<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-76893
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONTINUUS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE
(State or jurisdiction 7371 43-1070080
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
</TABLE>
108 PACIFICA
IRVINE, CALIFORNIA 92618
(949) 453-2200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN R. WARK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONTINUUS SOFTWARE CORPORATION
108 PACIFICA
IRVINE, CALIFORNIA 92618
(949) 453-2200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
D. BRADLEY PECK, ESQ. JEFFREY D. SAPER, ESQ.
MICAELA H. MARTIN, ESQ. MICHAEL J. DANAHER, ESQ.
PATRICK R. O'NEIL, ESQ. ANTONE F. JOHNSON, ESQ.
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
4365 EXECUTIVE DRIVE, SUITE 1100 650 PAGE MILL ROAD
SAN DIEGO, CA 92121 PALO ALTO, CA 94304
(619) 550-6000 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE PRICE(1)(2) REGISTRATION FEE(3)
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Common Stock, $.001
par value.......... 3,565,000 $10.00 $35,650,000 $9,910.70
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</TABLE>
(1) Includes shares that the underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933.
(3) $11,254.00 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THE PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES OUR
REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 9, 1999
3,100,000 SHARES
CONTINUUS LOGO
COMMON STOCK
$ PER SHARE
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<TABLE>
<S> <C> <C>
- - Continuus Software Corporation is offering - This is our initial public offering.
2,523,642 shares and selling stockholders are
offering 576,358 shares.
- - We anticipate that the initial public - Proposed trading symbol: Nasdaq National
offering price will be between $8.00 and Market -- CNSW
$10.00 per share.
</TABLE>
---------------------------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ---------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Continuus Software Corporation.................. $ $
Proceeds to selling stockholders............................ $ $
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</TABLE>
The underwriters have a 30-day option to purchase up to 465,000 additional
shares of common stock from us to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
U.S. BANCORP PIPER JAFFRAY CIBC WORLD MARKETS
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 3
(INSIDE FRONT COVER PAGE)
[The Continuus Software name and logo are depicted]
[Description of illustration: a collage of images, including part of a clock
face, currency, a ticker board, a computer monitor, compact disks, a cellular
telephone and fighter planes, appears in the center of the page against a white
background. At the top right corner of the page, the caption appears:
"SOFTWARE IS THE ENGINE OF VALUE IN THE INFORMATION ECONOMY
In every segment of the economy
- -software enables new products and services
- -software facilitates rapid large-scale change and innovation
- -software must, in turn, respond to rapid and constant change."
On the bottom third of the page the caption appears:
"FROM Telecommunications, where software enables the evolution and control of
the worldwide network infrastructure
Financial Services, where software-based systems and services facilitate the
reshaping of the industry on a global basis
Aerospace and Defense, where software enables the communication, command, and
control systems of the information age battlefield
Software and Services, which creates the software packages and custom solutions
that drive every other segment of the economy
E-commerce, where software powers the Internet's redefinition of entire
industries
Effectively managing Internet and enterprise software assets is a critical
success factor in the information economy. Continuus Software provides the
applications and infrastructure to manage the people, projects, and processes
for developing, enhancing, deploying and managing Internet and enterprise
software assets. For a listing of representative customers, including customers
from each of the above sectors, please see "Business -- Customers."
The Continuus Software name and logo are also depicted.]
<PAGE> 4
(INTERIOR FOLD-OUT FRONT COVER PAGE)
[Description of illustration: centered in the illustration is a horizontal band
of clouds. Blending out of the center band into a white background of clouds
appears the images of a man running, a magnifying glass, a man juggling balls of
light, and a butterfly. The caption "Continuus Solutions for Continuus
Improvement" appears horizontally across the center of the illustration. There
is a block of text in each corner, each of which is stated below:
REDUCE TIME-TO-MARKET
Organizations using our solutions can more rapidly and predictably deliver
Internet and software development projects. The Continuus Change Management
Suite and Continuus WebSynergy provide a common environment for all participants
in a development project. We facilitate better communication and coordination of
activities within teams and across multiple locations. Our products help to
manage and automate a common set of shared processes which helps to automate or
eliminate time-consuming and repetitive manual activities. Our products also
enable management to better monitor and evaluate project status and take
immediate corrective actions. This leads to improved productivity, reductions in
wasted time, and less risk of project failure.
CONTINUOUSLY IMPROVE QUALITY
Our solutions allow customers to increase the quality of Internet and software
applications. Customers can use our products to create a platform for
continuously improving the processes used to manage, develop, enhance and deploy
Internet and software-based systems. Our products allow an organization to
implement and enforce software engineering best practices. Our process
automation capabilities allow the elimination of many of the typical sources of
errors in building, configuring and deploying large Internet and software
systems.
EFFECTIVELY MANAGE E-ASSETS
Continuus provides our customers with a common repository database that can
serve as a central catalog for an organization's portfolio of Internet and
software assets, which we refer to as e-assets. Customers can manage a wide
range of software and software-related assets, including technical software that
may be embedded in other products, IT applications that are both internally
developed or purchased from package vendors and Internet applications. Customers
can track where components are used, ensure that no assets are lost, as well as
track and manage the complete history of changes to components over their
lifetime. Our repository also provides a foundation for improving an
organization's return on investment in its e-assets by enabling reuse of
software components.
QUICKLY ADAPT TO CHANGE
As customer's organizations grow and as they adopt new organizational
strategies, our products can be quickly and easily reconfigured to adapt to
these changes. Our products' distributed architecture can support a small
development team managing a single development project in a single location and
then easily scale to support hundreds of developers working on dozens of
concurrent projects distributed across many locations. Customers can quickly
tailor our products' process management capability to adopt new processes and
policies and best practices. Our customers can use our products with almost any
of the standard software development tools they are currently using or may adopt
in the future.
The Continuus Software name and logo are also depicted.]
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 8
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Special Note Regarding Forward-Looking Statements........... 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 34
Management.................................................. 46
Certain Transactions........................................ 55
Principal and Selling Stockholders.......................... 58
Description of Capital Stock................................ 61
Shares Eligible For Future Sale............................. 65
Underwriting................................................ 67
Legal Matters............................................... 68
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Consolidated Financial Statements.................. F-1
</TABLE>
---------------------------------------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date.
3
<PAGE> 6
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SUMMARY
The items in the following summary are described in more detail later in this
prospectus. This summary provides an overview of selected information and does
not contain all the information you should consider. Therefore, you should also
read the more detailed information set out in this prospectus, the financial
statements and the other information incorporated by reference into this
prospectus.
BUSINESS OF CONTINUUS SOFTWARE CORPORATION
Continuus is a leading provider of software products and services that enable
enterprises to manage their Internet and software assets, which we refer to as
e-asset management. E-asset management products and services, an emerging market
segment, enable organizations to more effectively develop, enhance, deploy and
manage their Internet and software systems. E-asset management provides an
alternative to using a collection of discrete products to automate various
aspects of the software development process by providing an integrated and
comprehensive platform for managing an enterprise's software-related assets,
processes, projects and people. Our integrated product line, consisting of the
Continuus WebSynergy Suite and the Continuus Change Management Suite, is
specifically designed to support the collaborative development, management,
approval and deployment of all types of software, Internet applications and web
content. Our product line simplifies the development of the most complex and
demanding Internet and software applications. Our customer base includes the
information technology departments of Fortune 500 class business and government
organizations as well as engineering departments of organizations that develop
software as a product or as a component of a product, such as independent
software vendors, computer hardware vendors, defense and aerospace
organizations, telecommunication equipment suppliers and transportation
equipment manufacturers. License revenues for Continuus Change Management Suite
account for substantially all of our software license revenues. We also offer
Continuus Professional Services which include consulting, training and
maintenance services to facilitate the successful implementation of our
solution.
In response to increasingly competitive global markets, businesses are seeking
cost savings and productivity gains through implementing software solutions that
automate business processes. These efforts to automate business processes, such
as customer billing, have led to an explosive growth in the scale and complexity
of software and software-related assets within organizations. The advent of the
Internet has further added complexity by increasing both the number of and
sophistication of new applications, such as on-line trading, and extending these
applications beyond the enterprise. The Internet has also highlighted and
accelerated the trend that software has become a major driver to both revenue
growth and expense reduction as Internet applications are directly connecting
organizations to their employees, customers, vendors and partners. In addition,
companies are adopting more complex organizational strategies in order to
develop, deploy and maintain applications in accelerated "Internet time." For
example, companies are dispersing and outsourcing their development across
locations to take advantage of the best qualified and most cost-effective
resources.
Because of these trends, software has become one of the most strategic assets
for companies, however, many companies are not managing these assets
effectively. A 1998 report by the Standish Group estimated that as few as 26% of
all software projects managed by corporate IT departments were completed on time
and on budget. Customers using our products can realize significant cost savings
through more effectively managing their e-assets. E-assets include software
source code as well as design specifications, documentation, help files and web
content, including HTML and XML components and video, graphics and sound
components. Our solution also enables organizations to improve the quality of
their e-assets and to reduce time to deliver Internet and software applications.
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4
<PAGE> 7
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Our objective is to become the leader in the emerging market for e-asset
management solutions. The key elements of our strategy are:
- provide comprehensive Internet and enterprise software asset
management solutions;
- focus on Internet and e-commerce application management;
- focus on successful customer implementation of our products;
- leverage our customer base;
- expand sales coverage; and
- expand partnering and strategic relationships.
We market and sell our products primarily through our direct sales force in
North America and Europe. We also market our products through distributors in
Australia, Denmark, Finland, India, Israel, Italy, the Netherlands, Norway,
Spain and Sweden. We currently have customers worldwide in a variety of
industries, including financial services, telecommunications, technology,
manufacturing and others. Our customers include AT&T, Dresdner Bank, BMW, Bell
Atlantic, Boeing, British Telecom, Morgan Stanley Dean Witter, Motorola,
Prudential, Siemens, Texas Instruments and USinternetworking.
Our principal executive offices are located at 108 Pacifica, Irvine, California
92618 and our telephone number is (949) 453-2200. We were incorporated on
January 12, 1984 as a California corporation. We will reincorporate in Delaware
prior to the consummation of this offering. Our fiscal year ends December 31. We
maintain a worldwide web site at www.continuus.com. The reference to our
worldwide web address does not constitute incorporation by reference of the
information contained at this site. Continuus Change Management Suite, Continuus
WebSynergy and the Continuus Software Corporation logo are trademarks of
Continuus. All other brand names or trademarks appearing in this prospectus are
the property of their respective holders.
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5
<PAGE> 8
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THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
By Continuus Software Corporation..................... 2,523,642 shares
By selling stockholders............................... 576,358 shares
---------
Total......................................... 3,100,000 shares
Common stock outstanding after the offering:
Actual................................................ 8,781,861 shares
Fully-diluted......................................... 13,330,469 shares
Offering price.......................................... $ per share
Use of proceeds......................................... Increase working capital
Proposed Nasdaq National Market symbol.................. CNSW
</TABLE>
The following shares are included in calculating the number of shares to be
outstanding after the offering, on both an actual and fully-diluted basis:
- 4,306,454 shares of common stock issued upon conversion of all
outstanding shares of preferred stock upon the closing of this
offering and
- 278,125 shares of common stock issued upon exercise of warrants
to purchase common stock at $5.57 per share upon the closing of
this offering.
The following shares are excluded in calculating the number of shares to be
outstanding after the offering on an actual basis and included on a
fully-diluted basis:
- 1,257,671 shares, subject to options outstanding as of March 31,
1999 at a weighted average exercise price of $3.27 per share, of
the 2,452,830 shares of common stock reserved for issuance under
our current stock option plan;
- 1,179,033 shares of common stock reserved for issuance and
subject to options outstanding as of March 31, 1999 under our
initial stock option plan at a weighted average exercise price
of $1.58 per share;
- 1,033,737 shares of common stock reserved for issuance upon
exercise of warrants outstanding as of March 31, 1999 at a
weighted average exercise price of $1.25 per share; and
- 1,078,167 shares of common stock reserved for issuance upon the
conversion of a $6 million senior secured convertible debenture
with a conversion price of $5.57 per share.
