation; Bylaws........................... 2
------------------------------------
1.5 Directors and Officers......................................... 3
----------------------
1.6 Effect on Capital Stock........................................ 3
-----------------------
1.7 Surrender of Certificates...................................... 5
-------------------------
1.8 Stock Options.................................................. 6
-------------
1.9 Assumption of Warrants......................................... 6
----------------------
1.10 No Fractional Shares........................................... 7
--------------------
1.11 Tax Treatment.................................................. 7
-------------
1.12 Accounting Treatment........................................... 7
--------------------
1.13 Shares of Dissenting Stockholders.............................. 7
---------------------------------
1.14 Taking of Necessary Action; Further Action..................... 7
------------------------------------------
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................. 8
2.1 Organization................................................... 8
------------
2.2 Company Capital Structure...................................... 8
-------------------------
2.3 Subsidiaries................................................... 9
------------
2.4 Authority...................................................... 9
---------
2.5 No Conflict.................................................... 9
-----------
2.6 Consents....................................................... 9
--------
2.7 Company Financial Statements...................................10
----------------------------
2.8 No Undisclosed Liabilities.....................................10
--------------------------
2.9 No Changes.....................................................10
----------
2.10 Tax Matters....................................................12
-----------
2.11 Restrictions on Business Activities............................14
-----------------------------------
2.12 Title of Properties; Absence of Liens and Encumbrances;
------------------------------------------------------
Condition of Equipment.......................................14
----------------------
2.13 Intellectual Property..........................................14
---------------------
2.14 Agreements, Contracts and Commitments..........................17
-------------------------------------
2.15 Interested Party Transactions..................................19
-----------------------------
2.16 Governmental Authorization.....................................19
--------------------------
2.17 Litigation.....................................................19
----------
2.18 Accounts Receivable; Inventory.................................20
------------------------------
2.19 Minute Books...................................................20
------------
2.20 Brokers' and Finders' Fees.....................................20
--------------------------
2.21 Employees; Employee Benefit Plans and Compensation.............20
--------------------------------------------------
2.22 Insurance......................................................21
---------
2.23 Compliance with Laws...........................................21
--------------------
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
2.24 Complete Copies of Materials...................................22
----------------------------
2.25 Tax-Free Reorganization and Pooling............................22
-----------------------------------
2.26 Required Vote..................................................22
-------------
2.27 Representations Complete.......................................22
------------------------
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB........22
3.1 Organization, Standing and Power...............................22
--------------------------------
3.2 Authority......................................................22
---------
3.3 Capital Structure..............................................23
-----------------
3.4 SEC Documents; Parent Financial Statements.....................23
------------------------------------------
3.5 No Conflict....................................................24
-----------
3.6 Consents.......................................................24
--------
3.7 Tax-Free Reorganization and Pooling............................24
-----------------------------------
3.8 No Shareholder Vote Required...................................24
----------------------------
3.9 No Material Adverse Change.....................................24
--------------------------
3.10 Litigation.....................................................24
----------
3.11 Representations Complete.......................................25
------------------------
ARTICLE IV ADDITIONAL AGREEMENTS..........................................25
4.1 Conduct of Business of the Company.............................25
----------------------------------
4.2 Access to Information..........................................27
---------------------
4.3 Confidentiality................................................27
---------------
4.4 Exclusivity....................................................27
-----------
4.5 Expenses.......................................................28
--------
4.6 Public Disclosure..............................................28
-----------------
4.7 Consents.......................................................28
--------
4.8 FIRPTA Compliance..............................................28
-----------------
4.9 Reasonable Efforts.............................................28
------------------
4.10 Notification of Certain Matters................................28
-------------------------------
4.11 Company's Accountants..........................................28
---------------------
4.12 Tax Treatment; Accounting Treatment............................28
-----------------------------------
4.13 Employee Benefits Matters......................................29
-------------------------
4.14 Officers and Directors.........................................29
----------------------
4.15 Blue Sky Laws..................................................29
-------------
ARTICLE V CONDITIONS TO THE MERGER.......................................29
5.1 Conditions to Obligations of Each Party to Effect the Merger...30
------------------------------------------------------------
5.2 Additional Conditions to Obligations of the Company............30
---------------------------------------------------
5.3 Additional Conditions to the Obligations of Parent and
------------------------------------------------------
Merger Sub...................................................31
----------
ARTICLE VI INDEMNIFICATION................................................32
6.1 Indemnification of Indemnified Parties.........................32
--------------------------------------
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
6.2 Defense of Third Party Claims..................................33
-----------------------------
6.3 Direct Claims..................................................33
-------------
6.4 Limitations....................................................33
-----------
6.5 Matters Not Subject to Minimum Loss............................34
-----------------------------------
6.6 Escrow Arrangements............................................34
-------------------
6.7 No Waiver Relating to Claims for Fraud.........................35
--------------------------------------
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER..............................35
7.1 Termination....................................................35
-----------
7.2 Effect of Termination..........................................36
---------------------
7.3 Amendment......................................................36
---------
7.4 Extension; Waiver..............................................37
-----------------
ARTICLE VIII THE SELLER REPRESENTATIVE......................................37
8.1 Authorization of the Seller Representative.....................37
------------------------------------------
8.2 Compensation; Exculpation; Indemnity...........................38
------------------------------------
8.3 Removal and Replacement of Seller Representative;
-------------------------------------------------
Successor Seller Representative; Action by
------------------------------------------
Seller Representative........................................39
---------------------
8.4 Reliance; Limitation as to Parent, Merger Sub and the Company..40
-------------------------------------------------------------
ARTICLE IX GENERAL PROVISIONS.............................................40
9.1 Notices........................................................40
-------
9.2 Interpretation.................................................41
--------------
9.3 Counterparts...................................................41
------------
9.4 Entire Agreement; Assignment...................................42
----------------------------
9.5 Severability...................................................42
------------
9.6 Other Remedies.................................................42
--------------
9.7 Governing Law..................................................42
-------------
9.8 Rules of Construction..........................................42
---------------------
9.9 Specific Performance...........................................42
--------------------
9.10 Survival of Representations, Warranties and Agreement..........42
-----------------------------------------------------
9.11 Headings.......................................................43
--------
9.12 Waiver of Jury Trial...........................................43
--------------------
-iii-
<PAGE>
MERGER AGREEMENT
This MERGER AGREEMENT (this "Agreement") is made and entered into March
8, 2000 among Software.com, Inc., a Delaware corporation ("Parent"),
Software.com Wireless, Inc., a Delaware corporation and a wholly-owned
subsidiary of Parent ("Merger Sub") and At Mobile.com, Inc., a Delaware
corporation (the "Company" and, together with Parent and Merger Sub,
individually a "Party" and collectively the "Parties").
RECITALS
A. The Board of Directors of each Party believes it is in the best
interests of each respective company and its stockholders that Parent acquire
the Company through the statutory merger of the Merger Sub with and into the
Company (the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding shares
of the Company's (i) common stock (the "Company Common Stock"), (ii) Series A
Preferred Stock (the "Series A Preferred Stock"), (iii) Series B Preferred Stock
(the "Series B Preferred Stock"), (iv) Series C Preferred Stock (the "Series C
Preferred Stock") and (v) Series D Preferred Stock (the "Series D Preferred
Stock") and collectively with the Series A Preferred Stock, the Series B
Preferred and the Series C Preferred Stock, the "Company Preferred Stock" and,
together with the Company Common Stock, the "Company Stock"), each having a par
value of $0.001 per share shall be converted into the right to receive shares of
the common stock, par value $0.001 per share, of Parent ("Parent Common Stock").
C. A portion of the shares of Parent Common Stock otherwise issuable
by Parent in the Merger shall be placed in escrow by Parent, the release of
which amount shall be contingent upon certain events and conditions.
D. The Company, Parent and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
E. For federal income tax purposes, the Parties intend to adopt a plan
or reorganization within the meaning of, and to cause the Merger to qualify as a
reorganization under, Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
F. For financial accounting purposes, the Parties intend that the
transactions under this Agreement (the "Transactions") will be accounted for as
a "pooling of interests" (a "Pooling Transaction") under United States generally
accepted accounting principles ("GAAP") and the rules, regulations and
interpretations of the Securities and Exchange Commission (the "SEC").
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time and pursuant to this Agreement
----------
and the applicable provisions of the Delaware General Corporation Law (the
"Delaware Law"), Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall cease and the Company shall
continue as the surviving corporation and as a wholly-owned subsidiary of
Parent. The Company as the surviving corporation after the Merger is sometimes
referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 7.1, the closing of the Merger (the "Closing") will take
-----------
place as promptly as practicable, but no later than two business days following
satisfaction or waiver of the conditions set forth in Article V, at the offices
---------
of Parent, 525 Anacapa Street, Santa Barbara, California 93101, unless another
place or time is agreed to by Parent and the Company. The date upon which the
Closing actually occurs is referred to as the "Closing Date." On the Closing
Date, the Parties shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of Delaware (the "Certificate
of Merger"). The date and time the Merger becomes effective in accordance with
the Delaware Law is referred to as the "Effective Date" or "Effective Time."
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in this Agreement, the Certificate of Merger and
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of the Company and Merger Sub shall vest in
the Surviving Corporation, and all debts, liabilities and duties of the Company
and Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time, the Certificate of Incorporation of the Merger Sub
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is At Mobile.com, Inc."
(b) The Bylaws of the Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
-2-
<PAGE>
1.5 Directors and Officers. The director(s) of Merger Sub immediately
----------------------
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws. The Merger Sub's officers immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation, each to hold office in accordance with the Bylaws of the Surviving
Corporation.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
-----------------------
Merger and without any action on the part of Merger Sub or the Company or any of
their respective stockholders:
(a) Cancellation of Parent-Owned and Company-Owned Stock. Each
----------------------------------------------------
share of Company Common Stock and Company Preferred Stock owned by Merger Sub,
Parent, the Company or any direct or indirect wholly-owned subsidiary of Parent
or of the Company immediately prior to the Effective Time (the "Excluded Company
Shares") shall be canceled and extinguished without any conversion thereof.
(b) Common Stock of Merger Sub. Each share of common stock of
--------------------------
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of the common stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall from and
after the Effective Time evidence ownership of shares of capital stock of the
Surviving Corporation.
(c) Conversion of Company Stock. Subject to Section 1.10, each
--------------------------- ------------
share of Company Stock issued and outstanding immediately prior to the Effective
Time (other than shares of Company Stock held by Dissenting Stockholders) shall
be converted into a fraction of a share of Parent Common Stock equal to the
Exchange Ratio (as defined in Section 1.6(e)). All such Company Stock, when so
--------------
converted, shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and the holder of a certificate ("Stock
Certificate") that, immediately prior to the Effective Time, represented
outstanding shares of Company Stock shall cease to have any rights with respect
thereto, except the right to receive, upon the surrender of such Stock
Certificate, (i) the Parent Common Stock (the "Merger Consideration") to which
such holder is entitled pursuant to this Section 1.6(c), (ii) certain dividends
--------------
and other distributions in with Section 1.6(d), and (iii) cash in lieu of
--------------
fractional shares Parent Common Stock in accordance with Section 1.10, without
------------
interest. Until surrendered as contemplated by Section 1.7, each Stock
-----------
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration as
contemplated by this Section 1.6(c). Notwithstanding the foregoing, if between
--------------
the date of this Agreement and the Effective Time, the outstanding shares of
Company Stock or Parent Common Stock shall have been changed into a different
number of shares or a different class because of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares, the Exchange Ratio with respect to such shares shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
After the Effective Time, the Stock
-3-
<PAGE>
transfer books of the Company shall be closed and there shall be no further
registration of transfers of Company Stock outstanding prior to the Effective
Time. If, at or after the Effective Time, Stock Certificates are presented to
the Surviving Corporation, they shall be canceled and exchanged as provided for,
and in accordance with the procedures set forth in this Section 1.6(c).
--------------
(d) Dividends and Distributions on Merger Consideration. No
---------------------------------------------------
dividends or other distributions declared or made after the Effective Time with
a record date after the Effective Time shall be paid to the holder of any
unsurrendered Stock Certificate with respect to the Merger Consideration
represented thereby until the holder of record of such Stock Certificate shall
surrender such Stock Certificate in accordance with Section 1.7. Subject to the
-----------
effect of applicable laws, following surrender of any such Stock
Certificate there shall be paid to the record holder of the certificate or
certificates representing the Merger Consideration issued in exchange therefor,
without interest, (i) the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such
Merger Consideration, and (ii) if the payment date for any dividend or
distribution payable with respect to such Merger Consideration has not occurred
prior to the surrender of such Stock Certificate, at the appropriate payment
date therefor, the amount of dividends or other distributions with a record date
after the Effective Time but prior to the surrender of such Stock Certificate
and a payment date subsequent to the surrender of such Stock Certificate.
(e) Certain Definitions. For purposes of this Agreement, the terms
-------------------
defined in this Section 1.6(e) shall have the meanings specified:
--------------
"Company Warrants" means the warrants to purchase Company
Common Stock the number and termination date of which and exercise price
for are as listed on Schedule 1.6(e).
---------------
"Dissenting Stockholder(s)" means holder(s) of Company Common
Stock who have validly perfected dissenters and appraisal rights under
Section 262 of the Delaware Law.