Except as otherwise noted, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- reflects a 1-for-2.65 reverse stock split, which will be
effective prior to the closing of this offering;
- reflects the conversion of all outstanding shares of preferred
stock into 4,306,454 shares of common stock upon completion of
the offering;
- reflects the conversion of all outstanding warrants to purchase
preferred stock into warrants to purchase common stock; and
- reflects the issuance of 278,125 shares of common stock upon the
exercise of warrants which will terminate if not exercised upon
completion of the offering.
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6
<PAGE> 9
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma information below gives effect, as of March 31, 1999, to the
receipt of $1,547,766 from holders of warrants to purchase 278,125 shares of
common stock upon exercise of the warrants concurrently with the closing of this
offering.
The pro forma as adjusted information below gives effect as of March 31, 1999,
to our receipt of the estimated net proceeds of approximately $19,953,000 from
the sale of 2,523,642 shares of common stock offered by us at an assumed initial
public offering price of $9.00 per share.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses........................ $ 3,887 $ 8,664 $ 9,611 $13,829 $14,429 $ 3,745 $4,172
Services................................. 2,478 4,436 6,488 9,434 13,007 3,065 4,067
------- ------- ------- ------- ------- ------- ------
Total revenues........................ 6,365 13,100 16,099 23,263 27,436 6,810 8,239
------- ------- ------- ------- ------- ------- ------
Cost of revenues:
Software licenses........................ 582 535 775 650 654 167 156
Services................................. 2,264 2,583 4,207 6,007 7,446 1,681 1,945
------- ------- ------- ------- ------- ------- ------
Total cost of revenues................ 2,846 3,118 4,982 6,657 8,100 1,848 2,101
------- ------- ------- ------- ------- ------- ------
Gross profit............................... 3,519 9,982 11,117 16,606 19,336 4,962 6,138
------- ------- ------- ------- ------- ------- ------
Operating expenses:
Sales and marketing...................... 5,347 9,296 11,776 12,079 15,469 3,577 4,098
Research and development................. 1,964 2,434 3,473 3,574 4,493 1,065 1,233
General and administrative............... 1,204 1,565 1,720 1,896 2,483 749 704
Compensation expense related to stock
option grants......................... -- -- -- -- -- -- 41
------- ------- ------- ------- ------- ------- ------
Total operating expenses.............. 8,515 13,295 16,969 17,549 22,445 5,391 6,076
------- ------- ------- ------- ------- ------- ------
Income (loss) from operations.............. (4,996) (3,313) (5,852) (943) (3,109) (429) 62
Other expense, net....................... 33 94 198 637 750 207 296
------- ------- ------- ------- ------- ------- ------
Loss before income tax provision........... (5,029) (3,407) (6,050) (1,580) (3,859) (636) (234)
Income tax provision....................... 1 4 3 3 7 13 5
------- ------- ------- ------- ------- ------- ------
Net loss................................... $(5,030) $(3,411) $(6,053) $(1,583) $(3,866) $ (649) $ (239)
======= ======= ======= ======= ======= ======= ======
Basic and diluted net loss per share....... $ (4.27) $ (2.34) $ (4.06) $ (1.00) $ (2.79) $ (0.40) $(0.15)
Basic and diluted weighted average
shares................................... 1,178 1,458 1,491 1,576 1,618 1,605 1,637
Pro forma basic and diluted net loss per
share(1)................................. $ (0.62) $(0.04)
======= ======
Pro forma basic and diluted weighted
average shares(1)........................ 6,202 6,222
======= ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,357 $ 3,905 $23,858
Working capital............................................. 826 2,374 22,327
Total assets................................................ 13,323 14,871 34,824
Long-term liabilities....................................... 6,376 6,376 6,376
Total stockholders' equity (deficit)........................ (3,285) (1,737) 18,216
</TABLE>
- ---------------------------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for method used to
determine pro forma basic and diluted net loss per share.
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7
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. Our business, financial condition or results of operations
could be harmed by any of the following risks. The trading price of our common
stock could decline due to any of the following risks, and you might lose all or
part of your investment.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, WHICH MAY CAUSE THE PRICE OF OUR
STOCK TO FALL
Our quarterly revenues and operating results fluctuate significantly and may
cause the price of our stock to fall. Our revenues and operating results depend
primarily on the volume and timing of customer contracts we receive during a
given quarter and the percentage of each contract we can recognize as revenue
during each quarter. We have often recognized a substantial portion of our
revenues in the last month of a quarter, with a concentration of these revenues
in the last weeks or days of the third month. A delay in an anticipated sale
near the end of a quarter can seriously harm our operating results for that
quarter. Accordingly, our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock will likely fall. For more detailed information regarding factors which
affect our operating results, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations."
Our expense levels are relatively fixed in the short term and are based, in
part, on our expectations of our future revenues. As a result, any delay in
generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS
We have experienced and expect to continue to experience seasonality in sales of
our software products. These seasonal trends materially affect our
quarter-to-quarter operating results. We may experience weaker demand for our
products and services in our third quarter each year, particularly in
international markets, as a result of reduced sales activities during the summer
months. As a result of customer buying patterns, we may also realize lower
revenues in the first quarter of each year than in the preceding fourth quarter.
WE EXPECT FUTURE LOSSES AND WE MAY NEVER BECOME PROFITABLE
We may never become profitable. We have not achieved profitability and we expect
to incur net losses in the foreseeable future. We incurred net losses of $3.9
million in 1998 and $0.2 million for the three months ended March 31, 1999. As
of March 31, 1999, we had an accumulated deficit of $23.6 million. We expect to
continue to increase our sales and marketing, product development and
administrative expenses. As a result, we will need to generate significant
additional revenues to achieve and maintain profitability.
Although our revenues have grown in recent quarters, we cannot be certain that
revenue growth will continue or that we will achieve sufficient revenues for
profitability. If we do achieve profitability in any period, we cannot be
certain that we will sustain or increase profitability on a quarterly or annual
basis. For more detailed information regarding our operating results and
financial condition, see "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
<PAGE> 11
CUSTOMER FOCUS AND SPENDING ON YEAR 2000 REMEDIATION MAY REDUCE OUR FUTURE
REVENUES
Our revenues may be reduced by customer focus on year 2000 problems. Many
computers, software applications and other equipment are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, some computers, software and other equipment could
fail to operate or fail to produce correct results if "00" is interpreted to
mean 1900 rather than 2000. These problems are commonly referred to as the "year
2000 problem."
Many customers may spend their limited financial and personnel resources
remediating year 2000 problems, thereby delaying or foregoing entirely
investment in more general IT products such as Continuus Change Management Suite
and Continuus WebSynergy. This trend could reduce our revenues in 1999 and 2000.
A REDUCTION IN REVENUES FROM THE CONTINUUS CHANGE MANAGEMENT SUITE WOULD HARM
OUR BUSINESS
A decline in the demand for Continuus Change Management Suite and the revenue
associated with licenses of the Continuus Change Management Suite would reduce
our total revenues and harm our business. In 1997, sales of the Continuus Change
Management Suite or its components accounted for 100% of our total software
license revenues. In 1998, the sales accounted for approximately 94% of our
total software license revenues and for the three months ended March 31, 1999,
they accounted for approximately 99% of our total software license revenues. In
comparison, Continuus WebSynergy-related sales accounted for 6% of our total
software license revenues in 1998 and for the three months ended March 31, 1999,
they accounted for approximately 1% of our total software license revenues. We
expect that the Continuus Change Management Suite will continue to account for a
substantial portion of our total revenues for the foreseeable future. The
following events may reduce the demand for the Continuus Change Management
Suite:
- competition from other products;
- significant flaws in our software products or incompatibility
with third-party hardware or software products;
- negative publicity or evaluation; or
- obsolescence of the hardware platforms or software environments
in which our systems run.
SINCE OUR FUTURE REVENUES PARTIALLY DEPEND ON OUR NEW INTERNET PRODUCT, OUR
REVENUES MAY SUFFER IF WE CANNOT SUCCESSFULLY MARKET THIS NEW PRODUCT
A substantial portion of our revenues in the future may be derived from
Continuus WebSynergy Suite and related services. A decline in the price of, or
demand for, Continuus WebSynergy, or our failure to achieve broad market
acceptance of Continuus WebSynergy, may reduce our revenues.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO ACHIEVE
SIGNIFICANT REVENUE GROWTH
We may not be able to recruit and retain the personnel we need to achieve
significant revenue growth. Our future success depends upon our ability to
recruit, train and retain additional sales and technical support personnel. We
sell our products primarily through our direct sales force and we support our
customers with our internal technical support staff. In the past, we have had
difficulty recruiting and retaining qualified personnel, and we cannot guarantee
that we will not experience
9
<PAGE> 12
similar difficulties in the future. Factors that may affect our ability to
recruit and retain personnel include:
- our ability to effectively manage an expansion of our sales and
technical support personnel and retain this personnel; and
- competition for qualified personnel from larger, more
established companies who have greater financial resources than
we do.
In 1996 and 1998, we suffered a material decline in sales growth due to turnover
in our sales force. Newly hired sales personnel generally do not become fully
productive until they have worked for at least two quarters. Because of the time
required to recruit new sales personnel and for them to become fully productive,
we cannot quickly and easily expand our sales force in response to unanticipated
events.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND MAY HARM OUR OPERATING RESULTS
The period of time between initial customer contact and an actual sales order
may span six months or more. This long sales cycle increases the risk that we
will not forecast our revenue accurately and adjust our expenditures
accordingly. The longer the sales cycle lasts, the more likely a customer is to
decide not to purchase our products or to scale down its order of our products
for various reasons, including:
- changes in our customers' budgets and purchasing priorities;
- actions by competitors, including introduction of new products
and price reductions; and
- diversion of resources and management's attention to other
information technology issues, such as year 2000 issues.
In addition, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our products, which may
cause additional delays during the evaluation process.
IF WE DO NOT CONTINUE TO RECEIVE REPEAT BUSINESS FROM EXISTING CUSTOMERS, OUR
REVENUE WILL SUFFER
In 1998, we generated approximately 58% of our software license revenues from
repeat business from existing customers. If we fail to generate repeat and
expanded business from our customers, our revenues will suffer. Our ability to
generate repeat business from current customers depends on many factors. Most of
our current customers initially purchase a limited number of licenses as they
implement and adopt our products. Even if the customer successfully uses our
products, customers may not purchase additional licenses to expand the use of
our products. Purchases of expanded licenses by these customers will depend on
their success in deploying our products, their satisfaction with our products
and support services and their perception of competitive alternatives. A
customer's decision whether to widely deploy our products and purchase
additional licenses may also be affected by factors that are outside of our
control or which are not related to our products or services. In addition, as we
deploy new versions of our products or introduce new product suites, our current
customers may not require the functionality of our new products and may not
ultimately license these products.
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<PAGE> 13
INTENSE COMPETITION MAY CAUSE US TO REDUCE PRICES OR LOSE CUSTOMERS, WHICH MAY
HARM OUR PROFITABILITY
The markets for integrated Internet and enterprise software asset management
solutions are intensely competitive, subject to rapid change and sensitive to
new product introductions or enhancements and marketing efforts by industry
participants. We expect to experience significant and increasing levels of
competition in the future. Competition may result in price reductions, reduced
margins or loss of customers which in turn could harm our profitability. See
"Business -- Competition."
Many of our existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing and sales
organizations, and significantly greater financial resources than we do.
Moreover, we have limited proprietary barriers to entry that could keep our
competitors from developing similar products or selling competing products in
our markets. We may not be able to maintain our competitive position against
current or future competitors, especially those with greater resources.
ONE OF OUR STRATEGIES IS TO TARGET THE EMERGING MARKET FOR E-ASSET MANAGEMENT
SOLUTIONS; IF THIS MARKET DOES NOT DEVELOP AS WE ANTICIPATE, OUR REVENUES MAY
SUFFER
We are expanding beyond our traditional software change management solution to
provide our customers with e-asset management, which provides a more
comprehensive, integrated solution to support broader needs. Potential customers
may not fully appreciate the value of our comprehensive and integrated e-asset
management solution as compared to traditional change management software. As a
result, the e-asset management market generally may not develop and continue or
grow as we anticipate. Any failure of this market to develop or grow would harm
our revenues.
CHANGES IN INTERNET TECHNOLOGY AND STANDARDS MAY IMPEDE MARKET ACCEPTANCE OF OUR
INTERNET PRODUCT
Rapidly changing Internet technology and standards may impede market acceptance
of Continuus WebSynergy. The success of Continuus WebSynergy will require us to
develop and introduce new technologies and product suites and to offer
functionality that we do not currently provide. Continuus WebSynergy has been
designed and the full e-asset management solution will be designed based upon
prevailing Internet technology. If Internet technologies emerge that are
incompatible with Continuus WebSynergy or other new Internet products we
develop, our products may become obsolete and existing and potential new
customers may seek alternatives to them. We may not be able to quickly adapt our
products to new Internet technology.
THE COSTS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS MAY NEGATIVELY IMPACT OUR
OPERATING MARGINS
We derived approximately 52% of our total revenues in 1998 from sales outside
North America, principally in Europe. During the three months ended March 31,
1999, we derived approximately 48% from sales outside North America. Our
international operations require and will continue to require significant
management attention and financial resources. If we fail to expand international
sales in a timely and cost-effective manner, our operating margins will
decrease. We believe that our growth and profitability will depend in part on
additional expansion of sales in foreign markets.
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<PAGE> 14
IF WE CANNOT MANAGE THE ADDITIONAL CHALLENGES PRESENTED BY OUR INTERNATIONAL
OPERATIONS, OUR REVENUES AND PROFITABILITY MAY SUFFER
We face additional challenges from our continued operations in foreign
countries. Our revenues and profitability could suffer if we cannot manage these
challenges, which include:
- longer payment cycles;
- difficulties in staffing and managing foreign operations;
- increased sales and marketing and research and development
expenses;
- costs and risks of relying upon distributors;
- various and changing regulatory requirements;
- export restrictions and availability of export licenses;
- tariffs and other trade barriers;
- political and economic instability; and
- potentially adverse tax laws.
Foreign laws also govern a certain number of our customer purchase agreements,
which may differ significantly from U.S. laws. Therefore, we may be limited in
our ability to enforce our rights under foreign agreements and to collect
payments should any customer refuse to pay us.
WE MAY LOSE OUR COMPETITIVE ADVANTAGE IN FOREIGN COUNTRIES DUE TO UNFAVORABLE
LAWS
We are subject to the Foreign Corrupt Practices Act which prohibits U.S.
individuals, companies and direct foreign subsidiaries of U.S. companies from
offering, promising, or paying anything of value to any foreign government
official in order to obtain or retain business. This may place us at a
competitive disadvantage to foreign companies that are not subject to the FCPA.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES
Our international customers pay us in their local currencies. In 1998, we
derived approximately 47% of our revenues in foreign local currencies.
Consequently, any gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuations in our operating results. Although we may utilize
some hedging in the future, we currently do not utilize foreign currency hedging
instruments. Historically foreign currency gains and losses have not been
material to our financial performance. We cannot guarantee that fluctuations in
currency rates will not harm our business, operating results and financial
condition in the future.
FAILURE TO MANAGE OUR GROWING OPERATIONS COULD INCREASE COSTS AND CAUSE DELAYS
IN MEETING OUR BUSINESS OBJECTIVES
We plan to increase business opportunities through an expansion of our
distribution network in the United States and internationally. However, we
cannot guarantee that the efforts and funds directed towards expanding our
distribution network will succeed. Our failure to implement new operational and
financial control systems to accommodate growth could increase costs and cause
delays in meeting our objectives. Any future growth will also depend on, among
other things, our ability to gain market acceptance for our products in new
geographic areas and to monitor and control the additional costs and expenses
associated with expansion. We cannot guarantee that we can successfully manage
these aspects of our business.
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<PAGE> 15
Any business opportunities will increase demands on our systems and controls. To
deal with these concerns, we will need to implement a variety of new and
upgraded operational and financial systems, procedures and controls and to hire
additional administrative personnel. We cannot be sure that we can complete the
implementation of these systems, procedures and controls or hire needed
personnel in a timely manner.
OUR NEW EXECUTIVE TEAM MAY NOT BE ABLE TO WORK TOGETHER TO MEET OUR BUSINESS
OBJECTIVES, WHICH MAY HARM OUR SALES AND PROFITABILITY
Several of our executive officers have been employed by us for a relatively
short period of time. Our Vice President, Research and Development, joined in
August 1998, our Chief Financial Officer joined in December 1998 and our Vice
President, Americas Operations, joined in March 1999. In addition, our former
Vice President, Research and Development, became Vice President, Marketing in
August 1998. The failure of the new management team to work together effectively
could delay efficient decision-making and execution by our executive team,
affecting product development and sales and marketing efforts, which would
negatively impact our profitability and sales.
OUR PRODUCTS MAY BECOME OBSOLETE AND UNMARKETABLE
The introduction of products utilizing new technologies and the emergence of new
industry standards could render our existing products and products currently
under development obsolete and unmarketable. The following factors characterize
the markets for our products:
- rapid technological advances;
- evolving industry standards;
- changes in end-user requirements; and
- frequent new product introductions and enhancements.
As a result, our future success depends upon our ability to enhance our current
products and successfully develop, introduce and sell new products that
incorporate new technology and respond to evolving end-user requirements. Any
failure to anticipate or adequately respond to technological developments or
end-user requirements, any significant delays developing or introducing new
products, or any failure of new products or features to provide the benefits
expected or to achieve market acceptance could damage our competitive position
in the marketplace and reduce revenues. We cannot guarantee that we will succeed
in developing and marketing new products or enhancements on a timely basis or
that we will not experience significant delays in the future.
SIGNIFICANT LIABILITY CLAIMS FROM OUR CUSTOMERS COULD REDUCE OUR REVENUES,
INCREASE OUR COSTS AND DELAY MARKET ACCEPTANCE OF OUR PRODUCTS
Because our software products are complex, they often contain errors or "bugs"
that can be detected at any point in a product's life cycle. These defects are
most frequently found during the period immediately following the introduction
of new products or enhancements to existing products and may be discovered in
the future. Software defects discovered after we ship our products could result
in loss of revenues or delays in market acceptance. Although we do from time to
time incur costs in correcting software defects, to date, no errors in our
software products have materially affected our results of operations. Because we
rely on our own products in connection with developing our software, any
software errors or defects could make it more difficult for us to develop
software in the future.
We typically design our customer license agreements to contain provisions which
limit our exposure to potential product liability claims. Specifically, in
agreements with our customers we attempt to
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<PAGE> 16
limit our liability for special and indirect damages, as well as damages related
to the loss of data, revenue or profits. We also attempt to limit our liability
to the contract price or the replacement cost of the software. However, we
cannot guarantee that contractual limitations of liability would be enforceable
or would otherwise protect us from liability for damages to a customer resulting
from a defect in one of our products, or associated with the professional
services we render. Although we maintain insurance which covers damages arising
from the implementation and use of our products, we are not certain that our
insurance would cover or be sufficient to cover any product liability claims
against us. Moreover, we incur risks of professional and other liability
stemming from our training and consulting services. Any product liability or
other claims against us, if successful and of sufficient magnitude, could harm
our profitability and future sales.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY HARM OUR
COMPETITIVE ADVANTAGE
Our success and competitive advantage is heavily dependent upon our proprietary
and licensed technology. Therefore, if we do not adequately protect our
proprietary and licensed technology, our business will suffer. We can not
guarantee that our confidentiality procedures can adequately deter
misappropriation or independent third-party development of our technology or
prevent an unauthorized third party from obtaining or using information that we
regard as proprietary. In addition, the laws of some foreign countries do not
protect or enforce proprietary rights to the same extent as do the laws of the
United States. Policing the unauthorized use of our products is difficult and,
while we can not determine the extent to which third parties are pirating our
software products, we expect software piracy to be a persistent problem in the
future.
IF WE CANNOT OBTAIN A COST-EFFECTIVE LICENSE TO AN APPROPRIATE DATABASE
MANAGEMENT SYSTEM, OUR PROFITABILITY MAY SUFFER
We rely upon a database management system developed by Informix Software, Inc.,
embedded in the Continuus Change Management Suite pursuant to a license that
expires on December 31, 1999. The Informix system, which is an industry standard
relational database engine, manages the repository database that contains all of
the information about the e-assets managed by the Continuus Change Management
Suite. We cannot be sure that Informix's product lines will continue to be
available to us on commercially reasonable terms. If Informix is acquired or
abandons or fails to enhance the database, we may need to seek other suppliers.
A replacement system may not be available upon similar economic terms. An
increase in the expense of a database management system could reduce our
profitability.
INFRINGEMENT CLAIMS RELATED TO OUR PROPRIETARY TECHNOLOGY MAY INCREASE OUR
COSTS, CAUSE DELAYS AND DECREASE OUR REVENUES
Although we believe that our products and technology do not infringe anyone
else's proprietary rights, third parties may assert infringement claims in the
future that may or may not be resolved in our favor. Because we are dependent
upon a limited number of products, any such claims related to proprietary
rights, with or without merit, could be:
- time-consuming;
- result in costly litigation;
- cause product shipment delays; or
- require us to enter into royalty or licensing agreements.
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<PAGE> 17
We expect proprietary-rights-related lawsuits to continue in our industry
segment as the number of products and competitors grow and the functionality of
products in different industry segments overlap. Royalty or licensing
agreements, if required to protect our products and technology and to protect
against infringement claims by others, may not be available on acceptable terms
or at all. In addition, we may initiate litigation to protect our proprietary
rights or to determine the validity and scope of others' proprietary rights.
This litigation could result in substantial costs and a diversion of resources
and could harm our profitability.
FUTURE ACQUISITIONS MAY DILUTE YOUR STOCK OWNERSHIP
Our strategic plans may include expanding our product offerings, distribution
channels, and market share through acquisitions. If we issue equity securities
in connection with a future acquisition, your stock ownership may be diluted.
FUTURE ACQUISITIONS MAY DECREASE OUR PROFIT MARGINS BY CONSUMING RESOURCES
Acquisitions can be expensive and time-consuming transactions. If we acquire
businesses or technologies in future acquisitions, our resources may be diverted
to completing the acquisitions and assimilating the acquired businesses or
technologies. Our profit margins could be negatively affected by this
consumption of resources.
THE VALUE OF AN ACQUIRED BUSINESS OR TECHNOLOGY MAY DIMINISH FOLLOWING AN
ACQUISITION;
A DIMINISHED VALUE COULD HARM OUR PROFITABILITY
We do not have significant experience at evaluating or completing acquisitions.
If the value of a business or technology we acquire diminishes following an
acquisition, our profitability could be harmed. The following occurrences may
cause the value to diminish:
- we might lose the key employees and customers of an acquired
business;
- the technology acquired may prove to be unproductive or may
infringe on the rights of another;
- a newly-acquired business may not perform as well as we
expected; and
- we may assume unknown liabilities.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR SOFTWARE OR OUR INTERNAL OPERATING SYSTEMS
COULD INCREASE COSTS AND REDUCE REVENUES
If any of our licensees experience year 2000 problems as a result of their use
of our software products, those licensees could assert claims for damages which,
if successful, could harm our profitability. We believe that current versions of
our software products are generally year 2000 compliant. However, we may learn
that certain of our software products do not contain all of the software
routines and codes necessary for the accurate calculation, display, storage and
manipulation of data involving dates. For a more detailed description of our
year 2000 preparedness assessment, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
IF CUSTOMERS NEED TO INSTALL THE YEAR 2000 COMPLIANT VERSION OF CONTINUUS CHANGE
MANAGEMENT SUITE BEFORE THE END OF 1999, OUR CONSULTING SERVICES MAY BE
SIGNIFICANTLY AFFECTED
Our ability to provide adequate levels of service to our customers may be
affected by demands on our personnel which are related to year 2000 compliance.