"Exchange Ratio" means the quotient of (i) 3,750,000 divided by
(ii) the Total Diluted Company Shares; provided that if the total expense
the Company incurs or will incur in connection with the Transactions
exceeds $6.5 million (including legal, accounting and investment banking
expenses of the Company) (the "Excess Expense"), then the number 3,750,000
shall be reduced by the quotient of the Excess Expense divided by 96.
"Person(s)" means any individual, partnership, limited
liability company, corporation, association, joint stock company, trust,
joint venture, labor organization, unincorporated organization or
Governmental Authority.
"Total Diluted Company Shares" means the sum of (i) the number
of shares of Company Common Stock outstanding as of the Effective Time
(excluding the Excluded Company Shares), (ii) the number of shares of
Company Common Stock into which the Company Preferred Stock outstanding as
of the Effective Time is convertible
-4-
<PAGE>
as of the Effective Time (excluding the Excluded Company Shares), (iii) the
number of shares of Company Common Stock for which the Company Options
outstanding as of the Effective Time and for which the Company has any
obligations as of the Effective Time to grant subsequent to the Effective
Time are exercisable for Company Common Stock as of the Effective Time
(assuming for these purposes that all such Company Options are fully
exercisable as of the Effective Time), (iv) the number of shares of Company
Common Stock for which the Company Warrants outstanding as of the Effective
Time which would not otherwise terminate as a result of the Transactions
and for which the Company has any obligation as of the Effective Time to
grant subsequent to the Effective Time are exercisable for Company Common
Stock as of the Effective Time (assuming for these purposes that all such
Company Warrants are fully exercisable as of the Effective Time), and (v)
the number of shares of Company Common Stock (without duplication) for
which all other derivative securities of the Company are exercisable for or
convertible into, directly or indirectly, as of the Effective Time.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Procedures. At the Closing, or as soon as practicable
-------------------
thereafter, (i) the holders of Stock Certificates shall surrender to Parent all
certificates which immediately prior to the Effective Time represented all
outstanding shares of Company Stock, (ii) upon such surrender of such
Certificates the holder thereof shall be entitled to receive in exchange
therefor a certificate representing the Merger Consideration represented thereby
(less the Escrow Amount, which Parent shall deposit in an escrow account
pursuant to Section 6.6) and cash in lieu of fractional shares in accordance
-----------
with Section 1.10, without interest, and (iii) the Stock Certificates so
------------
surrendered shall forthwith be canceled. The "Escrow Amount" for each holder of
one or more Stock Certificates shall equal the product of (1) the aggregate
Merger Consideration represented thereby, and (2) 0.10.
(b) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Stock
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Stock Certificate so surrendered will
have been properly endorsed and otherwise in proper form for transfer and that
the Person requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required because of the issuance of
a certificate for shares of Parent Common Stock in any name other than that of
the registered holder of the Stock Certificate surrendered, or established to
the satisfaction of Parent or any agent designated by it that such tax has been
paid or is not payable.
(c) No Further Ownership Rights in Company Stock. All shares of
--------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Stock in accordance with the terms hereof (including cash in lieu of fractional
shares) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Stock.
(d) Lost, Stolen or Destroyed Stock Certificates. If any Stock
--------------------------------------------
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person
-5-
<PAGE>
claiming such Stock Certificate be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such Person or entity of a bond in
such reasonable amount as Parent may direct as indemnity against any claim that
may be made against it with respect to such Certificate, Parent will issue in
exchange for such lost, stolen or destroyed Certificate the Merger
Consideration, and, if applicable, cash in lieu of fractional shares and unpaid
dividends and other distributions on any Merger Consideration deliverable in
respect thereof under this Agreement.
1.8 Stock Options.
-------------
(a) Assumption of Options. At the Effective Time, automatically and
---------------------
without any action on the part of the holder thereof, each outstanding employee
or director stock option of the Company outstanding at the Effective Time (the
"Company Options") shall be assumed by Parent and become an option to purchase
that number of shares of Parent Common Stock obtained by multiplying the number
of shares of Company Common Stock issuable upon the exercise of such option by
the Exchange Ratio at an exercise price per share equal to the per share
exercise price of such option divided by the Exchange Ratio and otherwise upon
the same terms and conditions as such outstanding options to purchase Company
Common Stock, including to the extent such options were incentive stock options;
provided, however, that in the case of any option to which Section 421 of the
Code applies because of the qualifications under Sections 422 or 423 of the
Code, the exercise price, the number of shares purchasable pursuant to such
option and the terms and conditions of exercise of such option shall comply with
Section 424(a) of the Code.
(b) Reservation of Shares. Parent shall take all corporate actions
---------------------
necessary to reserve for issuance a sufficient number of shares of Parent Common
Stock for delivery upon exercise of Company Options assumed by Parent pursuant
to Section 1.8(a).
--------------
(c) Form S-8. Within 30 days after Closing, Parent shall file a
--------
registration statement on Form S-8 (or any successor or other appropriate forms)
with respect to the shares of Parent Common Stock subject to Company Options and
shall use all reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain outstanding.
(d) Amendments to Plans. Each of the Company stock option plans
-------------------
providing for the issuance or grant of options in respect to the stock of
Company shall be assumed as of the Effective Time by Parent with such amendments
thereto as may be required to reflect the Merger, including the substitution of
Parent Common Stock for Company Common Stock thereunder.
1.9 Assumption of Warrants.
----------------------
(a) At the Effective Time, automatically and without any action on
the part of the holder thereof, Parent shall assume each Company Warrant
remaining outstanding following the Merger and it shall become a warrant to
purchase that number of shares of Parent Common Stock obtained by multiplying
the number of shares of Company Common Stock issuable upon the exercise of such
warrant by the Exchange Ratio at an exercise price per share equal to the per
-6-
<PAGE>
share exercise price of such warrant divided by the Exchange Ratio and otherwise
upon the same terms and conditions as the applicable warrant.
(b) Parent shall take all corporate actions necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of Company Warrants assumed by Parent pursuant to Section 1.9(a).
--------------
1.10 No Fractional Shares. No fractional shares of Parent Common Stock
--------------------
shall be issued in the Merger and fractional share interests shall not entitle
the owner thereof to vote or to any rights of a stockholder of Parent. All
holders of fractional shares of Parent Common Stock shall be entitled to
receive, in lieu thereof, an amount in cash determined by multiplying the
fraction of a share of Parent Common Stock to which such holder would otherwise
have been entitled by the closing sale price of Parent Common Stock on the
trading day prior to the Effective Time.
1.11 Tax Treatment. The Parties intend that the Merger shall constitute a
--------------
tax free reorganization within the meaning of Section 368 of the Code.
1.12 Accounting Treatment. The Parties intend that the Merger will be
--------------------
accounted for as a "pooling of interests" in accordance with GAAP and the rules,
regulations and interpretations of the SEC.
1.13 Shares of Dissenting Stockholders. Any issued and outstanding shares
---------------------------------
of Company Common Stock a Dissenting Stockholder holds shall be converted into
the right to receive such consideration as may be determined to be due to such
Dissenting Stockholder pursuant to the Delaware Law; provided, however, shares
of Company Common Stock outstanding at the Effective Time and held by a
Dissenting Stockholder who shall, after the Effective Time, withdraw their
demand for purchase or lose their right of purchase as provided in the Delaware
Law, shall be deemed to be converted, as of the Effective Time, into the right
to receive the shares of Parent Common Stock, dividends and distribution, if
any, in accordance with Section 1.6(d), and cash in lieu of fractional shares in
--------------
accordance with Section 1.10, without interest. The Company shall give Parent
------------
(A) prompt notice of any written demands it receives for purchase, withdrawals
of demands for purchase and any other instruments served pursuant to Section 262
of the Delaware Law, and (B) the opportunity to direct all negotiations and
proceedings with respect to demands for purchase under Section 262 of the
Delaware Law. The Company will not voluntarily make any payment with respect to
any such demands for purchase and will not, except with the prior written
consent of Parent, settle or offer to settle any such demands.
1.14 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company, Parent and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and the Company and Merger Sub
shall cause them to take, all such lawful and necessary action.
-7-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub,
subject to such exceptions as are specifically disclosed in the disclosure
schedules (referencing the appropriate section numbers) supplied by the Company
to Parent and attached hereto as Schedule 1 (the "Disclosure Schedules"), as
----------
follows:
2.1 Organization. The Company is a corporation duly incorporated and
------------
organized and is validly existing and in good standing under the laws of the
state of Delaware. The Company has the corporate power to own its properties and
to carry on its business as now being conducted. The Company is duly registered,
licensed or qualified as a foreign corporation and is in good standing under the
laws of each jurisdiction in which the failure to be so qualified could have a
material adverse effect on the business, assets, financial condition, results of
operations or prospects of the Company and its subsidiaries, if any, taken as a
whole (with reference to the Company or Parent, as applicable, hereinafter
referred to as a "Material Adverse Effect"). The Company has delivered a true
and correct officially certified copy of its Certificate of Incorporation and
Bylaws (together, the "Charter") to Parent.
2.2 Company Capital Structure. The authorized capital stock of the Company
-------------------------
consists of (i) 75,000,000 shares of Company Common Stock of which as of the
date hereof (A) 7,040,735 shares are issued and outstanding, (B) 8,100,000
shares are reserved for issuance under Company Options approved from time to
time by the Board under the Company's stock option plan(s), (C) 1,604,537 shares
are reserved for issuance upon exercise of Company Warrants, (D) 12,800,000
shares are reserved for issuance upon conversion of the Series A Preferred
Stock, (E) 11,000,000 shares are reserved for issuance upon conversion of the
Series B Preferred Stock, (F) 15,000,000 shares are reserved for issuance upon
conversion of the Series C Preferred Stock and (G) 16,500,000 shares are
reserved for issuance upon conversion of the Series D Preferred Stock; and (ii)
55,300,000 shares of preferred stock, par value $0.001 per share of the Company
of which as of the date hereof (A) 12,800,000 shares have been designated Series
A Preferred Stock, 12,612,312 of which are issued and outstanding and 109,885 of
which are reserved for issuance upon exercise of Company Warrants, (B)
11,000,000 shares have been designated Series B Preferred Stock, 9,952,253 of
which are issued and outstanding and 350,000 of which are reserved for issuance
upon exercise of Company Warrants, (C) 15,000,000 shares have been designated
Series C Preferred Stock, 12,655,174 of which are issued and outstanding, (D)
16,500,000 shares have been designated Series D Preferred Stock, 12,084,645 of
which are issued and outstanding and 120,846 are reserved for issuance upon
exercise of Company Warrants, and (E) no shares of preferred stock of the
Company remain undesignated. All issued and outstanding shares of Company Stock
have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase shares, and are owned by the
holders set forth in Schedule 2.2 (the "Holders") free and clear of any pledge,
------------
lien, security interest, encumbrance, claim or other equitable or third-party
interest. As of the date of this Agreement, options to purchase 7,798,721
shares of Company Common Stock are granted and outstanding and options
-8-
<PAGE>
to purchase 1,197,680 shares of Company Common Stock are fully vested and
immediately exercisable. Other than the shares of Company Stock owned by the
Holders, there are no other outstanding interests, existing or contingent or
direct or indirect, in Company Common Stock. Other than the Preferred Stock, the
Company Options and the Company Warrants, there are no rights ("Company Rights")
of any character, written or oral, to which the Company is a party or by which
it is bound, obligating the Company to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of Company Common Stock or obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such rights, including in favor of employees of the Company.
2.3 Subsidiaries. The Company does not have and has never had any
------------
subsidiaries or affiliated companies or any ownership interest(s) in any other
Person, and does not otherwise own and has never otherwise owned any shares in
the capital of or any interest in, or control, directly or indirectly, any other
corporation, partnership, association, joint venture or other business entity.
2.4 Authority. The Company has all requisite corporate power and authority
---------
to enter into this Agreement and the Related Agreements and to consummate the
Transactions. The execution and delivery of this Agreement and the Related
Agreements and the consummation of the Transactions have been duly authorized by
all necessary corporate action on the part of the Company, and no further action
is required on the part of the Company to authorize the Merger, this Agreement,
the Related Agreements and the Transactions. This Agreement and the Related
Agreements have been duly executed and delivered by the Company and, assuming
the due authorization, execution and delivery by the other Parties, constitutes
the valid and binding obligation of the Company, enforceable in accordance with
their respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies.
2.5 No Conflict. The execution and delivery of this Agreement and the
-----------
Escrow Agreement (the "Related Agreements") to which the Company is a party by
the Company do not, and, the consummation of the Transactions and thereby will
not, conflict with, or result in any violation of or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit (any such event, a "Conflict") under (i) any provision of
the Charter, (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to which the Company is
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets, other than any
such conflicts, violations, defaults, terminations, cancellations or
accelerations which would not impair the ability of the Company to consummate
the Transactions.
2.6 Consents. No consent, waiver, approval, order or authorization of, or
--------
registration, declaration or filing with, any court, administrative agency or
commission or other U.S. federal, state, province, county, local or other
foreign governmental authority, instrumentality, agency or commission
("Governmental Entity") or any third party, including a party to any agreement
with the Company (so as not to trigger any Conflict), is required by the Company
in connection with
-9-
<PAGE>
the execution and delivery of this Agreement and any Related Agreements to which
the Company is a party or the consummation of the Transactions, except for such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings (i) as may be required under applicable securities
laws, (ii) as are set forth in Schedule 2.6, and (iii) such other
------------
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on the Company or
impair its ability to consummate the Transactions.
2.7 Company Financial Statements.
----------------------------
(a) Schedule 2.7(a) includes the Company's unaudited financial
---------------
statements (balance sheets, income statements, changes in stockholders' equity
and cash flows) as of and for the calendar years ended December 31, 1999 (the
"Balance Sheet Date") and 1998, and the notes thereto, accompanied by the
reports thereon of Ernst & Young LLP, independent public accountants (the
"Financial Statements"). The Financial Statements have been prepared from, and
are in accordance with, the books and records of the Company and are complete
and have been prepared on the accrual basis accounting method (exclusive of
analysis of detailed software revenue recognition principles), applied on a
basis consistent throughout the periods indicated. Each of the Financial
Statements (including any notes thereto) was prepared in accordance with GAAP
consistently applied throughout the periods indicated (except as may be
indicated in the notes thereto). The Financial Statements present fairly the
financial position, operating results and changes in stockholders' equity and
cash flows of the Company as of the dates and for the periods indicated therein.
The balance sheet of the Company as of the Balance Sheet Date is hereinafter
referred to as the "December Balance Sheet." There shall be no capitalized
software development costs recorded in the Financial Statements or the December
Balance Sheet. The December Balance Sheet does not include any reserves, write-
offs or non-recurring charges in an amount that is inconsistent with the
Company's past practices.
2.8 No Undisclosed Liabilities. Except as reflected or reserved against in
--------------------------
the December Balance Sheet, as of the Balance Sheet Date, to the Company's
knowledge the Company did not have any liability, indebtedness, obligation,
expense, claim, deficiency, guaranty or endorsement of any type, whether
accrued, absolute, contingent, matured, unmatured or otherwise (whether or not
required to be reflected in financial statements in accordance with GAAP), which
in the aggregate exceeded $25,000, nor has the Company incurred any such
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement since the Balance Sheet Date, except for liabilities incurred in the
Ordinary Course of Business that, in the aggregate, do not exceed $25,000.
2.9 No Changes. Since the Balance Sheet Date, except as set forth on
----------
Schedule 2.9, there has not been, occurred or arisen any:
- ------------
(a) transaction by the Company except in the Ordinary Course of
Business as conducted on that date and consistent with past practice (which
practice has been reasonably and substantially consistent with the practices in
the Company's industry) ("Ordinary Course of Business");
-10-
<PAGE>
(b) capital expenditure or commitment for capital expenditure by the
Company, either individually or in the aggregate, exceeding $25,000;
(c) destruction of, damage to or loss of any material assets of the
Company (whether or not covered by insurance) or loss of any business or
customers of the Company that (i) accounted for $25,000 or more of the Company's
revenues for fiscal year 1999 or (ii) is projected to account for $50,000 or
more of the Company's projected revenue for fiscal year 2000;
(d) except as specifically requested by Parent, change in accounting
methods or practices (including any change in depreciation or amortization
policies or rates) by the Company;
(e) except as specifically requested by Parent, revaluation by the
Company of any of its assets, other than depreciation as required by GAAP;
(f) declaration, setting aside or payment of any dividends on or any
other distribution (whether in cash, stock or property) in respect of any
Company Stock or profits, or any split, combination or reclassification of
Company Stock or the issuance or authorization of the issuance of any securities
in respect of, in lieu of or in substitution for any share in the stated capital
of the Company, or the repurchase, redemption or other acquisition, directly or
indirectly, of any Company Stock or any Company Rights, other than in connection
with the Company's repurchase right under stock purchase or stock option
agreements with employees or consultants at cost;
(g) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration or payment, or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such Person, except as made in the Ordinary Course of Business;
(h) sale, lease, license or other disposition of any of the assets or
properties of the Company, except sales of inventory and licenses of software
pursuant to the Company's standard license agreement, each in the Ordinary
Course of Business;
(i) amendment, termination, violation by it, or, to its knowledge,
violation of a counterparty of any distribution agreement or any material
contract, agreement or license to which the Company is a party or by which it is
bound, other than termination by the Company pursuant to the terms thereof in
the Ordinary Course of Business;
(j) loan by the Company to any Person, other than advances to its
employees for travel and business expenses in the Ordinary Course of Business,
or incurrence by the Company of any indebtedness other than trade debt in the
Ordinary Course of Business, guaranty by the Company of any indebtedness or debt
securities of others, or issuance or sale of any debt securities of the Company;
-11-
<PAGE>
(k) waiver or release of any material right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company, exceeding $2,500 in the aggregate;
(l) commencement or notice, or to the knowledge of the Company,
threat of commencement, of any lawsuit or proceeding by or against the Company,
or of any investigation of the Company or its affairs;
(m) to the Company's knowledge, any claim of ownership by a third
party of any Intellectual Property Asset or infringement by the Company of any
third party's intellectual property rights;
(n) issuance or sale by the Company of any Company Stock, Company
Rights or any other securities of the Company, except pursuant to the Company's
stock option plan or upon exercise or conversion of exercisable or convertible
securities and except in connection with the Company's Series D Preferred Stock
financing;
(o) change in pricing or royalties set or charged by the Company
other than in the Ordinary Course of Business; or
(p) any event or condition of any character, that has had or the
Company believes could be reasonably expected to have a Material Adverse Effect
on the Company.
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For this Agreement, "Tax" or, collectively,
-------------------
"Taxes," means (i) any and all federal, state, province, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, goods and
services, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts; and (ii) any liability for the payment of
any amounts of the type described in clause (i) as a result of any express or
implied obligation to indemnify any other Person or as a result of any
obligation under any agreement or arrangement with any other Person with respect
to such amounts, including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth on Schedule 2.10:
---------------------- -------------
(i) The Company as of the Effective Time will have prepared and
timely filed all required federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") relating to any and all Taxes
concerning or attributable to the Company or its operations, and such Returns
are true and correct and have been completed in accordance with applicable law.
-12-
<PAGE>
(ii) The Company as of the Effective Time: (A) will have paid or
accrued all Taxes it is required to pay or accrue and (B) will have withheld and
timely remitted all income taxes and other Taxes required to be withheld and
remitted.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency or reassessment outstanding, assessed,
notified or proposed against the Company, nor has the Company executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(iv) No audit or other examination of any Return is currently in
progress, nor has the Company been notified in writing of any request for such
an audit or other examination.
(v) The Company does not have any liabilities for unpaid
federal, state, local and foreign Taxes which have not been accrued or reserved
against in accordance with GAAP on the December Balance Sheet, whether asserted
or unasserted, contingent or otherwise, and the Company has no knowledge of any
basis for the assertion of any such liability attributable to the Company, its
assets or operations.
(vi) The Company has provided to Parent copies of all federal and
state income and all state sales and use Tax Returns for all periods since the
date of the Company's incorporation.
(vii) There are no liens, pledges, mortgages, charges, adverse
claims, security interests or other encumbrances of any sort ("Liens") on the
assets of the Company relating to or attributable to Taxes.
(viii) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including the provisions of this Agreement,
covering any employee or former employee of the Company that, individually or
collectively, would give rise to the payment of any amount that would not be
deductible pursuant to Section 280G or 162 of the Code.
(ix) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(x) The Company is not a party to a tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement.
(xi) The Company is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(xii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income tax
deductions is accurately reflected on the Company's tax books and records.
-13-
<PAGE>
(xiii) The Company has never been a member of an affiliated group
(as defined in Section 1504 of the Code or any similar provision of any state
tax law) or filed or been included on a combined, consolidated or unitary
Return.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompetition or otherwise), commitment, judgment, injunction, order or decree
to which the Company is a party or which is otherwise binding upon the Company
that has or reasonably could be expected to have the effect of prohibiting or
impairing any business practice of the Company, any acquisition of property
(tangible or intangible) by the Company, or the conduct of any business
activities by the Company.
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
- ---------
(a) Schedule 2.12(a) contains a complete and accurate list of all
----------------
real property owned or leased by the Company (the "Schedule 2.12 property").
(b) Except as disclosed in Schedule 2.12(b), there are no existing
----------------
contracts or other agreements relating to the Schedule 2.12 property to which
-------------
the Company is a party (the "Leases"), and the Company has delivered to Parent
or counsel of Parent true and complete copies of all of the Leases.
(c) Except as disclosed in Schedule 2.12(c), (i) assuming each party
----------------
to each such Lease other than the Company has validly authorized and executed
such Lease, each of the Leases is valid, (ii) neither the Company nor, to the
knowledge of the Company, any other party thereto is in default thereunder, nor
is there any event which with notice or lapse of time, or both, would constitute
a default thereunder by the Company or, to the knowledge of the Company, any
other party thereto and (iii) the Company has not received notice that any party
to any Lease intends to cancel, terminate or refuse to renew the same or to
exercise or decline to exercise any option or other right thereunder. To the
knowledge of the Company, the other party to each such Lease validly authorized
and executed such Lease.
(d) The equipment and other tangible personal property owned or
leased by the Company (i) is adequate for the conduct of its business as
currently conducted, (ii) is in good operating condition, subject to normal wear
and tear, and (iii) has been reasonably maintained.
2.13 Intellectual Property.
---------------------
(a) Intellectual Property Assets. The term "Intellectual Property
----------------------------
Assets" includes any rights, licenses, liens, security interests, charges,
encumbrances, equities and other claims that the Company may have to claim
ownership, authorship or invention, to use, to object to or prevent the
modification of, to withdraw from circulation or control the publication or
distribution of any of the following worldwide used in its business as currently
conducted or proposed to be conducted:
-14-
<PAGE>
(i) the names "AtMobile.com, Inc.", "Global Mobility Systems,
Inc." and "Global Mobility Networks, Inc.", the domain names "atmobile.com",
"atmobile.net", "gmswireless.com", "igom.com" and "igom.net" and all fictitious
business names, trading names, corporate names, registered and unregistered
trademarks, service marks, and applications (collectively, "Marks") used in its
business as currently conducted or proposed to be conducted;
(ii) all patents, patent applications and business methods,
inventions and discoveries that may be patentable (collectively, "Patents") used
in its business as currently conducted or proposed to be conducted;
(iii) all copyrights in both published works and unpublished
works (collectively, "Copyrights") used in its business as currently conducted
or proposed to be conducted; and
(iv) all know-how, trade secrets, confidential information,
customer lists, software (source code and object code), technical information,
data, process technology, plans, drawings, and blue prints (collectively, "Trade
Secrets") used in its business as currently conducted or proposed to be
conducted.
(b) Agreements. Schedule 2.13(b) contains a complete and accurate
---------- ----------------
list of all material contracts relating to the Intellectual Property Assets to
which the Company is a party or by which the Company is bound, except for any
license for commonly available software programs with a value of less than
$10,000 under which the Company is the licensee. There is no existing dispute or
disagreement with respect to any such agreement nor, to the knowledge of the
Company, has any such dispute or disagreement been threatened.
(c) Software. Schedule 2.13(c) contains a complete and accurate list
-------- ----------------
of all computer software and/or middleware developed by or for the Company
(collectively referred to as the "Software"). Except as set forth on Schedule
--------
2.13(c), all Software is owned by the Company free and clear of any Liens and no
- -------
contractor, consultant or other third party has any claim of ownership in or to
the Software. The Company represents that any and all rights to the Software
shall be transferred to the Surviving Corporation at the Effective Time.
(d) Trade Secrets
-------------
(i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in detail and
content to identify and explain it and to allow its full and proper use without
reliance on the knowledge or memory of any individual.
(ii) The Company has taken all reasonable precautions to protect
the secrecy, confidentiality and value of the Trade Secrets.
(iii) The Company has good title and to its knowledge an absolute
exclusive right to use the Trade Secrets. The Trade Secrets are not part of the
public knowledge or literature, and, to knowledge of the Company, have not been
used, divulged, or appropriated
-15-
<PAGE>
either for the benefit of any third party or to the detriment of the Company. No
Trade Secret is subject to any adverse claim or to the Company's knowledge has
been challenged or threatened in any way.
(e) Originators, Programmers and Developers. Schedule 2.13(e)
--------------------------------------- ----------------
contains a complete and accurate list of all originators, developers or
programmers (other than employees), contractors or agents, who have written any
portion of or contributed to any development of the Software (collectively
referred to as the "Developers").
(f) Toolkits, Reused Code and Third-Party Software. Schedule 2.13(f)
---------------------------------------------- ----------------
of the Company Disclosure Schedule contains a complete and accurate list of all
code incorporated into the Software that was not specifically written or
developed for use in the Software (the "Preexisting Code"). This list includes
code from toolkits, from preexisting code written by the Developers and/or from
third-party software utilized to write or otherwise contribute to the
development of any of the Software. Upon consummation of the Merger, the
Surviving Corporation shall have at least a non-exclusive right to use any such
Preexisting Code and there are no third-party rights to such Preexisting Code
that will materially interfere with the Surviving Corporation's ownership and
use of the Software.