In June 1998, we issued a new version of the Continuus Change Management Suite
that is year 2000 compliant. However, only approximately 25%
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<PAGE> 18
of our customers have implemented the year 2000 compliant version to date. The
needs of the majority of our customers to implement the year 2000 compliant
version by the end of 1999 may divert or overwhelm the attention of our
consulting personnel. Our consulting personnel may be unable to adequately
provide our standard services because of the need to address year 2000
compliance issues. Consequently, customer relations may be strained.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
The stock market in general, and the Nasdaq National Market and the stock of
software companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to a company's
operating performance. The trading prices of many software companies' stocks are
at or near historical highs and these trading prices and multiples are
substantially above historical levels. If the price of our stock fluctuates, you
may not be able to resell shares of our common stock at or above the initial
offering price.
Our common stock has never been sold in a public market. We are negotiating the
initial offering price of the common stock with the underwriters. However, the
initial offering price may not be indicative of the prices that will prevail in
the public market after the offering. The trading price of our common stock
could fluctuate in response to factors described elsewhere in this prospectus
and:
- general market conditions;
- announcements of technological innovations or new products;
- publicity regarding actual or potential results with respect to
technologies or products under development;
- changes in recommendations of securities analysts; and
- other events or factors, many of which are beyond our control.
These broad market and industry factors may reduce our stock price, regardless
of our actual operating performance.
WE MAY BE SUBJECT TO LITIGATION DUE TO THE VOLATILITY OF OUR STOCK PRICE
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
volatile companies. Securities class-action litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would harm our profitability.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO
INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND CERTAIN TRANSACTIONS
Upon completion of this offering, our principal stockholders, executive
officers, directors and affiliated individuals and entities together will
beneficially own approximately 52.5% of the outstanding shares of common stock
or 50.0% if the underwriters' over-allotment option is exercised in full. As a
result, these stockholders, acting together, will be able to influence
significantly and possibly control most matters that require approval by our
stockholders, including approvals of amendments to our certificate of
incorporation, mergers or other business combination transactions, going private
transactions and other fundamental transactions.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL
If our stockholders sell substantial amounts of our common stock in the public
market following the offering, the market price of our common stock could fall.
Such sales also might make it more
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<PAGE> 19
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. See "Shares Eligible for Future Sale"
for more detailed information on the number of shares of common stock which may
be sold following the offering.
CERTAIN PROVISIONS IN OUR CORPORATE CHARTER AND BYLAWS MAY DISCOURAGE TAKE-OVER
ATTEMPTS AND THUS DEPRESS OUR STOCK PRICE
Provisions in the certificate of incorporation under which we will operate our
reincorporation in Delaware may have the effect of delaying or preventing a
change in control of Continuus or changes in our management. The provisions
could discourage potential take-over attempts and could reduce our stock price.
The provisions include:
- the lack of stockholder power to prevent the board of directors
from issuing additional shares of common stock and fixing the
rights, preferences and privileges of and issuing up to
5,000,000 shares of preferred stock with voting, conversion,
dividend and other rights and preferences that could adversely
affect the voting power or other rights of the holders of common
stock;
- the requirement that any action required or permitted to be
taken by stockholders must be effected at a duly called annual
or special meeting of stockholders and may not be effected by
written consent; and
- the requirement that at least 10% of the outstanding shares are
needed to call a special meeting of stockholders.
DELAWARE LAW MAY INHIBIT POTENTIAL ACQUISITION BIDS FOR CONTINUUS WHICH MAY
REDUCE OUR STOCK PRICE AND PREVENT CHANGES IN MANAGEMENT
Provisions of Delaware law may inhibit potential acquisition bids for Continuus
which could reduce our stock price and prevent changes in our management. We are
subject to the antitakeover provisions of the Delaware General Corporation Law,
which regulates corporate acquisitions. Delaware law prevents certain Delaware
corporations, which will include Continuus, from engaging, under certain
circumstances, in a "business combination" with any "interested stockholder" for
three years following the date that the particular stockholder became an
interested stockholder. For purposes of Delaware law, a "business combination"
includes, among other things, a merger or consolidation involving Continuus and
the interested stockholder and the sale of more than 10% of our assets. In
general, Delaware law defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of a
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.
YOUR INVESTMENT IN CONTINUUS COMMON STOCK FACES IMMEDIATE AND SUBSTANTIAL
DILUTION WHICH MAY REDUCE THE VALUE OF YOUR INVESTMENT
The initial public offering price is substantially higher than the book value
per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $7.00 in net tangible book
value per share of common stock. Net tangible book value per share is computed
by taking total assets less liabilities and tangible assets, which consist of
deferred financing costs and prepaid license fees, and dividing that number by
the number of pro forma common shares outstanding. This dilution figure deducts
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us from the initial public offering price. Investors will
incur additional dilution upon the exercise of outstanding stock options.
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<PAGE> 20
USE OF PROCEEDS
We estimate that we will receive approximately $19,953,000, or $23,845,000 if
the underwriters' over-allotment option is exercised in full, in net proceeds
from the sale of the 2,523,642 shares of common stock we are offering hereby at
an assumed initial public offering price of $9.00 per share. We will not receive
any proceeds from the sale of shares of common stock by our selling
stockholders.
We are conducting this offering primarily to increase our working capital,
increase our visibility in the marketplace, create a public market for our
common stock, and facilitate future access by Continuus to public equity
markets. We intend to use the net proceeds to increase working capital. Although
we believe that working capital generated by our operations will be sufficient
to fund our planned activities, from time to time we may use a portion of the
net proceeds to facilitate execution of our business plan, including sales and
marketing activities, product development and support and capital expenditures.
We estimate that our capital expenditures in the remainder of 1999 and the first
half of 2000 will be approximately $3,000,000, which is expected to fund
improvements in the technical infrastructure, operational and financial
information systems and office space expansion. The amount of net proceeds that
we actually spend for these purposes will depend significantly on a number of
factors, including our future revenues and our ability to generate cash from
operations. We have not yet determined the amount of net proceeds to be used for
any specific purpose. Accordingly, management will have significant flexibility
in applying the net proceeds of this offering.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, products or technologies or to obtain the right to use
complementary technologies. We have no agreements or commitments with respect to
any acquisition or investment, and are not involved in any negotiations with
respect to any transaction.
Pending use of the net proceeds for the above purposes, we intend to invest the
net proceeds of this offering in short-term, interest bearing, investment grade
securities.
DIVIDEND POLICY
To date, we have never declared nor paid any cash dividends on our common stock.
We currently intend to retain any earnings for funding growth and, therefore, do
not anticipate paying any cash dividends in the future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. Certain
statements under the captions "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors."
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<PAGE> 21
CAPITALIZATION
The table below sets forth our long-term obligations and capitalization:
- as of March 31, 1999;
- on a pro forma basis to reflect the issuance of common stock
issued upon the conversion of all outstanding preferred stock
upon the closing of this offering and the receipt of $1,547,766
from the exercise of warrants to purchase 278,125 shares of
common stock concurrently with the closing of this offering; and
- on a pro forma as adjusted basis to give effect to this offering
at an assumed initial public offering price of $9.00 per share
and the application of the estimated net proceeds from the
offering.
The table below excludes:
- 1,257,671 shares, subject to options outstanding as of March 31,
1999 at a weighted average exercise price of $3.27 per share, of
the 2,452,830 shares of common stock reserved for issuance under
our current stock plan;
- 1,179,033 shares of common stock reserved for issuance and
subject to options outstanding under our initial stock option
plan as of March 31, 1999 at a weighted average exercise price
of $1.58 per share;
- 1,033,737 shares of common stock reserved for issuance upon
exercise of warrants outstanding as of March 31, 1999 at a
weighted average exercise price of $1.25 per share; and
- 1,078,167 shares of common stock issuable upon conversion of a
$6 million senior secured convertible debenture.
You should read this table in conjunction with our consolidated financial
statements and related notes to our consolidated financial statements.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, including current
maturities......................................... $ 7,068 $ 7,068 $ 7,068
-------- -------- --------
Stockholders' deficit:
Preferred stock, $.001 par value; 5,000,000 shares
authorized, no shares issued or outstanding;
actual, pro forma and as adjusted............... -- -- --
Series A through E convertible preferred stock, no
par value; 4,691,625 shares authorized;
4,306,454 shares issued and outstanding, actual,
no pro forma or pro forma as adjusted shares
issued or outstanding........................... 18,018 -- --
Common stock and additional paid-in capital $.001
par value; 30,000,000 shares authorized;
1,673,640, 6,258,219 and 8,781,861 shares issued
and outstanding, actual, pro forma or pro
forma as adjusted............................. 2,009 21,823 41,776
Warrants to purchase common stock.................. 114 114 114
Warrants to purchase preferred stock............... 248 -- --
Accumulated deficit.................................. (23,674) (23,674) (23,674)
-------- -------- --------
Total stockholders' deficit................... (3,285) (1,737) 18,216
-------- -------- --------
Total capitalization....................... $ 3,783 $ 5,331 $ 25,284
======== ======== ========
</TABLE>
See our consolidated financial statements for details of each series of
outstanding preferred stock.
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<PAGE> 22
DILUTION
Our pro forma net tangible book value (deficit) as of March 31, 1999 was
approximately $(2,379,234), or $(0.38) per share of common stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities divided by 6,258,219 shares of common stock outstanding
after giving effect to the conversion of all 4,306,454 outstanding shares of
preferred stock into common stock and the receipt of $1,547,766 upon the
exercise of warrants to purchase 278,125 shares which will be exercised
concurrently with the closing of this offering.
After giving effect to the sale of the 2,523,642 shares of common stock offered
hereby at an assumed initial public offering price of $9.00 per share and our
receipt of the estimated net proceeds from the sale of the shares, our pro forma
net tangible book value at March 31, 1999 would have been approximately
$17,574,000, or $2.00 per share. This represents an immediate increase in pro
forma net tangible book value of $2.38 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $7.00 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Historical net tangible book value (deficit) per share.... (0.66)
Increase in historical net tangible book value per share
due to the issuance of 278,125 shares of common stock
upon the exercise of warrants.......................... 0.28
Pro forma net tangible book value (deficit) per share..... (0.38)
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.38
------
Pro forma net tangible book value per share after this
offering.................................................. 2.00
-----
Net tangible book value dilution per share to new
investors.............................................. $7.00
=====
</TABLE>
The table below summarizes, on a pro forma basis, as of March 31, 1999, the
following differences between our existing stockholders and new investors
purchasing our common stock in this offering:
- the number of shares purchased from Continuus;
- the aggregate cash consideration paid; and
- the average price per share paid.
The table also gives effect, on a pro forma basis to the conversion of all
outstanding shares of preferred stock into common stock and the receipt of
$1,547,766 upon the exercise of warrants to purchase 278,125 shares of common
stock:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 6,258,219 71% $21,533,259 49% $3.44
New investors..................... 2,523,642 29% 22,712,778 51% $9.00
--------- ----- ----------- -----
Total........................ 8,781,861 100.0% $44,266,037 100.0%
========= ===== =========== =====
</TABLE>
The foregoing computation assumes the exercise of no stock options or warrants
except as noted above, nor the conversion of any of our indebtedness into
equity, after March 31, 1999. As of March 31, 1999, there were outstanding
options to purchase 2,436,704 shares of common stock at a weighted average
exercise price of $2.45 per share, warrants to purchase 1,033,737 shares of
common stock at a weighted average exercise price of $1.25 per share and a
debenture convertible into 1,078,167 shares of common stock. To the extent these
options and warrants are exercised or the debenture converted, there will be
further dilution to new investors. See "Management -- Equity
20
<PAGE> 23
Incentive Plans," "Description of Capital Stock" and Notes 8 and 10 of Notes to
Consolidated Financial Statements.