(g) Know-How Necessary for the Business.
-----------------------------------
(i) The Intellectual Property Assets are sufficient for the
operation of the Company's businesses as currently conducted. The Company is the
owner of all right, title, and interest in and to each of the Intellectual
Property Assets, free and clear of all Liens, and has the right to use without
payment to a third party all of the Intellectual Property Assets.
(ii) Except as set forth on Schedule 2.13(g), all former and
----------------
current employees of the Company have executed written agreements with the
Company that assign to the Company all rights to any inventions, improvements,
discoveries or information relating to the business of the Company. To the
Company's knowledge, no employee of the Company has entered into any agreement
that restricts or limits in any way the scope or type of work in which the
employee may be engaged or requires the employee to transfer, assign, or
disclose information concerning his or her work to anyone other than the
Company.
(h) Patents.
-------
(i) Schedule 2.13(h) contains a complete and accurate list and
----------------
summary description of all Patents and Patent applications. The Company is the
owner of all right, title, and interest in and to each of the Patents, free and
clear of all Liens.
(ii) None of the products manufactured and sold, nor any process
or know-how used, by the Company infringes or to the Company's knowledge is
alleged to infringe any patent or other proprietary right of any third party. To
its knowledge, there is no patent or patent application of any third party that
interferes or would be likely to interfere with the Company's use of any
Intellectual Property Asset.
-16-
<PAGE>
(i) Trademarks.
----------
(i) Schedule 2.13(i) contains a complete and accurate list and
----------------
summary description of all Marks. The Company is the owner of all right, title,
and interest in and to each of the Marks, free and clear of all Liens.
(ii) All Marks that have been registered with the United States
Patent and Trademark Office or with a corresponding state office are currently
in compliance with all formal legal requirements (including the timely post-
registration filing of affidavits of use and incontestability and renewal
applications), are valid and enforceable, and are not subject to any maintenance
fees or taxes or actions falling due within ninety days after the Closing Date.
(iii) No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to the knowledge of the Company, no such
action is threatened with the respect to any of the Marks.
(iv) To the knowledge of the Company, there is no potentially
interfering trademark or trademark application of any third party.
(v) No Mark is infringed or, to knowledge of the Company, has
been challenged or threatened in any way. None of the Marks used by the Company
infringes or to the Company's knowledge is alleged to infringe any trade name,
trademark, or service mark of any third party.
(vi) All products and materials containing a Mark bear the
proper legal notice where permitted by law.
(j) Copyrights.
----------
(i) Schedule 2.13(i) contains a complete and accurate list and
----------------
summary description of all Copyrights. The Company is the owner of all right,
title, and interest in and to each of the Copyrights, free and clear of all
Liens.
(ii) All the Copyrights that have been registered are currently
in compliance with formal legal requirements, are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within
ninety days after the Closing Date.
(iii) No Copyright is infringed or, to knowledge of the Company,
has been challenged or threatened in any way. None of the subject matter of any
of the Copyrights infringes or to the Company's knowledge is alleged to infringe
any copyright of any third party or is a derivative work based on the work of a
third party.
(iv) All works encompassed by the Copyrights have been marked
with the proper copyright notice.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
-17-
<PAGE>
(a) Except as set forth on Schedule 2.14(a), the Company does not
----------------
have any continuing obligations under, nor is it a party to or bound by:
(i) any collective bargaining agreement, or any contract with
or commitment to any trade union, employee bargaining agent or affiliated
bargaining agent, and the Company has not conducted any negotiations with
respect to enter into any such contracts or commitments,
(ii) any agreement or arrangement that contains any severance
pay or post-employment liability or obligation or is otherwise required by
statute or case law to provide any of the foregoing,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plan or arrangement,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson, or any
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including any stock option plan,
share appreciation rights plan or share purchase plan, any of the benefits of
which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the Transactions or the value of any of
the benefits of which will be calculated on the basis of any of the
Transactions,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property,
(viii) any agreement of indemnification or guaranty, other than
intellectual property indemnification to customers in the Ordinary Course of
Business,
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any Person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of material assets or any interest in any business
enterprise outside the ordinary course of the Company's business,
(xii) any mortgage, indenture, loan or credit agreement,
security agreement or other agreement or instrument relating to the borrowing of
money or extension of credit, including guaranties referred to in clause (viii)
hereof,
-18-
<PAGE>
(xiii) any purchase order or contract for the purchase of raw
materials, other than purchase orders made in the Ordinary Course of Business
and involving not more than $25,000,
(xiv) any distribution, joint marketing or development
agreement, or
(xv) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within 30 days.
(b) Except as noted in Schedule 2.14(b), the Company has not
----------------
breached, violated or defaulted under, or received written notice that it has
breached, violated or defaulted under, any of the material terms or conditions
of any agreement, contract or commitment required to be set forth in Schedule
--------
2.14(a), (any such agreement, contract or commitment referenced in the preceding
- -------
clause, a "Contract"), nor is the Company aware of any event that would
constitute such a breach, violation or default with the lapse of time, the
giving of notice or both. Each Contract is in full force and effect and, except
as otherwise disclosed in Schedule 2.14(b), is not subject to any default, of
----------------
which the Company is aware, by any party obligated to the Company pursuant
thereto. The Company has obtained, or will obtain prior to the Closing Date, all
necessary consents, waivers and approvals of parties to any Contract as are
required thereunder in connection with the Merger, or that are required to be
obtained in order for such Contract to remain in effect without modification
after the Merger.
2.15 Interested Party Transactions. Except as disclosed on Schedule 2.15,
----------------------------- -------------
no officer, director, employee or holder of Company Stock (or any spouse or
member of the immediate family of any of such Persons, or any trust, partnership
or corporation in which any of such Persons has or has had a material interest),
has directly or indirectly, (i) an interest in any Person which furnished or
sold, or furnishes or sells, services or products that the Company furnishes or
sells, or proposes to furnish or sell in an amount in excess of $10,000 per
year, or (ii) any interest in any Person that purchases from or sells or
furnishes to, the Company, any goods or services in an amount in excess of
$10,000 per year or (iii) a beneficial interest in any Contract set forth on
Schedules 2.14(a) or 2.14(b); provided, that passive ownership of no more than
- ----------------------------
5% of the outstanding stock of a corporation shall not be deemed an "interest in
any entity" for purposes of this Section 2.15.
------------
2.16 Governmental Authorization. Schedule 2.16 accurately lists each
-------------------------- -------------
material consent, license, permit, grant or other authorization issued to the
Company by a Governmental Entity (a) pursuant to which the Company currently
operates or holds any interest in any of its properties or (b) which is required
for the operation of its business or the holding of any such interest (herein
collectively called "Authorizations"). All Authorizations are in full force and
effect and constitute all Authorizations required to permit the Company to
operate or conduct its business or hold any interest in its properties or
assets.
2.17 Litigation. There is no action, suit, claim, proceeding or arbitration
----------
of any nature pending or threatened against the Company or any of its properties
or any of its officers, directors or stockholders in respect of the Company.
There is no investigation pending or threatened against the Company, its
properties or any of its officers, directors or stockholders in
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respect of the Company by or before any Governmental Entity. No Governmental
Entity has at any time challenged or questioned the legal right of the Company
to manufacture, offer or sell any of its products in the present manner or style
thereof.
2.18 Accounts Receivable; Inventory.
------------------------------
(a) Set forth in Schedule 2.18(a) is a list of all accounts
----------------
receivable of the Company reflected on the December Balance Sheet ("Accounts
Receivable") along with a range of days elapsed since invoice as of the date of
the December Balance Sheet. All Accounts Receivable of the Company (i) arose in
the Ordinary Course of Business, (ii) represent bona fide indebtedness incurred
by the applicable account debtors in the amounts invoiced by the Company and
stated on its books and records, subject to collection and (iii) are not subject
to any defenses, counterclaims or claims for set off. The reserves against the
Accounts Receivable have been established in accordance with GAAP, and based
upon a review of such Accounts Receivable, the Company reasonably believes such
reserves to be adequate. No Person has any Lien on any of such Accounts
Receivable and no request or agreement for deduction or discount has been made
with respect to any of such Accounts Receivable. No such Accounts Receivable is
owed by a Person that the Company has knowledge that has sought the protection
of any bankruptcy or insolvency law or is the subject of any dispute as to
payment.
(b) The inventory of the Company, to the extent that it is reflected
on the Financial Statements and the inventory as the same shall exist on the
date hereof (other than the reserve established for the inventory reflected in
the Financial Statements), consisted and will consist of items which were and
will be of the usual quality and quantity necessary for the normal conduct of
the business of the Company and reasonably expected to be usable or saleable
within a reasonable period of time in the ordinary course of the business of the
Company. With respect to inventory in the hands of suppliers for which the
Company is committed as of the date hereof, such inventory is reasonably
expected to be usable in the Ordinary Course of Business of the Company as
currently being conducted.
2.19 Minute Books. The minute books of the Company made available to Parent
------------
or counsel for Parent are the only minute books of the Company and contain an
accurate summary of all formal meetings of directors (and committees thereof)
and stockholders or actions by written consent since the formation of the
Company.
2.20 Brokers' and Finders' Fees. Except as contemplated by Schedule 2.20,
---------------------------- -------------
the Company has not incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement, the Related Agreements or any
Transaction.
2.21 Employees; Employee Benefit Plans and Compensation. Schedule 2.21
-------------------------------------------------- -------------
lists each of the following which is sponsored, maintained or contributed to by,
or under which there is any liability of, the Company and which is for the
benefit of any current or former employee, officer, director, agent, consultant
or similar representative to the Company: (i) all employee benefit plans, as
such term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), including employee benefit plans (such as
foreign plans) which
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are not subject to the provisions of ERISA (each an "Employee Plan") and (ii)
each personnel policy, stock option plan, stock purchase plan, stock
appreciation right plan, phantom stock plan, collective bargaining agreement,
bonus plan or arrangement, incentive award plan or arrangement, vacation policy,
severance pay plan, policy or agreement, deferred compensation agreement or
arrangement, executive compensation or supplemental income arrangement,
consulting agreement, employee agreement, cafeteria plan, education assistance
plan, dependent care assistance plan and each other employee benefit plan,
agreement, arrangement, program, practice or understanding (each a "Company
Program" or "Company Agreement"). With respect to any employee benefit plan,
within the meaning of Section 3(3) of ERISA, which is subject to ERISA and which
is sponsored, maintained or contributed to, or has been sponsored, maintained or
contributed to within six years prior to the Closing Date, by the Company or any
member of the Controlled Group of Corporations (as defined in Section 1563 of
the Code) of which the Company is part, (a) no withdrawal liability, within the
meaning of Section 4201 of ERISA, has been incurred, which withdrawal liability
has not been satisfied, (b) no liability to the Pension Benefit Guarantee
Corporation has been incurred by the Company or any member of the Controlled
Group of Corporations of which the Company is part, which liability has not been
satisfied, (c) no accumulated funding deficiency, whether or not waived, within
the meaning of Section 302 of ERISA or Section 412 of the Code has been
incurred, and (d) all contributions (including installments) to such plan
required by Section 302 of ERISA and Section 412 of the Code have been timely
made. With respect to any kind of employee benefit plan, such plan has been
funded and maintained in compliance with all laws applicable thereto and the
requirements of such plan's governing documents.
2.22 Insurance. Schedule 2.22 lists all insurance policies and fidelity
--------- -------------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. Such insurance policies are
customary for similarly situated companies and reasonably satisfactory to ensure
the Company against the risks associated with its business. There is no claim by
the Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). There has been no threatened termination of, or material
premium increase with respect to, any of such policies.
2.23 Compliance with Laws. The Company has complied in all material
--------------------
respects with, is not in violation in any material respect of, and has not
received any notices of violation with respect to, any foreign, federal, state,
province or local statute, law or regulation (including any federal, state,
foreign or local law, rule or regulation, or any judicial or administrative
order, consent decree or judgment, relating to pollution or protection of the
environment, health, safety or natural resources, including those relating to
(A) releases or threatened releases of hazardous substances or materials
containing hazardous substances or (B) the manufacture, handling, transport,
use, treatment, storage or disposal of hazardous substances or materials
containing hazardous substances) with respect to the conduct of its business, or
the ownership or operation of its business, assets or properties.
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2.24 Complete Copies of Materials. The Company has delivered to Parent true
----------------------------
and complete copies of each agreement, contract, commitment or other document
(or summaries of same) that is referred to in the Disclosure Schedules or that
has been requested by Parent or its counsel.
2.25 Tax-Free Reorganization and Pooling. Neither the Company nor, to the
-----------------------------------
knowledge of the Company, any of its affiliates has taken or agreed to take any
action or failed to take any action which action or failure would prevent the
Merger and the other Transactions from being treated for financial accounting
purposes as a Pooling Transaction or would prevent the Merger from constituting
a reorganization within the meaning of section 368(a) of the Code.
2.26 Required Vote. The only vote of the holders of any class or series of
-------------
the Company's capital stock that will be necessary to consummate the Merger and
the other Transactions are as contemplated by the written consent attached as
Exhibit 2.26.
- ------------
2.27 Representations Complete. None of the representations or warranties
------------------------
made in this Article II (as modified by the Disclosure Schedules), nor any
----------
statement made in any schedule or certificate furnished by the Company pursuant
to this Agreement contains, as of the date hereof, any untrue statement of a
material fact, or omits, as of the date hereof, to state any material fact
necessary to make the statements contained herein or therein, in the light of
the circumstances under which made, not misleading. There is no event, fact or
condition that materially and adversely affects the business, assets, financial
condition or results of operations of the Company, or that reasonably could be
expected to do so, that has not been set forth in this Agreement or in the
Disclosure Schedules.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub, jointly and severally, represent and warrant to the
Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Each of Parent and Merger
Sub has the corporate power to own its properties and to carry on its business
as now being conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified would have
a Material Adverse Effect on Parent. Neither Parent nor Merger Sub is in
violation of any material provision of its Certificate of Incorporation or
Bylaws.
3.2 Authority. Parent and Merger Sub have all requisite corporate power and
---------
authority to enter into this Agreement, the Employment Agreements and the
Related Agreements and to consummate the Transactions. The execution and
delivery of this Agreement and the Related Agreements and the consummation of
the Transactions have been duly authorized by all
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necessary corporate action on the part of Parent and Merger Sub. This Agreement
and the Related Agreements have been duly executed and delivered by Parent and
Merger Sub and, assuming the due authorization, execution and delivery by the
other parties hereto and thereto, constitute the valid and binding obligation of
Parent and Merger Sub, enforceable in accordance with their respective terms,
subject to the laws of general application relating to bankruptcy, insolvency
and the relief of debtors and to rules of law governing specific performance,
injunctive relief or other equitable remedies.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 150,000,000 shares of
Parent Common Stock, of which 43,705,493 shares were issued and outstanding as
of February 28, 2000, and 5,000,000 shares of Preferred Stock, none of which is
issued or outstanding. The authorized capital stock of Merger Sub consists of
1,000 shares of Common Stock, 1,000 shares of which are issued and outstanding
and are held by Parent. All such shares have been duly authorized, and all such
issued and outstanding shares have been validly issued, are fully paid and
nonassessable and are free of any liens other than any liens created by or
imposed upon the holders thereof, and were not issued in violation of or subject
to any preemptive right, or other rights to subscribe for or purchase shares.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and nonassessable and
will be issued in compliance with all applicable federal and state securities
laws.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
------------------------------------------
made available to the Company true and complete copies of all reports or
registration statements filed by it with the SEC under the Securities Act of
1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), for all periods subsequent to June 24,
1999, all in the form so filed (all of the foregoing being collectively referred
to as the "SEC Documents"). As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as applicable, and none of the SEC Documents
filed under the Exchange Act contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed document with the SEC and copies of such documents have been made
available to the Company or counsel for the Company. None of the SEC Documents
filed under the Securities Act contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading at the time such SEC documents became
effective under the Securities Act. The financial statements of Parent,
including the notes thereto, included in the SEC Documents (the "Parent
Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
consistently applied (except as may be indicated in the notes thereto) and
present fairly the consolidated financial position of Parent at the dates
thereof and of its operations and cash flows
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<PAGE>
for the periods then ended (subject, in the case of unaudited statements, to
normal audit adjustments).
3.5 No Conflict. The execution and delivery of this Agreement and the
-----------
Related Agreements does not, and the consummation of the Transactions will not
result in a Conflict with (i) any provision of the Charter of Parent or Merger
Sub, (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to which Parent or Merger
Sub is subject, or (iii) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Parent or its properties or assets, other than
any such conflicts, violations, defaults, terminations, cancellations or
accelerations which would not impair the ability of Parent or Merger Sub to
consummate the Transactions.
3.6 Consents. No consent, waiver, approval, order or authorization of, or
--------
registration, declaration or filing with, any Governmental Entity or any third
party, including a party to any agreement with Parent or Merger Sub (so as not
to trigger any Conflict), is required by or with respect to Parent or Merger Sub
in connection with the execution and delivery of this Agreement and the Related
Agreements or the consummation of the Transactions, except for such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings (i) as may be required under applicable securities laws, (ii) as are set
forth in Schedule 3.6, and (iii) such other consents, authorizations, filings,
------------
approvals and registrations which if not obtained or made would not have a
Material Adverse Effect on Parent or Merger Sub or impair their ability to
consummate the Transactions.
3.7 Tax-Free Reorganization and Pooling. Neither Parent, Merger Sub nor,
-----------------------------------
to the knowledge of Parent and Merger Sub, any of their affiliates have taken or
agreed to take any action or failed to take any action which action or failure
would prevent the Merger and the other Transactions from being treated for
financial accounting purposes as a Pooling Transaction or would prevent the
Merger from constituting a reorganization under section 368(a) of the Code.
3.8 No Shareholder Vote Required. No vote of the stockholders of Parent is
----------------------------
required by law, Parent's Charter or otherwise for Parent and Merger Sub to
enter into this Agreement and the Related Agreements and to consummate the
Merger and the Transactions.
3.9 No Material Adverse Change. Since December 31, 1999, Parent has
--------------------------
conducted its business in the ordinary course and there has not occurred any
damage to, destruction or loss of any assets of the Parent (whether or not
covered by insurance) that materially and adversely affects the financial
condition or business of Parent.
3.10 Litigation. Except as disclosed on Schedule 3.10, there is no action,
---------- -------------
suit, claim, proceeding or arbitration of any nature pending or threatened
against the Parent or any of its properties or any of its officers, directors or
stockholders in respect of the Parent. There is no investigation pending or
threatened against the Parent, its properties or any of its officers, directors
or stockholders in respect of the Parent by or before any Governmental Entity.
No Governmental Entity has at any time challenged or questioned the legal right
of the Parent to manufacture, offer or sell any of its products in the present
manner or style thereof.
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<PAGE>
3.11 Representations Complete. Except as disclosed on Schedule 3.10, none
------------------------ -------------
of the representations or warranties made in this Article III, nor any statement
-----------
made in any schedule or certificate furnished by Parent or Merger Sub pursuant
to this Agreement contains, as of the date hereof, any untrue statement of a
material fact, or omits, as of the date hereof, to state any material fact
necessary to make the statements contained herein or therein, in the light of
the circumstances under which made, not misleading. There is no event, fact or
condition that materially and adversely affects the business, assets, financial
condition or results of operations of the Company, or that reasonably could be
expected to do so, that has not been set forth in this Agreement or in the SEC
Documents or Parent Financial Statements.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Conduct of Business of the Company. From the date of this Agreement
----------------------------------
until the earlier of (i) the termination of this Agreement and (ii) the
Effective Time, the Company agrees (except to the extent that Parent shall
otherwise consent in writing) to carry on the business of the Company in the
Ordinary Course of Business, to pay its debts and Taxes when due, to pay or
perform other obligations when due, and, to the extent consistent with such
business, to use all reasonable efforts consistent with past practice and
policies to preserve intact the Company's present business organization, keep
available the services of its present officers and key employees and preserve
their relationships with customers, suppliers, distributors, licensors,
licensees and others having business dealings with it, all with the goal of
preserving unimpaired its goodwill and ongoing businesses at the Effective Time.
The Company shall promptly notify Parent of any event or occurrence or emergency
not in the ordinary course of its business, and any material event involving the
Company or its business. Without limiting the generality of the foregoing and
except as expressly contemplated by this Agreement, the Company shall not,
without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the Ordinary
Course of Business;
(b) Transfer to any Person any rights to Intellectual Property Assets
(other than pursuant to end-user licenses, in the Company's standard form
entered into in the Ordinary Course of Business consistent with past practice);
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
Ordinary Course of Business, or violate the terms of, any of the agreements set
forth or described in the Disclosure Schedules;
(e) Commence or settle any litigation;
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<PAGE>
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or Company Rights), other than (i) issuances of Company Common Stock upon
the exercise of options granted under the Company's 1997 Stock Option Plan, (ii)
issuances of securities issuable upon conversion or exercise of outstanding
convertible or exercisable securities, or (iii) the repurchase of shares of its
capital stock from employees at cost;
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or Company Rights;
(h) Cause or permit any amendments to its Charter;
(i) Merge or consolidate with any corporation, partnership,
association or other business organization or entity or division thereof, or
acquire or agree to acquire by purchasing any assets or equity securities of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the Ordinary Course of Business and consistent with past
practice;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or guarantee
any debt securities of others;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee, except payments made pursuant to standard
written agreements outstanding on the date hereof and set forth in the
Disclosure Schedules;
(m) (i) Adopt or amend any employee benefit plan, (ii) enter into any
employee benefit, stock option or other compensation agreement, extend
employment offers, (iii) pay or agree to pay any special bonus or special
remuneration to any director or employee, or (iv) increase the salaries or wage
rates of its employees;
(n) Revalue any of its assets, including writing down the value of
accounts receivable other than in the Ordinary Course of Business;
(o) Pay, discharge or satisfy, in an amount in excess of $5,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the Ordinary Course of Business of
liabilities reflected or reserved against in the Financial Statements or
expenses consistent with the provisions of this Agreement incurred in connection
with any Transaction;
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<PAGE>
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(q) Enter into any strategic alliance, development or joint marketing
agreement or any other material agreement;
(r) Change any method of accounting or accounting practice, except for
any such change required by GAAP;
(s) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (r), or any other action (or omit to take
---------------
an action) that would prevent the Company from performing or cause the Company
not to perform its covenants hereunder or that would make any representation or
warranty of the Company hereunder inaccurate in any respect at, or as of any
time prior to, the Effective Time.
4.2 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives (collectively, the
"Representatives"), reasonable access during normal business hours during the
period prior to the Effective Time to (a) all of its properties, books,
contracts, commitments and records, and (b) all other information concerning its
business, properties and personnel (subject to restrictions imposed by
applicable law) as Parent may reasonably request, including access upon
reasonable request to employees, customers and vendors of the Company for due
diligence inquiry. The Company shall provide to Parent and its Representatives
copies of internal financial statements and other documents promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 4.2 shall affect or be deemed to modify any representation or
-----------
warranty contained herein, or the conditions of the parties to consummate the
Merger.
4.3 Confidentiality. Each Party agrees that the information obtained in any
---------------
investigation pursuant to Section 4.2, or pursuant to the negotiation and
-----------
execution of this Agreement or the effectuation of the Transactions shall be
governed by the terms of the Nondisclosure Agreement dated February ___, 2000
between the Company and Parent (the "Nondisclosure Agreement").
4.4 Exclusivity. The Company will not and will use its best efforts to
-----------
cause its officers, directors, stockholders and advisors to not (a) solicit,
initiate, or encourage the submission of any proposal or offer from any Person
relating to the acquisition of any equity interests or any substantial portion
of the assets of the Company (including any acquisition structured as a merger,
consolidation, or share exchange) or (b) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing. The Company will notify Parent
immediately if any Person makes any proposal, offer, inquiry, or contact with
respect to any of the foregoing and the terms of any such proposal, offer,
inquiry, or contact.
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<PAGE>
4.5 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including all legal, accounting,
financial advisory, consulting and all other fees and expenses of third parties
("Third Party Expenses") incurred by a Party or any Person with an interest in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the Transactions shall be the obligation of the respective
party incurring such fees and expenses.
4.6 Public Disclosure. Unless otherwise required by law (including federal
-----------------
and state securities laws) or, as to Parent, by the rules and regulations of The
Nasdaq Stock Market, Inc. prior to the Effective Time, no disclosure (whether or
not in response to an inquiry) of the subject matter of this Agreement shall be
made by any Party unless approved by Parent prior to release, provided that such
approval shall not be unreasonably withheld.
4.7 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers, assignments and approvals under any of the Contracts as may
be required in connection with the Merger (all of such consents, waivers and
approvals having been set forth on Schedule 2.6) so as to preserve all rights of
and benefits to the Company thereunder.
4.8 FIRPTA Compliance. On or prior to the Closing Date, the Company shall
-----------------
deliver to Parent a properly executed statement in a form reasonably acceptable
to Parent for purposes of satisfying Parent's obligations under Treasury
Regulation Section 1.1445-2(c)(3).
4.9 Reasonable Efforts. Subject to the terms and conditions provided in
------------------
this Agreement, each Party shall use its reasonable best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the Transactions, to obtain all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings and to remove any injunctions or other impediments or
delays, legal or otherwise, to consummate and make effective the Transactions
under this Agreement for the purpose of securing to the parties hereto the
benefits contemplated by this Agreement.
4.10 Notification of Certain Matters. Each Party shall give prompt notice
-------------------------------
to the other Party of (i) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which is likely to cause any representation or
warranty of such Party contained in this Agreement to be untrue or inaccurate at
or prior to the Effective Time and (ii) any failure of such Party to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 4.10 shall not limit or otherwise affect any remedies available to
the Party receiving such notice.
4.11 Company's Accountants. The Company will use its reasonable best
----------------------
efforts to cause the Company's management and its independent accountants to
facilitate on a timely basis the preparation of unaudited financial statements
as required by Parent to comply with applicable SEC regulations and filings.
4.12 Tax Treatment; Accounting Treatment. Each Party shall use its
-----------------------------------
reasonable best efforts to cause the Merger to qualify, and shall not take, and
shall use all reasonable efforts to
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prevent any subsidiary, director or officer of such Party from taking, any
actions which could prevent the merger from qualifying, as (i) a reorganization
under the provisions of Section 368(a) of the Code and (ii) a Pooling
Transaction.