The sale of common stock by the selling stockholders in this offering will
reduce the pro forma number of shares held by existing stockholders as of March
31, 1999 to 5,681,861, or approximately 64.7% of the total number of shares of
common stock outstanding immediately after this offering, or 61.4% if the
underwriters exercise their over-allotment option in full, and will increase the
number of shares to be purchased by new stockholders to 3,100,000 (or 3,565,000
if the underwriters exercise their over-allotment option in full), or
approximately 35.3% of the total number of shares of common stock outstanding
immediately after this offering, or 38.6% if the underwriters exercise their
over-allotment option in full. See "Principal and Selling Stockholders."
21
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes to the consolidated financial statements appearing elsewhere in this
prospectus. The following selected consolidated statement of operations data for
the years ended December 31, 1996, 1997 and 1998 and the three months ended
March 31, 1998 and 1999 and the consolidated balance sheet data as of December
31, 1997 and 1998 and March 31, 1999 have been derived from audited and
unaudited consolidated financial statements included elsewhere in this
prospectus. The consolidated data presented below for the years ended December
31, 1994 and 1995 and at December 31, 1994, 1995 and 1996 are derived from
audited consolidated financial statements that are not included in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses......................... $ 3,887 $ 8,664 $ 9,611 $13,829 $14,429 $3,745 $4,172
Services.................................. 2,478 4,436 6,488 9,434 13,007 3,065 4,067
------- ------- ------- ------- ------- ------ ------
Total revenues.......................... 6,365 13,100 16,099 23,263 27,436 6,810 8,239
------- ------- ------- ------- ------- ------ ------
Cost of revenues:
Software licenses......................... 582 535 775 650 654 167 156
Services.................................. 2,264 2,583 4,207 6,007 7,446 1,681 1,945
------- ------- ------- ------- ------- ------ ------
Total cost of revenues.................. 2,846 3,118 4,982 6,657 8,100 1,848 2,101
------- ------- ------- ------- ------- ------ ------
Gross profit................................ 3,519 9,982 11,117 16,606 19,336 4,962 6,138
------- ------- ------- ------- ------- ------ ------
Operating expenses:
Sales and marketing....................... 5,347 9,296 11,776 12,079 15,469 3,577 4,098
Research and development.................. 1,964 2,434 3,473 3,574 4,493 1,065 1,233
General and administrative................ 1,204 1,565 1,720 1,896 2,483 749 704
Compensation expense related to stock
option grants........................... -- -- -- -- -- -- 41
------- ------- ------- ------- ------- ------ ------
Total operating expenses................ 8,515 13,295 16,969 17,549 22,445 5,391 6,076
------- ------- ------- ------- ------- ------ ------
Income (loss) from operations............... (4,996) (3,313) (5,852) (943) (3,109) (429) 62
Other expense, net........................ 33 94 198 637 750 207 296
------- ------- ------- ------- ------- ------ ------
Loss before income tax provision............ (5,029) (3,407) (6,050) (1,580) (3,859) (636) (234)
Income tax provision........................ 1 4 3 3 7 13 5
------- ------- ------- ------- ------- ------ ------
Net loss.................................... $(5,030) $(3,411) $(6,053) $(1,583) $(3,866) $ (649) $ (239)
======= ======= ======= ======= ======= ====== ======
Basic and diluted net loss per share........ $ (4.27) $ (2.34) $ (4.06) $ (1.00) $ (2.79) $(0.40) $(0.15)
Basic and diluted weighted average shares... 1,178 1,458 1,491 1,576 1,618 1,605 1,637
Pro forma basic and diluted net loss per
share(1).................................. $ (0.62) $(0.04)
======= ======
Pro forma basic and diluted weighted average
shares(1)................................. 6,202 6,222
======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 1,812 $ 3,018 $ 1,189 $ 6,175 $ 2,452 $ 2,357
Working capital (deficit)....................... 470 1,566 (2,385) 4,452 833 826
Total assets.................................... 4,178 9,166 8,563 17,653 12,748 13,323
Long-term liabilities........................... 193 717 848 6,723 6,440 6,376
Total stockholders' equity (deficit)............ 1,042 3,555 (458) 664 (3,155) (3,285)
</TABLE>
- -------------------------
(1) See note 1 of notes to consolidated financial statements for an explanation
of the method used to determine pro forma basic and diluted net loss per
share.
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of software products and services for e-asset
management, an emerging market segment that enables organizations to more
effectively develop, enhance, deploy and manage their Internet and enterprise
software systems. We originally incorporated in 1984 as a supplier of
application software for the automotive industry. In 1987, we sold our
application software business to focus on the development of a software change
management product. In subsequent years, we expanded our focus to encompass a
fully integrated change management suite. In 1994, we released the 4.0 version
of the Continuus Change Management Suite. In May 1998, we released Continuus
WebSynergy, a web content and application management solution, and began
expanding our focus to include e-asset management. Our revenues were $16.1
million in 1996, $23.3 million in 1997 and $27.4 million in 1998. Our revenues
were $6.8 million in the three months ended March 31, 1998 and $8.2 million in
the three months ended March 31, 1999. Since 1995, we have licensed our products
to over 400 customers worldwide. We incurred net losses for each fiscal year
from inception through 1998 and, as of March 31, 1999, had an accumulated
deficit of $23.6 million.
Substantially all revenues have been derived from software licenses or from
related services. Software license revenues are primarily based on the number of
end-user seats and the number of copies of our server products that are licensed
by customers. Customers often obtain an initial license for small groups and may
later purchase additional licenses to cover more users. Currently, approximately
half of our software license revenues result from sales to existing customers.
Software license transactions generally average less than $100,000, although
larger transactions do occur. We recognize revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position No.
97-2. License revenues from sales to end users are recognized upon shipment of
the product if a signed contract exists, the fee is fixed and determinable and
collection is deemed probable. If an acceptance period is provided, revenue is
recognized upon the earlier of customer acceptance or the expiration of that
period.
Service revenue includes consulting, training and maintenance services. We
recognize consulting and training service revenue when earned and maintenance
revenues ratably over the term of the agreement, generally 12 months. Consulting
and training revenues are dependent upon the number of new software licenses and
the number of employees and consultants available to staff engagements.
Maintenance revenues are also dependent upon new software licenses and the rate
at which existing customers renew their support agreements. The gross margins on
the software licenses are significantly higher than the gross margins achieved
for services. Total gross margins may be lower to the extent that service
revenues increase as a percentage of total revenues.
We market our software and services in North America through a direct sales
organization. Since 1995, we have invested significant financial and management
resources to establish and grow our direct sales and support operations in
France, Germany and the United Kingdom. Our foreign subsidiaries bill customers
and incur expenses in their local currencies which are translated into U.S.
dollars for financial accounting purposes. Accordingly, fluctuations in foreign
currency exchange rates may cause fluctuations in our reported operating
results. In addition, fluctuations in foreign currency exchange rates impact the
dollar value of foreign currency-denominated accounts receivable and other
assets. We do not currently utilize foreign currency hedging instruments;
however, we believe that hedging may be utilized in the future to manage risks
associated with foreign currency fluctuations. We market our software through
distributors covering Australia, Denmark, Finland, India, Italy, Israel, the
Netherlands, Norway, Spain and Sweden. The transactions with our distributors
are conducted in U.S. dollars. Total revenues from customers located outside
North America accounted
23
<PAGE> 26
for approximately 33.5% of total revenues in 1996, 47.2% in 1997, 51.8% in 1998,
and 42.6% and 48.2% for the three months ended March 31, 1998 and 1999.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated the percentage of
revenues represented by certain line items in our consolidated statements of
operations:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------
1996 1997 1998 1998 1999
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses........................... 59.7% 59.4% 52.6% 55.0% 50.6%
Services.................................... 40.3 40.6 47.4 45.0 49.4
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Software licenses........................... 4.8 2.8 2.4 2.5 1.9
Services.................................... 26.1 25.8 27.1 24.7 23.6
----- ----- ----- ----- -----
Total cost of revenues................... 30.9 28.6 29.5 27.2 25.5
----- ----- ----- ----- -----
Gross profit.................................. 69.1 71.4 70.5 72.8 74.5
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing......................... 73.1 51.9 56.4 52.5 49.7
Research and development.................... 21.6 15.4 16.4 15.6 15.0
General and administrative.................. 10.7 8.2 9.1 11.0 8.5
Compensation expense related to stock option
grants................................... -- -- -- -- 0.5
----- ----- ----- ----- -----
Total operating expenses................. 105.4 75.5 81.9 79.1 73.7
----- ----- ----- ----- -----
Income (loss) from operations................. (36.3) (4.1) (11.4) (6.3) 0.8
Other expense, net.......................... 1.2 2.7 2.7 3.0 3.6
----- ----- ----- ----- -----
Loss before income tax provision.............. (37.5) (6.8) (14.1) (9.3) (2.8)
Income tax provision........................ 0.0 0.0 0.0 .2 0.1
----- ----- ----- ----- -----
Net loss...................................... (37.5)% (6.8)% (14.1)% (9.5)% (2.9)%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------
1996 1997 1998 1998 1999
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Software license revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of software licenses.................... 8.1 4.7 4.5 4.5 3.7
----- ----- ----- ----- -----
Gross margin............................... 91.9% 95.3% 95.5% 95.5% 96.3%
===== ===== ===== ===== =====
Services revenue............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services............................. 64.8 63.7 57.2 54.8 47.8
----- ----- ----- ----- -----
Gross margin............................... 35.2% 36.3% 42.8% 45.2% 52.2%
===== ===== ===== ===== =====
</TABLE>
24
<PAGE> 27
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUES
Software Licenses. Software license revenues were $3.7 million for the three
months ended March 31, 1998 and $4.2 million for the three months ended March
31, 1999. This represents an increase of 11.4%. The increase was primarily due
to an increase in the number and experience level of sales personnel. Software
license revenues in North America were $1.8 million for the three months ended
March 31, 1998 and $2.2 million for the three months ended March 31, 1999,
representing an increase of 22.2%. Software license revenues from international
operations were $1.9 million for the three months ended March 31, 1998 and $2.0
million for the three months ended March 31, 1999, representing an increase of
5.3%. The increase in both North America and international software license
revenues was due to an increase in sales volume.
Services. Service revenues were $3.1 million for the three months ended March
31, 1998 and $4.1 million for the three months ended March 31, 1999. This
represents an increase of 32.7%. This increase was primarily due to increases in
consulting and training services for new customers, which reflects the growth in
software license revenues, and consulting, training and maintenance for existing
customers.
COST OF REVENUES
Cost of Software Licenses. The cost of software license revenues includes both
the amortization of prepaid royalty costs associated with third-party software
which is embedded in our products and the costs associated with product
documentation, packaging and shipping. The cost of software license revenues was
$167,000 for the three months ended March 31, 1998 and $156,000 for the three
months ended March 31, 1999, representing a decrease of 6.6%. This decrease was
primarily due to lower product documentation costs. Gross margins on software
licenses were 95.5% for the three months ended March 31, 1998 and 96.3% for the
three months ended March 31, 1999.
Cost of Services. Cost of service revenues consists primarily of salaries and
related expenses for consultants and technical support personnel. Cost of
service revenues was $1.7 million for the three months ended March 31, 1998 and
$1.9 million for the three months ended March 31, 1999. This represents an
increase of 15.7%. This increase was primarily due to increases in the size of
our professional services organization worldwide. Gross margins on service
revenues were 45.2% for the three months ended March 31, 1998 and 52.2% for the
three months ended March 31, 1999. This increase in gross margins on service
revenues was primarily due to increased utilization as new employees became more
productive.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel, field office
expenses, travel and entertainment and promotional expenses. Sales and marketing
expenses were $3.6 million for the three months ended March 31, 1998 and $4.1
million for the three months ended March 31, 1999, representing an increase of
14.6%. The higher sales and marketing expenses were due to a $400,000 increase
in sales personnel expenses resulting from new hires and a larger sales force,
including commissions, compensation, recruiting and training costs. Marketing
expenditures also increased by $100,000. As a percentage of total revenues,
sales and marketing expenses were 52.5% for the three months ended March 31,
1998 and 49.7% for the three months ended March 31, 1999.
Research and Development. Research and development expenses consist primarily of
expenses related to software development personnel and other costs associated
with product development. All costs incurred in the research and development of
software products and enhancements to existing
25
<PAGE> 28
software products have been expensed as incurred. Research and development
expenses were $1.1 million for the three months ended March 31, 1998 and $1.2
million for the three months ended March 31, 1999, representing an increase of
15.8%. This increase was primarily due to staffing increases to support the
development of new products as well as the enhancement of existing products. As
a percentage of total revenues, research and development expenses were 15.6% for
the three months ended March 31, 1998 and 15.0% for the three months ended March
31, 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes and administrative costs,
including legal and accounting fees and bad debts. General and administrative
expenses were $749,000 for the three months ended March 31, 1998 and $704,000
for the three months ended March 31, 1999, representing a decrease of 6.0%. This
decrease was primarily due to financing costs incurred in the three months ended
March 31, 1998. As a percentage of total revenues, general and administrative
expenses were 11.0% for the three months ended March 31, 1998 and 8.5% for the
three months ended March 31, 1999.
Compensation Expense Related to Stock Option Grants. Compensation expense
related to stock option grants consists of compensation expense for options to
purchase shares of common stock below the estimated fair market value of our
common stock. Compensation expense related to stock option grants were $0 for
the three months ended March 31, 1998 and $41,000 for the three months ended
March 31, 1999. As a percentage of total revenues, compensation expense related
to stock option grants was 0.5% for the three months ended March 31, 1999.
Other Expenses. Other expenses consist primarily of interest expense and foreign
currency translation. Other expenses were $207,000 for the three months ended
March 31, 1998 and $296,000 for the three months ended March 31, 1999,
representing an increase of 43.0%. This increase was primarily due to higher
losses from foreign currency translation. As a percentage of total revenues,
other expenses were 3.0% for the three months ended March 31, 1998 and 3.6% for
the three months ended March 31, 1999.
Income Tax Provision. The income tax provision for the three months ended March
31, 1998, and 1999 consisted solely of minimum state income taxes due to our net
loss in each of those periods.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
Software Licenses. Software license revenues were $9.6 million in 1996, $13.8
million in 1997 and $14.4 million in 1998, representing increases of 43.9% from
1996 to 1997 and 4.3% from 1997 to 1998. The increase from 1996 to 1997 was
primarily due to increases in the number of sales people as well as the release
of the Windows-based version of the Continuous Change Management Suite and a
growing market acceptance of our products, which improved the productivity of
our sales force. The lower growth from 1997 to 1998 stemmed from a reduction in
the sales force in early 1998 which slowed software license revenues,
particularly in North America, until replacements could be recruited and become
productive. Newly hired sales personnel generally do not become fully productive
until they have worked for at least two quarters. The slowdown in software
license revenues was partially offset by sales of licenses of Continuus
WebSynergy, which was released in mid-1998. Software license revenues in North
America were $5.7 million in 1996, $6.7 million in 1997 and $6.6 million in
1998, representing an increase of 17.0% from 1996 to 1997 and a decrease of 1.5%
from 1997 to 1998. The increase from 1996 to 1997 was due to increased sales
volume. The slight decrease from 1997 to 1998 was due to decreased sales volume
resulting from the reduction in the North American sales force. Software license
revenues from international operations were
26
<PAGE> 29
$3.9 million in 1996, $7.1 million in 1997 and $7.8 million in 1998,
representing increases of 83.2% from 1996 to 1997 and 9.8% from 1997 to 1998.
Software license revenues from international operations increased in both 1997
and 1998 as a result of increases in sales volume.
Services. Service revenues were $6.5 million in 1996, $9.4 million in 1997 and
$13.0 million in 1998, representing increases of 45.4% from 1996 to 1997 and
37.9% from 1997 to 1998. The increases in both periods were primarily due to
increases in consulting and training services for new customers, which reflects
the number of software licenses sold, and consulting, training and maintenance
services for existing customers. Service revenue increased as a percentage of
total revenues, from 40.3% in 1996 and 40.6% in 1997, to 47.4% in 1998,
primarily due to lower software license revenue growth in 1998.
COST OF REVENUES
Cost of Software Licenses. Cost of software license revenues was $775,000 in
1996, $650,000 in 1997 and $654,000 in 1998, representing a decrease of 16.1%
from 1996 to 1997 and an increase of 0.6% from 1997 to 1998. The decrease from
1996 to 1997 was primarily due to lower product documentation costs. Gross
margins on software licenses were 91.9% in 1996, 95.3% in 1997 and 95.5% in
1998.
Cost of Services. Cost of service revenues was $4.2 million in 1996, $6.0
million in 1997 and $7.4 million in 1998, representing increases of 42.8% from
1996 to 1997 and 24.0% from 1997 to 1998. The increases in both periods were
primarily due to costs associated with increasing the size of our professional
services organization worldwide. Gross margins on service revenue were 35.2% in
1996, 36.3% in 1997 and 42.8% in 1998. These year-to-year increases in gross
margins on service revenue were primarily due to price increases for
international consulting and training, which became effective in 1997, and from
increased utilization as new employees became more productive.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses were $11.8 million in 1996,
$12.1 million in 1997 and $15.5 million in 1998, representing increases of 2.6%
from 1996 to 1997 and 28.1% from 1997 to 1998. The increase in sales and
marketing expenses from 1996 to 1997 was due to a $1.5 million increase in sales
personnel expenses resulting from new hires and a larger sales force, including
commissions, compensation, recruiting and training costs. The expenses were
offset by a $1.2 million decrease in marketing expenditures. The increase in
sales and marketing expenses from 1997 to 1998 was primarily due to sales
personnel expenses associated with increased revenue growth. These expenses
included a $2.5 million increase in commissions, compensation, recruiting and
training costs. Marketing expenditures also increased by $900,000. As a
percentage of total revenues, sales and marketing expenses were 73.1% in 1996,
51.9% in 1997 and 56.4% in 1998. These costs decreased as a percentage of total
revenues from 1996 to 1997, primarily because sales personnel hired in 1996 were
more productive in 1997 and also because recruiting and training costs were
lower in 1997. We expect that sales and marketing expenses will continue to
increase in absolute dollars as we continue to hire additional sales and
marketing personnel, establish additional sales offices and increase promotional
activities.
Research and Development. Research and development expenses were $3.5 million in
1996, $3.6 million in 1997 and $4.5 million in 1998, representing an increase of
2.9% from 1996 to 1997 and an increase of 25.7% from 1997 to 1998. The increase
from 1997 to 1998 was primarily due to staffing increases made to support the
development of new products as well as the enhancement of existing products. As
a percentage of total revenues, research and development expenses were 21.6% in
1996, 15.4% in 1997 and 16.4% in 1998. We expect research and development
expenditures will continue to increase in absolute dollars as we continue to
hire additional engineering personnel.
27
<PAGE> 30
General and Administrative. General and administrative expenses were $1.7
million in 1996, $1.9 million in 1997 and $2.5 million in 1998, representing an
increase of 10.2% from 1996 to 1997 and an increase of 31.0% from 1997 to 1998.
The increase from 1997 to 1998 was primarily due to a $300,000 increase in
financing costs and a $300,000 increase in compensation, recruiting and training
costs resulting from increased staffing. As a percentage of total revenues,
general and administrative expenses were 10.7% in 1996, 8.2% in 1997 and 9.1% in
1998. We expect general and administrative expenses to continue to increase in
absolute dollars as we hire additional administrative personnel, incur costs
associated with being a public company and move to larger facilities in 2000.
Other Expenses. Other expenses were $198,000 in 1996, $637,000 in 1997 and
$750,000 in 1998, representing an increase of 221.7% from 1996 to 1997 and an
increase of 17.7% from 1997 to 1998. The increases from 1996 to 1997 and from
1997 to 1998 were primarily due to higher interest expense net of interest
income. As a percentage of total revenues, other expenses were 1.2% in 1996,
2.7% in 1997 and 2.7% in 1998.
Income Tax Provision. The income tax provision for the years ended December 31,
1996, 1997 and 1998 consisted solely of minimum state income taxes due to our
net loss in each of those periods.
RECENT OPERATING RESULTS
For the three months ended June 30, 1999 (unaudited), the Company had revenues
of approximately $8.8 million and operating income of $161,000. The results for
the three months ended June 30, 1999 are preliminary and unaudited, may be
subject to audit adjustments and are not necessarily indicative of the results
to be expected for future periods.
28
<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly results for each of the
periods presented, together with such data as a percentage of total revenues. In
the opinion of management, this quarterly information has been prepared on the
same basis as the annual consolidated financial statements presented elsewhere
in this prospectus and includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the information for the
periods presented when read in conjunction with the consolidated financial
statements and the notes to the consolidated financial statements. The operating
results for any quarter are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses....... $2,641 $3,228 $3,640 $4,320 $3,745 $ 3,565 $ 2,852 $4,267 $4,172
Services................ 1,934 2,292 2,441 2,767 3,065 3,170 3,256 3,516 4,067
------ ------ ------ ------ ------ ------- ------- ------ ------
Total revenues........ 4,575 5,520 6,081 7,087 6,810 6,735 6,108 7,783 8,239
Cost of revenues:
Software licenses....... 133 207 163 147 167 169 157 161 156
Services................ 1,244 1,390 1,620 1,753 1,681 1,930 1,935 1,900 1,945
------ ------ ------ ------ ------ ------- ------- ------ ------
Total cost of
revenues............ 1,377 1,597 1,783 1,900 1,848 2,099 2,092 2,061 2,101
------ ------ ------ ------ ------ ------- ------- ------ ------
Gross profit.............. 3,198 3,923 4,298 5,187 4,962 4,636 4,016 5,722 6,138
------ ------ ------ ------ ------ ------- ------- ------ ------
Operating expenses:
Sales and marketing..... 2,489 2,915 3,059 3,616 3,577 3,946 3,932 4,014 4,098
Research and
development........... 823 909 859 983 1,065 1,123 1,159 1,146 1,233
General and
administrative........ 443 467 487 499 749 548 679 507 704
Compensation expense
related to stock
option grants......... -- -- -- -- -- -- -- -- 41
------ ------ ------ ------ ------ ------- ------- ------ ------
Total operating
expenses............ 3,755 4,291 4,405 5,098 5,391 5,617 5,770 5,667 6,076
------ ------ ------ ------ ------ ------- ------- ------ ------
Income (loss) from
operations.............. (557) (368) (107) 89 (429) (981) (1,754) 55 62
Other expense, net...... 143 105 153 236 207 142 138 263 296
------ ------ ------ ------ ------ ------- ------- ------ ------
Loss before income
taxes................... (700) (473) (260) (147) (636) (1,123) (1,892) (208) (234)
Income tax provision
(benefit)............... -- -- -- 3 13 4 2 (12) 5
------ ------ ------ ------ ------ ------- ------- ------ ------
Net loss.................. $ (700) $ (473) $ (260) $ (150) $ (649) $(1,127) $(1,894) $ (196) $ (239)
====== ====== ====== ====== ====== ======= ======= ====== ======
AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------------------------------------
Revenues:
Software licenses....... 57.7% 58.5% 59.9% 61.0% 55.0% 52.9% 46.7% 54.8% 50.6%
Services................ 42.3 41.5 40.1 39.0 45.0 47.1 53.3 45.2 49.4
------ ------ ------ ------ ------ ------- ------- ------ ------
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses....... 2.9 3.8 2.7 2.1 2.5 2.5 2.6 2.1 1.9
Services................ 27.2 25.2 26.6 24.7 24.7 28.7 31.7 24.4 23.6
------ ------ ------ ------ ------ ------- ------- ------ ------
Total cost of
revenues............ 30.1 29.0 29.3 26.8 27.2 31.2 34.3 26.5 25.5
------ ------ ------ ------ ------ ------- ------- ------ ------
Gross profit.............. 69.9 71.0 70.7 73.2 72.8 68.8 65.7 73.5 74.5
------ ------ ------ ------ ------ ------- ------- ------ ------
Operating expenses:
Sales and marketing..... 54.4 52.8 50.3 51.0 52.5 58.6 64.4 51.6 49.7
Research and
development........... 18.0 16.5 14.1 13.9 15.6 16.7 19.0 14.7 15.0
General and
administrative........ 9.7 8.5 8.0 7.0 11.0 8.1 11.1 6.5 8.5
Compensation expense
related to stock
option grants......... -- -- -- -- -- -- -- -- 0.5
------ ------ ------ ------ ------ ------- ------- ------ ------
Total operating
expenses............ 82.1 77.8 72.4 71.9 79.1 83.4 94.5 72.8 73.7
------ ------ ------ ------ ------ ------- ------- ------ ------
Income (loss) from
operations.............. (12.2) (6.8) (1.7) 1.3 (6.3) (14.6) (28.8) 0.7 0.8
Other expense, net...... 3.1 1.9 2.5 3.3 3.0 2.1 2.3 3.4 3.6
------ ------ ------ ------ ------ ------- ------- ------ ------
Loss before income
taxes................... (15.3) (8.7) (4.2) (2.0) (9.3) (16.7) (31.1) (2.7) (2.8)
Income tax provision
(benefit)............... -- -- -- -- 0.2 0.1 -- (0.2) 0.1
------ ------ ------ ------ ------ ------- ------- ------ ------
Net loss.................. (15.3)% (8.7)% (4.2)% (2.0)% (9.5)% (16.8)% (31.1)% (2.5)% (2.9)%
====== ====== ====== ====== ====== ======= ======= ====== ======
</TABLE>
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Our software license revenues for the three months ended September 30, 1998 were
lower than in prior quarters primarily due to reductions in the sales force in
early 1998 and the time required to rebuild our sales force. Our sales and
marketing expenses as a percentage of total revenues were higher in the three
months ended June 30, 1998 and September 30, 1998 due to the decreases in total
revenues and to a lesser extent increases in costs of recruiting and training
new sales personnel and increased advertising expenses.