4.13 Employee Benefits Matters. To the extent that service is relevant for
-------------------------
eligibility, vesting and (except as would result in a duplication of benefits)
benefit accruals under any employee benefit plan, program or arrangement
maintained by Parent, such plan, program or arrangement maintained by Parent
shall credit each employee of the Company (a "Company Employee") who
participates therein for service on or prior to the Effective time with the
Company. Parent agrees to offer to Company Employees benefits commensurate with
those benefits conferred to Parent employees similarly situated. In addition,
Parent shall (i) waive limitations on benefits relating to any pre-existing
conditions under any parent welfare benefit plan in which Company Employees may
participate and (ii) recognize, for purposes of annual deductible and out-of-
pocket limits under its medical and dental plan, deductible and out-of-pocket
expenses paid by Company Employees and their respective dependents under
Company's medical, dental and other healthcare plans in the calendar year in
which the Effective Time occurs.
4.14 Officers and Directors. Parent agrees that all rights to
----------------------
indemnification (including advancement of expenses) existing on the date hereof
in favor of the present or former officers, directors, and employees of the
Company (collectively, the "Indemnified Parties") with respect to actions taken
in their capacities as officers, directors and employees (other than actions
causing a breach of this Agreement) prior to the Effective Time as provided in
the Company's Certificate of Incorporation or Bylaws, employment agreements and
indemnification agreements shall survive the Merger and continue in full force
and effect for a period of six years following the Effective Time and shall be
guaranteed by the Parent and that Company's former and present officer and
directors shall be provided by Parent with the same level of indemnification as
currently exists for Parent's officers and directors. This Section 4.14 shall
survive the consummation of the Merger at the Effective Time, and is intended to
be for the benefit of, and shall be enforceable by, the Indemnified Parties,
their heirs and personal representative and shall be binding on the Surviving
Corporation and Parent and their respective successors and assigns.
4.15 Blue Sky Laws. Parent shall take such steps as may be necessary to
-------------
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Parent Common Stock in connection with the
Merger. The Company shall use its best efforts to assist Parent as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of Parent Common Stock in
connection with the Merger.
ARTICLE V
CONDITIONS TO THE MERGER
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5.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each Party to effect the Merger shall be subject to
the satisfaction at or prior to the Closing of the following conditions:
(a) Government Approvals. All approvals of Governmental Entities
--------------------
necessary to consummate the Transactions.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
----------------------------------------
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect.
(c) Listing. The shares of Parent Common Stock issuable in the Merger
-------
shall have been approved for listing on The Nasdaq Stock Market, Inc., subject
only to official notice of issuance.
5.2 Additional Conditions to Obligations of the Company. The obligations of
---------------------------------------------------
the Company to consummate the Merger and the Transactions shall be subject to
the satisfaction at or prior to the Closing of each of the following conditions,
any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. The representations and warranties
------------------------------
of Parent and Merger Sub contained in this Agreement shall be true and correct
in all material respects (except for those representations and warranties
(including those with respect to the Parent Financial Statements) which are by
their terms qualified by a standard of materiality, which representations and
warranties shall be true and correct in all respects) on and as of the Effective
Time with the same force and effect as if made on and as of the Effective Time,
and the Company shall have received certificates to such effect signed on behalf
of Parent and Merger Sub by duly authorized officers of Parent and Merger Sub.
(b) Agreements and Covenants. Parent and Merger Sub shall have
------------------------
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Effective Time, and the Company shall have received a certificate to such
effect signed by a duly authorized officer of Parent.
(c) Tax Opinion. The Company shall have received an opinion from
-----------
Venture Law Group, P.C. to the effect that the Merger will constitute a
reorganization under section 368(a) of the Code, and such opinion shall not have
been withdrawn. In rendering such opinion, counsel shall be entitled to rely
upon, among other things, reasonable assumptions as well as representations of
Parent, Merger Sub and the Company and certain stockholders of the Company.
(d) Registration Rights Agreement. Parent shall have executed and
-----------------------------
delivered to each Holder a Registration Rights Agreement in the form of Exhibit
-------
5.2(d).
- ------
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<PAGE>
(e) Legal Opinion. The Company shall have received from Akin, Gump,
-------------
Strauss, Hauer & Feld, L.L.P., counsel to Parent, an opinion dated the Closing
Date covering the matters set forth on Exhibit 5.2(e).
--------------
(f) Listing. The Parent Common Stock issuable in the Merger shall have
-------
been approved for listing (subject to notice of issuance) on the Nasdaq National
Market.
(g) Options. The parties set forth on Schedule 5.2(g) shall have been
------- ---------------
granted options in such amounts as set forth on Schedule 5.2(g) (which shall
---------------
total 550,000 shares) to purchase Parent Common Stock on Parent's standard terms
and conditions, at an exercise price equal to the fair market value of Parent
Common Stock on the Effective Date.
5.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
-----------------------------------------------------------------
obligations of Parent and Merger Sub to consummate the Merger and the
Transactions shall be subject to the satisfaction at or prior to the Closing of
each of the following conditions, any of which may be waived, in writing,
exclusively by Parent:
(a) Representations and Warranties. The representations and warranties
------------------------------
of the Company contained in this Agreement shall be true and correct in all
material respects (except for those representations and warranties (including
those with respect to the Financial Statements) which are by their terms
qualified by a standard of materiality, which representations and warranties
shall be true and correct in all respects) on and as of the Effective Time
(without regard to any updates to the Disclosure Schedule, unless otherwise
agreed by Parent) with the same force and effect as if made on and as of the
Effective Time, and Parent and Merger Sub shall have received a certificate to
such effect signed on behalf of the Company by a duly authorized officer of the
Company.
(b) Agreements and Covenants. The Company shall have performed or
------------------------
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time, and Parent and Merger Sub shall have received a certificate to
such effect signed by a duly authorized officer of the Company.
(c) Third Party Consents. Any and all consents, assignments, approvals
--------------------
and waivers listed on Schedule 2.6 shall have been obtained.
------------
(d) Escrow Agreement. The Escrow Agreement shall have been duly
----------------
executed and delivered by parties thereto and shall be in full force and effect.
(e) Affiliate Letters. Each Person who is, as of the Effective Time,
-----------------
an "affiliate" of the Company for purposes of Rule 145 under the Securities Act
or under applicable SEC accounting releases with respect to pooling of interest
accounting treatment shall have executed and delivered to Parent a written
agreement in the form of Exhibit 5.3(e)r.
---------------
(f) Employment Agreement. No Company employee, as of the Closing, who
--------------------
has executed an employment agreement with Parent or a subsidiary thereof (an
"Employment
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<PAGE>
Agreement"), shall have provided Parent with reason to believe that such
employee will not be willing to perform under his or her Employment Agreement.
(g) Pooling. Parent shall have received from Ernst & Young LLP a
-------
written opinion dated the Effective Date to the effect that the Transactions,
including the Merger when effected in accordance with the terms hereof, shall be
accounted for in the consolidated financial statements of Parent and its
subsidiaries as a Pooling Transaction.
(h) Tax Opinion. Parent shall have received an opinion from Akin,
-----------
Gump, Strauss, Hauer & Feld, L.L.P. to the effect that the Merger will
constitute a reorganization under section 368(a) of the Code, and that such
opinion shall not have been withdrawn. In rendering such opinion, counsel shall
be entitled to rely upon, among other things, reasonable assumptions as well as
representations of Parent, Merger Sub and the Company and certain stockholders
of the Company.
(i) Legal Opinions. Parent shall have received from Venture Law Group,
--------------
P.C., counsel to the Company, an opinion dated the Closing Date covering the
matters set forth on Exhibit 5.3.
-----------
(j) Dissenting Shares. The holders of no more than 5% of Company
-----------------
Common Stock (calculated on a fully converted basis) shall have exercised their
right to dissent from the Merger under the Delaware Law.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification of Indemnified Parties. By virtue of the approval of
--------------------------------------
this Agreement and the Merger by the Company's Board of Directors and approval
of this Agreement by the Company's stockholders pursuant to the Company's
Charter and the applicable provisions of the Delaware Law, each of the Company's
stockholders shall be deemed to have agreed that, from and after the Effective
Time and subject to the provisions of this Article, each of the Company's
stockholders shall, jointly and severally, indemnify and hold harmless the
Parent, each of Parent's affiliates, and each officer, director and employee of
Parent and its affiliates (the "Indemnified Parties") from and against any and
all damages, losses, claims, liabilities, assessments, judgments, taxes,
demands, charges, suits, penalties, costs and expenses (including court costs
and reasonable attorneys' and experts' fees and expenses incurred in
investigating, preparing for and participating in any litigation, action or
proceeding, including any litigation, action or proceeding brought to enforce
the terms and provisions of this Article) that arise out of (a) any failure of
any of the representations or warranties made by the Company under this
Agreement to be true and accurate at the time as of which they are made; or (b)
any breach or default by the Company of any covenant or agreement made by the
Company under this Agreement and which is required to be performed by the
Company at or prior to the Effective Time ("Indemnified Costs").
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<PAGE>
6.2 Defense of Third Party Claims.
-----------------------------
(a) An Indemnified Party shall give prompt written notice to any
Person who is obligated to provide indemnification under Section 6.1 (an
-----------
"Indemnifying Party") of the commencement or assertion of any action,
proceeding, demand or claim by a third party (collectively, a "Third Party
Action") in respect of which such Indemnified Party shall seek indemnification
hereunder; provided, however, that an Indemnified Party shall be deemed to have
given such notice to each of the Company's stockholders if such Indemnified
Party gives such notice to the Seller Representative. Any failure so to notify
an Indemnifying Party shall not relieve such Indemnifying Party from any
liability that it, he or she may have to such Indemnified Party under this
Article unless, and only to the extent that, the failure to give such notice
materially and adversely prejudices such Indemnifying Party.
(b) The Indemnifying Party shall be entitled, at its own expense, to
participate in the defense of such Third Party Action.
(c) The Indemnifying Party shall obtain the prior written approval of
the Indemnified Party before entering into or making any settlement, compromise,
admission, or acknowledgment of the validity of such Third Party Action or any
liability in respect thereof if such settlement, compromise, admission, or
acknowledgment (i) would impose injunctive or other equitable relief against the
Indemnified Party, or (ii) could, in the reasonable opinion of the Indemnified
Party, have a Material Adverse Effect on such Indemnified Party.
(d) No Indemnifying Party shall consent to the entry of any judgment
or enter into any settlement that does not include as an unconditional term
thereof the giving by each claimant or plaintiff to each Indemnified Party of a
release from all liability in respect of such Third Party Action.
6.3 Direct Claims. In any case in which an Indemnified Party seeks
-------------
indemnification hereunder which is not subject to Section 6.2 because no Third
-----------
Party Claim is involved (a "direct action"), the Indemnified Party shall notify
the Indemnifying Party in writing of any Indemnified Costs which such
Indemnified Party claims are subject to indemnification under the terms hereof.
Subject to Section 6.4(b) and 6.4(d), failure of the Indemnified Party to
--------------
exercise promptness in such notification shall not amount to a waiver of such
claim.
6.4 Limitations. The following provisions shall limit the indemnification
-----------
obligations hereunder:
(a) Minimum Loss. Subject to Section 6.5, no Indemnifying Party shall
------------ -----------
be required to indemnify an Indemnified Party for Indemnified Costs unless and
until the aggregate amount of all Indemnified Costs for which all Indemnified
Parties (taken together), are otherwise entitled to indemnification pursuant to
this Article exceeds $500,000 (the "Minimum Loss"). After the Minimum Loss is
exceeded, such Indemnified Parties shall be entitled to be paid the entire
amount of any Indemnified Costs from the first dollar of Indemnified Costs,
subject to the limitations on recovery and recourse set forth in this Section
-------
6.4.
- ---
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<PAGE>
(b) Limitation as to Time. No Indemnifying Party shall be liable for
---------------------
any Indemnified Costs pursuant to this Article unless a written claim for
indemnification in accordance with Section 6.2 or 6.3 is given by the
Indemnified Party to the Indemnifying Party with respect thereto on or before
5:00 p.m., Santa Barbara, California time on the first anniversary of the
Closing Date (the "Expiration Date"), except that this time limitation shall be
two years for claims based upon a breach of the representations and warranties
made in Section 2.2.
-----------
(c) Liability Cap. Without limiting any of the foregoing provisions of
-------------
this Section 6.4, the Parties hereby agree that (i) the maximum liability of a
-----------
particular Holder under this Article for Indemnified Costs shall in no event
exceed the value of the Parent Common Stock held in escrow for such Holder
pursuant to the Escrow Agreement valued as of the Effective Time, except that
the limitation set forth in this Section 6.4(c) shall not (A) apply to claims
--------------
based upon a breach of the representations and warranties made in Section 2.2 or
-----------
(B) limit the liability of any officer, director or stockholder of the Company
for such Person's fraud or intentional misrepresentation as set forth in Section
-------
6.7. Except as contemplated above, resort to the Escrow Fund shall be the
- ---
exclusive contractual remedy of Parent for any Damages if the Merger closes.