We expect to be affected by seasonal trends in customer buying patterns in the
future. We believe that it is likely that we will experience relatively higher
revenues in our fiscal quarters ending December 31 and relatively lower revenues
in our fiscal quarters ending March 31 as a result of customer buying patterns.
To the extent future international operations continue to constitute a high
percentage of our total revenues, we anticipate that we may also experience
relatively weaker demand in the fiscal quarters ending on September 30 as a
result of reduced sales activity in Europe during the summer months.
We have begun discussions with our existing repository database vendor to
continue to license the database from the vendor under similar economic terms.
We believe that we will be able to renew our current license or replace the
database upon similar economic terms. However, if we are unsuccessful, our
quarterly and annual operating results may be materially affected.
Additional factors which we expect to cause our quarterly and annual operating
results to fluctuate include:
- the size and timing of individual orders;
- lengthy sales and implementation cycles;
- changes in the mix of higher margin and lower margin products
and services;
- timing and market acceptance of the introduction of new
products;
- competition and pricing in the software industry;
- consulting personnel utilization rates; and
- the mix of international and domestic revenues.
For a discussion of risks associated with fluctuations in our operating results,
see "Risk Factors -- Our operating results fluctuate significantly, which may
cause the price of our stock to fall." Because of these and other factors, our
quarterly revenues, expenses and results of operations could vary significantly
in the future, and period-to-period comparisons should not be relied upon as
indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had cash and cash equivalents of approximately $2.4
million, a decrease of $95,000 from December 31, 1998. Since inception, we have
financed our operations primarily through private placements of our equity
securities, which have provided net proceeds totaling $18.4 million as of March
31, 1999. We also borrowed $6.0 million through the issuance of a senior secured
convertible debenture in 1997. As of March 31, 1999, we had $1.1 million
outstanding under capital equipment lease lines of credit and no other
outstanding lines of credit. However, after March 31, 1999, we entered into a
$2,000,000 revolving line of credit with a commercial bank which expires on
April 22, 2001. We currently have not made any draws on this line of credit. We
also entered into an equipment lease line for an aggregate of $1,000,000 of
which none is outstanding.
Our operating activities used cash of $450,000 in 1997, $2.2 million in 1998 and
generated cash of $78,000 in the three months ended March 31, 1999 primarily due
to income from operations. The
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increase in cash used by operating activities in 1998 was primarily due to the
increase in the net loss from 1997 to 1998. Our investing activities used
approximately $93,000 in 1997 and $439,000 in 1998. Our financing activities
provided $5.5 million in 1997. The primary source of funds in 1997 was the
issuance of the $6.0 million senior secured convertible debenture. We used $1.1
million in financing activities in 1998 primarily for capital lease payments.
Expenditures for property and equipment were $1.2 million in 1997, $1.0 million
in 1998 and $170,000 for the three months ended March 31, 1999. Most property
acquired in 1997 and 1998 was computer hardware and software and was financed
through capital leases. We anticipate that we will purchase similar levels of
new equipment through the remainder of 1999. We anticipate moving to larger
facilities in the first quarter of 2000 when our current lease expires, which
will increase our expenditures for new property and equipment. As of March 31,
1999, the Company has outstanding the $6.0 million senior secured convertible
debenture and additional capital commitments in the form of capital leases of
$1,068,000.
We believe that our existing cash balances and cash from operations will be
sufficient to finance our operations through at least the next 18 months. If
additional financing is needed, there can be no assurances that such financing
will be available to us on commercially reasonable terms.
IMPACT OF YEAR 2000 PROBLEMS
Many computers, software applications and other equipment are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, some computers, software and other equipment could
fail to operate or fail to produce correct results if "00" is interpreted to
mean 1900, rather than 2000. These problems are commonly referred to as the
"year 2000 problem."
GENERAL READINESS ASSESSMENT. The year 2000 problem affects the computers,
software applications and other equipment that we use, operate or maintain for
our operations. As a result, we have established a year 2000 readiness committee
fully supported by representatives of all departments.
ASSESSMENT OF CONTINUUS' SOFTWARE PRODUCTS. Beginning in 1997, we began
assessing the ability of our software to operate properly in the year 2000. We
believe the latest revisions, version 4.5 and higher, of our currently available
software products on Windows and supported variants of UNIX are year 2000
compliant and that this software accurately processes date data from, into and
between the 20th and 21st centuries. In particular, in June 1998, we issued a
new version of our Continuus Change Management Suite that is year 2000
compliant. However, only approximately 25% of our customers have installed the
year 2000 compliant version of the Continuus Change Management Suite to date.
The needs of the majority of our customers to install the year 2000 compliant
version by the end of 1999 may require substantial assistance from our
consulting personnel later this year, which could interfere with our ability to
fulfill all demands for our services. We expect to continue to test our new
software and products for year 2000 compliance and compliance when used with
other standard operating systems or computer platforms, including those
developed by other companies.
ASSESSMENT OF INTERNAL INFRASTRUCTURE. We substantially completed year 2000
testing of our major information technology systems in October 1998 and have
identified those components which are not year 2000 compliant. In addition, we
continue to test our systems on an ongoing basis and will attempt to remediate
any year 2000 problems before September 30, 1999.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and
related systems, the operation of office and facilities equipment, such as fax
machines, telephone switches, security systems and other common devices may be
affected by the year 2000 problem. We are currently assessing the potential
effect and costs of remediating the year 2000 problem on our office equipment
and our facilities. We expect to complete the process before September 30, 1999.
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VENDORS AND SUPPLIERS. We completed our communications with external vendors and
suppliers that provide us with material software and information systems in
February 1999 to determine the extent to which their failure to remedy their own
year 2000 problems would materially affect us. Based on our vendors' and
suppliers' representations, we believe that the third-party hardware and
software we employ is year 2000 compliant, except for one application which is
expected to be updated and become year 2000 compliant in the second quarter of
1999. As we establish relationships with additional third parties, we intend to
identify and resolve issues involving the year 2000 problem. However, we have
limited or no control over the actions of these third parties. Thus, while we
expect that we will be able to resolve any issues involving third parties, there
can be no assurance that the third parties will resolve any or all year 2000
problems before the occurrence of a material disruption to the operation of our
business. Any failure of these third parties to timely resolve year 2000
problems with their systems could harm our business.
COSTS OF REMEDIATION. To date, we have not incurred any material costs directly
associated with year 2000 compliance efforts, except for compensation expense
associated with existing salaried employees who have devoted some of their time
away from their primary responsibilities and instead to year 2000 assessment and
remediation efforts. We estimate the total cost to us associated with year 2000
compliance, including costs of completing any required modification, upgrades or
replacements of our internal systems, will not exceed $50,000, most of which we
expect to incur before the end of the third quarter of 1999. This estimate is
being monitored, and we will revise it as additional information becomes
available.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify and
resolve all year 2000 problems that could harm our business operations before
the end of 1999. However, we believe that it is not possible to determine with
complete certainty that all year 2000 problems affecting us have been identified
or corrected. The number of devices and systems that could be affected and the
interactions among these devices and systems are too numerous to address. In
addition, no one can accurately predict which year 2000 problem-related failures
will occur or the severity, timing, duration or financial consequences of these
potential failures. As a result, we believe that the following consequences are
possible:
- a significant number of operational inconveniences and
inefficiencies for us and our customers that will divert
management's time and attention as well as financial and human
resources from ordinary business activities;
- possible minor business disputes and claims, including claims
under product warranty, due to year 2000 problems experienced by
our customers and incorrectly attributed to our products or
performance, which we believe will be resolved in the ordinary
course of business; and
- possible serious business disputes alleging that we failed to
comply with the terms of contracts or industry standards, some
of which could result in litigation or contract termination.
CONTINGENCY PLANS. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of the second quarter of 1999. Depending on the systems
affected, these plans could include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of back-up equipment and software or
other redundant systems;
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- increased work hours for our personnel or the hiring of
additional information technology staff; and
- the use of contract personnel to correct, on an accelerated
basis, any year 2000 problems that arise or to provide interim
alternate solutions for information system deficiencies.
The discussion of our efforts and expectations relating to year 2000 compliance
are forward-looking statements. Our ability to achieve year 2000 compliance, and
the level of incremental costs associated with compliance, could be adversely
affected by, among other things, the availability and cost of contract personnel
and external resources, third party suppliers' ability to modify proprietary
software, and unanticipated problems not identified in our ongoing review.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which we are
required to adopt effective in 2000. SFAS No. 133 will require us to record all
derivatives on the balance sheet at fair value. We do not currently engage in
hedging activities but will continue to evaluate the effects of adopting SFAS
No. 133. We will adopt SFAS No. 133 in 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and long-term debt. At March 31, 1999,
the carrying values of our financial instruments approximated their fair values
based on current market prices and our incremental borrowing rate.
We have not invested in derivative financial instruments. We have foreign
currency exposure since we transact business in foreign currencies. However,
foreign currency translation and transaction gains and losses have not been
significant. A significant change in foreign currency values could harm our
financial position and results of operations.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union introduced a new
currency, the euro, on January 1, 1999. The new currency is in response to the
European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their local
currency, initially available for currency trading on currency exchanges and
non-cash transactions such as banking. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.
Our transactions are recorded in both U.S. dollars and foreign currencies.
Future transactions may be recorded in the euro. We have not incurred and do not
expect to incur any significant costs from the continued implementation of the
euro. However, the currency risk of the euro could harm our business.