(d) Materiality. For purposes of determining (i) whether an
-----------
indemnifying Party shall be required to indemnify an Indemnified Party under
this Article, (ii) the aggregate amount of Minimum Loss suffered by an
Indemnified Party, or (iii) the aggregate amount of Indemnified Costs suffered
by an Indemnified Party, each representation and warranty (whether made as of
the date of this Agreement or made on and as of the Closing Date) contained in
this Agreement for which indemnification is sought hereunder shall be read
(including for purposes of determining whether a breach of such representation
or warranty has occurred) without regard to, and as if such representation or
warranty did not contain, materiality qualifications that may be contained
therein.
(e) Sole and Exclusive Remedy. Each Party acknowledges and agrees
-------------------------
that, after the Closing, notwithstanding any other provision of this Agreement
to the contrary, such Party's sole and exclusive remedy with respect to
Indemnified Costs shall be in accordance with, and limited by, the provisions
set forth in this Article.
6.5 Matters Not Subject to Minimum Loss. Notwithstanding any of the
-----------------------------------
provisions set forth in Section 6.4, the parties hereby agree that Section
----------- -------
6.4(a) shall not limit in any way the obligations of the Company's stockholders
- ------
to indemnify the Indemnified Parties for Indemnified Costs arising out of claims
based upon a breach of representations and warranties made in Sections 2.9(f),
---------------
2.9(g), 4.1(f), 4.1(g) and 4.1(l).
- ------ ------ ------ ------
6.6 Escrow Arrangements. At the Effective Time, the Escrow Amount shall be
-------------------
placed in an escrow fund (the "Escrow Fund"), to be governed by the terms of the
Escrow Agreement. The Escrow Fund shall be available to compensate Indemnified
Parties for Indemnified Costs. An Indemnified Party may not receive any shares
from the Escrow Fund unless and until Officer's Certificates (as defined in
Section 5 of the Escrow Agreement) identifying Indemnified
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<PAGE>
Costs, have been delivered to the Escrow Agent as provided in Section 5 of the
Escrow Agreement. The terms and conditions of the Escrow Fund shall be set forth
more fully in an Escrow Agreement in the form attached hereto as Exhibit 6.6
-----------
(the "Escrow Agreement").
6.7 No Waiver Relating to Claims for Fraud. The liability of any Party
--------------------------------------
under Article VI shall be in addition to, and not exclusive of, any other
----------
liability that such Party may have at law or equity based on such party's such
Party fraudulent acts or omissions. None of the provisions set forth in this
Agreement, including the provisions set forth in Section 6.4(a) (relating to
--------------
Minimum Loss), Section 6.4(b) (relating to limitations on the time during which
--------------
a claim for indemnification may be brought), or Section 6.4(c) (relating to a
--------------
cap on liability), shall be deemed a waiver by any Party of any right or remedy
which such Party may have at law or equity based on any other Party's willful
breach of any covenant set forth in this Agreement or any Party's fraudulent
acts or omissions, nor shall any such provisions limit, or be deemed to limit,
(a) the amounts of recoveries sought or awarded in any claim based on any other
Party's willful breach of any covenant set forth in this Agreement or any
Party's fraudulent acts or omissions, (b) the time period during which a claim
based on any other Party's willful breach of any covenant set forth in this
Agreement or any Party's fraudulent acts or omissions may be brought, or (c) the
recourse which any party may seek against another party with respect to a claim
based on any other Party's willful breach of any covenant set forth in this
Agreement or any Party's fraudulent acts or omissions; provided, that with
respect to such rights and remedies at law or equity, the Parties further
acknowledge and agree that none of the provisions of this Section 6.7 nor any
-----------
reference to this Section 6.7 throughout this Agreement, shall be deemed a
-----------
waiver of any defenses which may be available in respect to actions or claims
based on any other Party's willful breach of any covenant set forth in this
Agreement or any Party's fraudulent acts or omissions, including defenses of
statutes of limitations or limitations of damages.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. Except as provided in Section 7.2, this Agreement may be
----------- -----------
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by May 31, 2000 (provided that the right to terminate this Agreement
under this Section 7.1(b) (i) shall not be available to any Party whose willful
--------------
failure to fulfill any obligation hereunder has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date and
provided further that if a request for additional information is received from a
Governmental Entity pursuant to the HSR Act, such date shall be extended to the
90th day following acknowledgment by such Governmental Entity that Parent and
the Company have complied with such request); (ii) there shall be a final
nonappealable order of a federal or state court in effect preventing
consummation of the Merger; or (iii) there shall be any statute, rule,
regulation or
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<PAGE>
order enacted, promulgated or issued or deemed applicable to the Merger by any
Governmental Entity that would make consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate, as
a result of the Merger, any portion of the business or assets of the Company or
Parent;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of the Company and
as a result of such breach the conditions set forth in Section 5.3(a) or 5.3(b),
-------------- ------
as the case may be, would not then be satisfied; provided, however, that if such
-------- -------
breach is curable by the Company within 30 days through the exercise of its
reasonable best efforts, then for so long as the Company continues to exercise
such reasonable best efforts Parent may not terminate this Agreement under this
Section 7.1(d) unless such breach is not cured within 30 days (but no cure
- --------------
period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Merger Sub and as a result of such breach the conditions set forth in
Section 5.2(a) or 5.2(b), as the case may be, would not then be satisfied;
- -------------- ------
provided, however, that if such breach is curable by Parent or Merger Sub
- -------- -------
within 30 days through the exercise of its reasonable best efforts, then for so
long as Parent or Merger Sub continues to exercise such reasonable best efforts
the Company may not terminate this Agreement under this Section 7.1(e) unless
--------------
such breach is not cured within 30 days (but no cure period shall be required
for a breach which by its nature cannot be cured). Where action is taken to
terminate this Agreement pursuant to this Section 7.1, it shall be sufficient
-----------
for such action to be authorized by the Board of Directors of the party taking
such action.
7.2 Effect of Termination. If this Agreement terminates as provided in
---------------------
Section 7.1, this Agreement shall forthwith become void, and there shall be no
- -----------
liability or obligation on the part of Parent, Merger Sub or the Company, or
their respective officers, directors or stockholders; provided, that each Party
--------
shall remain liable for any breaches of this Agreement prior to its termination;
and provided further, that Sections 4.3 and 4.5 and Article IX shall remain in
--------------- ------------ --- ----------
full force and effect and survive any termination of this Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto by
---------
action taken by or on behalf of the respective Boards of Directors of Parent and
the Company at any time prior to the Effective Time; provided, however, that,
-------- -------
after the approval of and adoption of this Agreement and the Merger by the
Holders, no amendment may be made which would reduce the
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<PAGE>
amount or change the Merger Consideration. This Agreement may not be amended
except in a writing signed by the Company, Parent and Merger Sub.
7.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
-----------------
Merger Sub, on the one hand, and the Company, on the other, to the extent
legally allowed, may (i) extend the time for the performance of any of the
obligations of the other Party, (ii) waive any inaccuracies in the
representations and warranties made to such Party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such Party contained herein. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such Party.
ARTICLE VIII
THE SELLER REPRESENTATIVE
By virtue of the approval of this Agreement and the Merger by the Company's
Board of Directors and approval of this Agreement by the Holders pursuant to the
Company's Articles of Incorporation and Bylaws and the applicable provisions of
the Delaware Law, each of the Holders shall be deemed to have agreed that:
8.1 Authorization of the Seller Representative. George Clute (the "Seller
------------------------------------------
Representative") (and each successor appointed in accordance with Section 8.3)
-----------
hereby is appointed, authorized and empowered to act, on behalf of the Holders,
in connection with, and to facilitate the consummation of the Transactions, and
in connection with the activities to be performed on behalf of the Holders under
this Agreement and the Escrow Agreement, for the purposes and with the powers
and authority hereinafter set forth in this Article VIII and in the Escrow
------------
Agreement, which shall include the power and authority:
(a) To execute and deliver the Escrow Agreement (with such
modifications or changes therein as to which the Seller Representative, in its
reasonable discretion, shall have consented to) and to agree to such amendments
or modifications thereto as the Seller Representative, in its reasonable
discretion, may deem necessary or desirable to give effect to the matters set
forth in this Article VIII;
------------
(b) To execute and deliver such waivers and consents in connection
with this Agreement and the consummation of the Transactions as the Seller
Representative, in its reasonable discretion, may deem necessary or desirable to
give effect to the intentions of this Agreement;
(c) As the Seller Representative of the Holders, to enforce and
protect the rights and interests of the Holders and to enforce and protect the
rights and interests of the Holders arising out of or under or in any manner
relating to this Agreement and the Escrow Agreement (including in connection
with any and all claims for indemnification brought by an Indemnified Party
under Article VI) and, in connection therewith, to (i) assert any claim or
----------
institute any
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<PAGE>
action, proceeding or investigation; (ii) investigate, defend, contest or
litigate any claim, action, proceeding or investigation initiated by any
Indemnified Party, or any other Person, against the Holders and/or the Escrow
Amount, and receive process on behalf of any or all of the Holders in any such
claim, action, proceeding or investigation and compromise or settle on such
terms as the Seller Representative shall determine to be appropriate, give
receipts, releases and discharges on behalf of all of the Holders with respect
to any such claim, action, proceeding or investigation; (iii) file any proofs,
debts, claims and petitions as the Seller Representative may deem advisable or
necessary; (iv) settle or compromise any claims asserted under Article VI; (v)
----------
assume, on behalf of all of the Holders, the defense of any claim that is the
basis of any claim asserted under Article VI; and (vi) file and prosecute
----------
appeals from any decision, judgment or award rendered in any of the foregoing
actions, proceedings or investigations, it being understood that the Seller
Representative shall not have any obligation to take any such actions, and shall
not have liability for any failure to take any such action;
(d) To enforce payment from the Escrow Account on behalf of the
Company's stockholders, in the name of the Seller Representative or, if the
Seller Representative so elects, upon at least 15 days' prior written notice to
the Holders and in the absence of written instructions to the contrary, in the
names of one or more of the Holders;
(e) To cause to be paid out of the Escrow Account the full amount of
any judgment or judgments and legal interest and costs awarded in favor of any
Indemnified Party arising out of the indemnification provisions set forth in
Article VI;
- ----------
(f) To refrain from enforcing any right of the Holders or any of them
and/or of the Seller Representative arising out of or under or in any manner
relating to this Agreement or the Escrow Agreement;
(g) To make, execute, acknowledge and deliver all such other
agreements, guarantees, orders, receipts, endorsements, notices, requests,
instructions, certificates, stock powers, letters and other writings, and, in
general, to do any and all things and to take any and all action that the Seller
Representative, in its sole and absolute discretion, may consider necessary or
proper or convenient in connection with or to carry out the activities described
in paragraphs (a) through (f) above and the Transactions.
The grant of authority provided for in this Section 8.1: (i) is coupled
-----------
with an interest and is being granted, in part, as an inducement to the Company,
Parent and Merger Sub to enter into this Agreement and shall be irrevocable and
survive the death, incompetency, bankruptcy or liquidation of any Holder and
shall be binding on any successor thereto; (ii) subject to the provisions of
Section 8.3 below, may be exercised by the Seller Representative acting by
- -----------
signing as Seller Representative of each of the Company's stockholders; and
(iii) shall survive any distribution from the Escrow Agent.
8.2 Compensation; Exculpation; Indemnity.
------------------------------------
(a) The Seller Representative shall not be entitled to any fee,
commission or other compensation for the performance of its service hereunder,
but shall be entitled to the payment of
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<PAGE>
all of its out-of-pocket expenses incurred as Seller Representative, and in
furtherance of the foregoing, may pay or cause to be paid or reimburse itself
for the payment of any and all such expenses out of any amounts to be released
from the Escrow Account for the benefit of the Holders.
(b) In dealing with this Agreement, the Escrow Agreement and any
instruments, agreements or documents relating thereto, and in exercising or
failing to exercise all or any of the powers conferred upon the Seller
Representative hereunder or thereunder, (i) the Seller Representative shall not
assume any, and shall incur no, responsibility whatsoever to any Holder because
of any error in judgment or other act or omission performed or omitted hereunder
or in connection with the Agreement or Escrow Agreement; and (ii) the Seller
Representative shall be entitled to rely on the advice of counsel, public
accountants or other independent experts experienced in the matter at issue, and
any error in judgment or other act or omission of the Seller Representative
pursuant to such advice shall in no event subject the Seller Representative to
liability to the Company, any of the Holders, Parent, Merger Sub, the Surviving
Corporation or any other Person.
8.3 Removal and Replacement of Seller Representative; Successor Seller
------------------------------------------------------------------
Representative; Action by Seller Representative.
- -----------------------------------------------
(a) If the Seller Representative is unable or unavailable to perform
their duties hereunder, a Seller Representative, who shall be a Holder or a
representative of a non-individual Holder, or, if after the Effective Time,
shall have been a Holder or a representative of a non-individual Holder
immediately prior to the Effective Time, shall be appointed by the Holders who,
immediately prior to the Effective Time, shall be appointed by the Holders who,
immediately prior to the Effective Time, hold a majority of the Company Common
Stock and Company Preferred Stock (calculated on an as converted basis), unless
such Person is unable or unwilling to accept such appointment.
(b) Any Seller Representative, or all of them, may be removed at any
time by a written notice delivered by the Holders who, immediately prior to the
Effective Time, hold a majority of the Company Common Stock and Company
Preferred Stock (calculated on an as converted basis) to the Seller
Representative, the other Holders, Parent and the Surviving Corporation. A
Seller Representative so removed shall be replaced promptly by Holders who,
immediately prior to the Effective Time, hold a majority of the Company Common
Stock and Company Preferred Stock (calculated on an as converted basis) by
written notice delivered to all of the Holders and Parent.
(c) If any successor Seller Representative is appointed as
contemplated in Sections 8.3(a) or 8.3(b), written notice of such appointment
-------------------------
executed by the Holders who, immediately prior to the Effective Time, hold a
majority of the Company Common Stock and Company Preferred Stock (calculated on
an as converted basis) shall be delivered to the Seller Representative, the
Company's other Holders and Parent. Any successor Seller Representative shall
have all of the authority and responsibilities conferred upon or delegated to a
Seller Representative pursuant to this Article VIII.
------------
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<PAGE>
8.4 Reliance; Limitation as to Parent, Merger Sub and the Company.
-------------------------------------------------------------
(a) Parent, Merger Sub, the Company and Surviving Corporation may
conclusively and absolutely rely, without inquiry, and until the receipt of
written notice of a change of the Seller Representative under Section 8.3 may
-----------
continue to rely, without inquiry, upon the action of the Seller Representative
as the action of each Holder in all matters referred to in this Article VIII.
------------
(b) Each Party acknowledges and agrees that, except as set forth in
this Section 8.4, the provisions of this Article VIII create no binding
----------- ------------
obligations between Parent, Merger Sub and the Surviving Corporation, on
the one hand, and the Holders, on the other hand; provided, however, that
if Parent is given written notice of the appointment of a successor Seller
Representative as contemplated in Section 8.3, Parent, Merger Sub and the
-----------
Surviving Corporation shall be obligated to recognize, and shall only be
able to so rely upon the action of, such successor Seller Representative as
the Seller Representative for all purposes under this Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be mailed by certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Software.com, Inc.
525 Anacapa Street
Santa Barbara, California 93101
Attention: General Counsel
Telephone No.: (805) 882-2470
Facsimile No.: (805) 882-2473
with a copy (which shall not constitute notice) to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place, South Tower
711 Louisiana Street
Houston, Texas 77002
Attention: Julien R. Smythe
Telephone No.: (713) 220-5800
Facsimile No.: (713) 236-0822
(b) if to the Company, to:
-40-
<PAGE>
AtMobile.com, Inc.
11201 S.E. 8th Street
Suite 110
Bellevue, Washington 98004
Attention: Michael Buhrmann
Telephone No.: (425) 372-____
Facsimile No.: (425) 372-2255
with a copy (which shall not constitute notice) to:
Venture Law Group, P.C.
4750 Carillon Point
Kirkland, Washington 98033-7355
Attention: John W. Robertson
Telephone No.: (425) 739-8700
Facsimile No.: (425) 739-8750
with a copy (which shall not constitute notice) to:
Seller Representative
___________________________
___________________________
Attention:_________________
Telephone No.:_____________
Facsimile No.:_____________
9.2 Interpretation. The words "include," "includes" and "including" when
--------------
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. As used in this Agreement, the phrases "to a Party's
knowledge," "a Party is not aware," and similar phrases shall mean the knowledge
of such Party, or of the officers and directors of such Party, after careful
consideration of the matters set forth in the representation that is so
qualified and a reasonably diligent review of all files, documents, agreements
and other materials in such Person's possession or subject to his or her
control. The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
Party and delivered to the other Party, it being understood that all parties
need not sign the same counterpart.
-41-
<PAGE>
9.4 Entire Agreement; Assignment. This Agreement, the schedules and
----------------------------
Exhibits hereto, the Related Agreements and the documents and instruments and
other agreements among the Parties referenced herein and therein (including the
Nondisclosure Agreement): (a) constitute the entire agreement among the Parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other Person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Merger Sub may assign their respective rights and delegate their respective
obligations hereunder to their respective affiliates.
9.5 Severability. If any provision of this Agreement or the application
------------
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The Parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a Party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such Party, and the exercise by a Party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each Party agrees that process may be served upon them in any manner authorized
by the laws of the State of Delaware for such Persons and waives and covenants
not to assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
9.8 Rules of Construction. The Parties agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the Party drafting such agreement or document.
9.9 Specific Performance. The Parties agree that irreparable damage would
--------------------
occur if any provision of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. Therefore, the Parties shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
Time is of the essence in the performance of a Party's obligations hereunder.
9.10 Survival of Representations, Warranties and Agreement. Regardless of any
-----------------------------------------------------
investigation at any time made by or on behalf of any Party or of any
information any Party may
-42-
<PAGE>
have in respect thereof, each of the representations and warranties made by
Parent, Merger Sub or the Company hereunder or pursuant hereto or in connection
with the Transactions shall survive the Closing, but shall terminate at 5:00
p.m., Santa Barbara, California time on the Expiration Date, other than the
representations and warranties made by the Company in Section 2.2, which
-----------
representations and warranties shall survive until the first anniversary of the
Expiration Date. Following the date of termination of a representation or
warranty, no claim can be brought with respect to a breach of such
representation or warranty, but no such termination shall affect any claim for a
breach of a representation or warranty that was asserted before the date of
termination. To the extent that such are performable after the Closing, each
covenant and agreement contained in this Agreement shall survive the Closing for
the period stated or, if no such period is stated, such covenant or agreement
shall survive indefinitely.
9.11 Headings. The descriptive headings contained in this Agreement are
--------
included for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement
9.12 Waiver of Jury Trial. Each of Parent, Merger Sub and the Company
--------------------
hereby irrevocably waives all right to trial by jury in any action, proceeding
or counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement or the actions of Parent, Merger Sub or the Company
in the negotiation, administration, performance and enforcement thereof.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]
-43-
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
AT MOBILE.COM, INC. SOFTWARE.COM, INC.
By: _____________________________ By: ________________________________________
Michael Buhrmann, Chief John MacFarlane, Chief Executive Officer
Executive Officer
SOFTWARE.COM WIRELESS, INC.
By: ________________________________________
John MacFarlane, Chief Executive Officer
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit 5.2(d) Form of Registration Rights Agreement
Exhibit 5.2(e) Form of Opinion of Akin, Gump, Strauss,
Hauer & Feld, L.L.P.
Exhibit 5.3(e) Form of Affiliate Letter
Exhibit 5.3(j) Form of Opinion of Venture Law Group
Exhibit 6.6 Form of Escrow Agreement
<PAGE>
EXHIBIT 10.11
SOFTWARE.COM, INC.
2000 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option
--------------------
Plan are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees and Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
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 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.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers, 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. Neither service
<PAGE>
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 day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(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) "Notice of Grant" means a written or electronic notice
---------------
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(o) "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.
(p) "Option" means a nonstatutory stock option granted pursuant to
------
the Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(q) "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.
(r) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(s) "Optionee" means the holder of an outstanding Option granted
--------
under the Plan.
(t) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(u) "Plan" means this 2000 Nonstatutory Stock Option Plan.
----
-2-
<PAGE>
(v) "Service Provider" means an Employee including an Officer,
----------------
Consultant or Director.
(w) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(x) "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 12
-------------------------
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 750,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated).
4. Administration of the Plan.
--------------------------
(a) Administration. The Plan shall be administered by (i) the
--------------
Board or (ii) 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:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options 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 the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
-3-
<PAGE>
(viii) 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 satisfying foreign laws;
(ix) to modify or amend each Option (subject to Section 14(b)
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;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xi) to determine the terms and restrictions applicable to
Options;
(xii) 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 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; and
(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.
5. Eligibility. Options may be granted to Service Providers; provided,
-----------
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Officers and Directors.
6. Limitation. Neither the Plan nor any Option 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.
7. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for ten (10) years, unless sooner
terminated under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated 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.
-4-
<PAGE>
(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.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares, provided Shares acquired directly from the
Company, (A) have been owned by the Optionee for more than six (6) 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) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
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. 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, notwithstanding the exercise of the Option.
The Company shall issue (or cause to
-5-
<PAGE>
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 12 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, but only within such
period of time as is specified in the Option Agreement, and only 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.
11. Non-Transferability of Options. Unless determined otherwise by the
------------------------------
Administrator, an Option 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
-6-
<PAGE>
lifetime of the Optionee, only by the Optionee. If the Administrator makes an
Option transferable, such Option shall contain such additional terms and
conditions as the Administrator deems appropriate.
12. 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 the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, 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.
(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 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 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 shall be assumed or an equivalent option
or right 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, the Option shall terminate as of the
closing of such merger or sale of assets. For the purposes of this paragraph,
the Option 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, 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
-7-
<PAGE>
received upon the exercise of the Option, for each Share of Optioned Stock 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.
13. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, 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.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) 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.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option 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 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.
16. 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.
17. 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.
-8-
<PAGE>
SOFTWARE.COM, INC.
2000 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number __________________________
Date of Grant __________________________
Vesting Commencement Date __________________________
Exercise Price per Share $_________________________
Total Number of Shares Granted __________________________
Total Exercise Price $_________________________
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: __________________________
Vesting Schedule:
----------------
Subject to the Optionee continuing to be a Service Provider on such dates,
this Option shall vest and become exercisable in accordance with the following
schedule:
25% of the Shares subject to the Option shall vest twelve (12) months
after the Vesting Commencement Date, and 1/48th of the Shares subject
to the Option shall vest upon the last day of each month thereafter.
Termination Period:
------------------
This Option may be exercised for three (3) months after Optionee ceases to
be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for twelve (12) months after Optionee ceases to be a
Service Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
<PAGE>
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby
---------------
grants to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
------------------
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
---------
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares, provided Shares acquired directly
from the Company (i) have been owned by the Optionee for more than six (6)
months on the date of surrender, and (ii) have a Fair Market Value on the date
of surrender equal to the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred
-----------------------------
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the
-2-
<PAGE>
lifetime of Optionee only by the Optionee. The terms of the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term
--------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
7. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator
-3-
<PAGE>
upon any questions relating to the Plan and Option Agreement. Optionee further
agrees to notify the Company upon any change in the residence address indicated
below.
OPTIONEE SOFTWARE.COM, INC.
____________________________________ ____________________________________
Signature By
____________________________________ ____________________________________
Print Name Title
___________________________________
Residence Address
___________________________________
-4-
<PAGE>
EXHIBIT A
---------
SOFTWARE.COM, INC.
2000 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
Software.Com, Inc.
525 Anacapa Street
Santa Barbara, CA 93101
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, _____,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Software.Com, Inc. (the "Company") under
and pursuant to the 2000 Nonstatutory Stock Option Plan (the "Plan") and the
Stock Option Agreement dated, _________, ___ (the "Option Agreement"). The
purchase price for the Shares shall be $_____, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all
<PAGE>
prior undertakings and agreements of the Company and Purchaser with respect to
the subject matter hereof, and may not be modified adversely to the Purchaser's
interest except by means of a writing signed by the Company and Purchaser. This
agreement is governed by the internal substantive laws, but not the choice of
law rules, of California.
Submitted by: Accepted by:
PURCHASER SOFTWARE.COM, INC.
____________________________________ ____________________________________
Signature By
____________________________________ ____________________________________
Print Name Title
____________________________________
Date Received
Address: Address: 525 Anacapa Street
- ------- --------------------------- -------
--------------------------- Santa Barbara, CA 93101
---------------------------
-2-
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The Company has the following subsidiaries:
Software.com Ltd. (UK);
Nihon Software.com Ltd.(Japan);
Software.com Pte. Ltd. (Singapore);
Software.com Italia S.r.1.;
Software.com Deutschland Gmbh;
Software.com Hong Kong Limited;
Mobility.Net Corporation;
Software.com, BV;
Software.com Telarc, Inc.; and
Software.com International, Inc.
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-89549) pertaining to the 1995 Stock Plan, the 1999 Employee
Stock Purchase Plan, the Mobility.Net Corporation 1999 Stock Option Plan and
Options under Stock Option Agreements of our report dated January 24, 2000, with
respect to the consolidated financial statements and financial statement
schedule of Software.com, Inc. included in this Annual Report (Form 10-K) for
the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 41,715
<SECURITIES> 25,748
<RECEIVABLES> 23,292
<ALLOWANCES> 1,024
<INVENTORY> 0
<CURRENT-ASSETS> 91,654
<PP&E> 9,242
<DEPRECIATION> 5,306
<TOTAL-ASSETS> 104,039
<CURRENT-LIABILITIES> 18,610
<BONDS> 0
0
0
<COMMON> 119,902
<OTHER-SE> 1,673
<TOTAL-LIABILITY-AND-EQUITY> 104,039
<SALES> 0
<TOTAL-REVENUES> 44,638
<CGS> 0
<TOTAL-COSTS> 14,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 790
<INTEREST-EXPENSE> 598
<INCOME-PRETAX> (10,321)
<INCOME-TAX> 212
<INCOME-CONTINUING> (10,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,533)
<EPS-BASIC> (0.31)
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