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BUSINESS
COMPANY OVERVIEW
We are a leading provider of software products and services that enable
enterprises to manage their Internet and software assets, which we refer to as
e-asset management. E-asset management products and services, an emerging market
segment, enable organizations to more effectively develop, enhance, deploy and
manage their Internet and software systems. E-asset management provides an
alternative to using a collection of discrete products to automate various
aspects of the software development process by providing an integrated and
comprehensive platform for managing an enterprise's software-related assets,
processes, projects and people. Our integrated product line, consisting of the
Continuus WebSynergy Suite and the Continuus Change Management Suite, simplifies
the development of the most complex and demanding Internet and software
applications. Our customer base includes the information technology departments
of Fortune 500 class business and government organizations as well as
engineering departments of organizations that develop software as a product or
as a component of a product, such as independent software vendors, computer
hardware vendors, defense and aerospace organizations, telecommunication
equipment suppliers and transportation equipment manufacturers. License revenues
for the Continuus Change Management Suite account for substantially all of our
software license revenues. We also offer Continuus Professional Services which
include consulting, training and maintenance services to facilitate the
successful implementation of our solution.
INDUSTRY BACKGROUND
In today's increasingly competitive global markets, businesses are seeking to
continuously improve their products, services and operations. Businesses have
invested billions of dollars in information technology to more effectively
develop and operate new products, automate processes within the enterprise and
extend business interactions to external parties. Software has become essential
for many critical business operations and is one of the most strategic assets
for companies. Today, businesses are developing the next generation of software
applications as well as extending existing applications to offer differentiated
products and unique services to customers. These efforts to create new business
opportunities, enhance competitive advantage and further automate business
processes are leading to explosive growth in the scale and complexity of
software and software-related assets in organizations.
The Internet has further added complexity by increasing both the number and
sophistication of new applications and extending applications beyond the
enterprise. The Internet has highlighted and accelerated the trend that software
has become a major driver to both revenue growth and expense reduction.
Increasingly, businesses are using the Internet for general communication,
electronic commerce and complex applications. Business activities over the
Internet extend traditional business processes and transform the ways in which
organizations connect to and provide services to their customers, vendors,
employees and other partners. As organizations extend their core processes over
the Internet and conduct significant volumes of business through the Internet,
quality problems and delays in delivering those new Internet applications can
have an immediate, significant negative impact on customer service, revenue and
profitability.
The increased value of software is not simply driven by the Internet. Software
has increasingly become a critical value-added component of products as diverse
as automobiles, cellular telephones, medical instruments, home appliances and
defense and aerospace systems. In addition, future generations of many of these
devices will be linked together by networks, further increasing the scale and
complexity of embedded software. As software becomes more essential for many
uses, businesses are continuously seeking to develop new applications and
increase product functionality while
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<PAGE> 37
simultaneously shortening development cycles. These factors have made it
increasingly difficult to develop, deploy and manage software projects.
The importance of software and the rapid adoption of the Internet are increasing
the need for products and services for managing, developing, enhancing and
deploying Internet and enterprise software systems as strategic business assets.
A key challenge for businesses is managing rapid and unpredictable business and
technological change within increasingly complex and heterogeneous computing
environments. For example, companies have spent considerable time and money to
solve year 2000 problems and to convert existing applications to an architecture
which is built around and depends upon the Internet. The Standish Group
estimated that in 1998 as few as 26% of all corporate IT software projects were
completed on time and on budget.
In response to increased technical complexity and the need to deliver
applications in accelerated "Internet time," businesses are also adopting more
complex organizational strategies. As organizations are increasingly
distributing development across locations to take advantage of the best
qualified developers and most cost-effective resources, they must control and
manage an even more complex development process. In addition, on many Internet
application projects, there are hundreds of content contributors. Coordinating
the efforts of content contributors and software developers is a highly complex
and error-prone process.
We believe that up until now software providers have generally developed
products that address only discrete aspects of Internet and enterprise software
asset management. For example, version control products provide a way to archive
and track the history of changes to a software program. Project management
products provide a way to create a project plan for a software or Internet
development project and then to monitor and report on the status of the project.
Problem tracking products provide a way to record requests to change a software
program or system based on problems observed in the system and then to track the
progress of a project to correct the problem. Web content management products
that provide version control-type capability for web content such as text
instead of software programs are the latest example of products that address
discrete problems.
In order to provide automated support of the software development process, most
organizations use fragmented collections of such tools, often using different
tools from project to project or from development group to development group,
thus creating isolated collections of software assets and non-integrated
processes. We believe that organizations are beginning to realize that they
cannot meet the requirements for speed and quality of software projects in the
much more complex environment of the Internet without a better management
infrastructure. We believe that organizations using fragmented collections of
discrete products are less able to share best practices, automate currently
manual processes, maintain up-to-date management visibility or reuse components
across teams and projects.
Alternatively, some organizations have internally developed partial or complete
asset management solutions, generally building them on top of basic version
control. These internally developed systems are expensive to maintain and are
generally not flexible or scalable. Also, internally developed systems and most
commercial packages were not designed to handle the new technologies which have
been introduced by the Internet.
Consequently, we believe businesses are now seeking comprehensive and integrated
solutions that work together to address all aspects of Internet and enterprise
software asset management, rather than toolkits and single purpose products. A
fully integrated e-asset management solution must:
- provide the ability to manage an organization's complete
portfolio of software-related assets, projects, processes and
people;
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<PAGE> 38
- manage internally developed business applications, purchased
software packages, Internet-based systems and software as a
component of other products or devices;
- allow both software developers and Internet content contributors
to collaborate in a common team environment;
- allow management to monitor the status of projects, control
process and control approval cycles; and
- be highly scalable and adaptable to changes in technologies,
organizational structure and project team composition.
We believe that we are the only provider offering an integrated e-asset
management solution.
THE CONTINUUS SOLUTION
Continuus provides e-asset management solutions that enable organizations to
more effectively develop, enhance, deploy and manage their Internet and
enterprise software systems. Our solution is specifically designed to support
the collaborative development, management, approval and deployment of all types
of software, Internet applications and web content. Our integrated product line,
consisting of the Continuus WebSynergy Suite and the Continuus Change Management
Suite, utilizes a flexible and scalable architecture with embedded workflow
capability which simplifies the Internet and software development process and is
capable of handling the most complex and demanding applications. We also offer
Continuus Professional Services which include consulting, training and
maintenance services to facilitate the successful implementation of the
Continuus WebSynergy and Continuus Change Management Suites.
Our comprehensive solutions provide our customers with the following key
benefits:
REDUCE TIME TO DELIVER INTERNET AND ENTERPRISE SOFTWARE
APPLICATIONS. Organizations using our solutions can more rapidly and predictably
deliver Internet and software development projects, thereby improving
organizational competitiveness and effectiveness. Our products increase
productivity by providing a common team environment for all participants in the
development of an Internet or software project, no matter what their level of
technical proficiency. By providing a common set of shared processes and a
common platform for team communication and collaboration, our products enable
better coordination of activities within teams and across multiple locations.
Our products also accelerate development by automating many of the error-prone
manual and repetitive tasks associated with software development, without
introducing levels of control and restrictions that developers will resist. In
addition, our products provide task-based change management, permitting
automatic visibility to the status of in-process development tasks. This reduces
development cycles by enabling management to accurately evaluate project status
and to ensure that problems are continually tracked and fixed early in the
development process.
IMPROVE THE QUALITY OF E-ASSETS. Our solution enables organizations to increase
software quality and integrity by continuously improving the processes used to
develop, enhance, deploy and manage Internet and software-based systems. Our
products provide non-intrusive process management capabilities that allow a
project team or organization to implement and enforce company or industry best
practices. This process automation eliminates many of the typical sources of
errors in building and configuring large software systems or Internet
applications. Our products' team collaboration capabilities eliminate errors
arising from team coordination issues such as interference from parallel changes
to shared components. Our solutions improve the quality of software assets by
enabling management to deploy only tested and approved new versions of
components or entire systems. For example, Continuus WebSynergy's workflow and
staging support ensure that only approved content changes become available on an
organization's production web servers.
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<PAGE> 39
MORE EFFECTIVELY MANAGE E-ASSETS. Our products are built on a common, shared
database repository that catalogs and manages an organization's entire portfolio
of e-assets. These assets include technical software that may itself be a
product or may be embedded into a business's products, and IT applications, such
as internally developed client-server applications, packaged applications and
Internet applications. E-assets include software source code as well as design
specifications, documentation, help files and web content, including HTML and
XML components and video, graphics and sound components. We track where assets
are used, ensure that no assets are lost over time and provide a complete asset
change history. Our repository also provides a foundation for improving an
organization's return on investment in its e-assets by enabling reuse of
software components.
QUICKLY ADAPT TO ORGANIZATIONAL AND TECHNOLOGICAL CHANGE. As organizations grow
and restructure, our products can be quickly and easily reconfigured to adapt to
these changes. The distributed architecture of our products can support a small
development team managing a single development project in a single location and
then rapidly scale to support hundreds of developers working on dozens of
concurrent projects dispersed across several locations. Our product's flexible
process infrastructure allows individual projects to adapt processes and
policies to project needs while complying with organization-wide standards. Our
product architecture is also open to provide maximum flexibility and
interoperability and supports a wide range of different development languages
and developer tools, as well as internally developed and externally sourced
software and other components.
STRATEGY
Our objective is to become the leader in the emerging market for e-asset
management solutions. The key elements of our strategy are:
PROVIDE COMPREHENSIVE E-ASSET MANAGEMENT SOLUTIONS. We believe that our
consistent innovation has made us a leader in providing comprehensive e-asset
management solutions. We will continue to extend our current product suite to
provide comprehensive, integrated solutions for managing e-assets over their
entire life cycles. Continuus Change Management Suite and Continuus WebSynergy
Suite provide the core applications and platform for our solutions. In 1998, we
built upon our leadership position in integrated change management products by
introducing Continuus WebSynergy to address the challenges of developing and
managing Internet applications. In 1999, we plan to launch Continuus WebPT, an
Internet-enabled change request and problem tracking component of our product
line. We also plan to enhance the entire product line with new features that
allow management to monitor project status. In addition, we plan to release new
versions of Continuus WebSynergy and Continuus Change Management Suites. We also
intend to continue to extend our product line through relationships with other
software vendors.
FOCUS ON INTERNET AND E-COMMERCE APPLICATION MANAGEMENT. Continuus WebSynergy
addresses the critical issues associated with managing the development and
deployment of Internet applications including corporate intranet applications,
corporate web sites and e-commerce applications. We intend to focus on selling
to companies in industry sectors where the deployment of Internet applications
provides a key competitive advantage. We also intend to focus on the rapidly
growing community of e-commerce vendors and Internet and application service
providers. We believe that these customers will have a need for the full
Continuus Change Management Suite as well as Continuus WebSynergy Suite to
manage applications, web content and related software asset development.
FOCUS ON SUCCESSFUL CUSTOMER IMPLEMENTATION. We believe that initial and ongoing
customer satisfaction can lead to significant revenue opportunities in the
future. Currently, approximately half of our license revenue comes from existing
customers expanding their use of Continuus products. Our long-term success
depends upon our customer's successful implementation of our products. Therefore
37
<PAGE> 40
we intend to increase the size of our consulting and training staff as well as
to increase the scope of the service offerings we provide. We anticipate that
our expanded service offerings will result in an increased rate of deployment of
our products within our customers. We also expect to continue to augment our
service offerings through relationships with regional and national consulting
firms, systems integrators and other service providers.
LEVERAGE OUR CUSTOMER BASE. Since 1995, we have licensed our products to over
400 organizations worldwide and intend to expand the use of our products within
our existing customer accounts. We believe many customers would benefit from
deploying the Continuus Change Management Suite more broadly and utilizing
Continuus WebSynergy as they develop and deploy Internet-based applications. We
intend to make additional sales of our products and services to our existing
customers to help them meet these growing needs.
EXPAND SALES COVERAGE. We have already established effective direct sales
channels in North America and Europe. In 1998, North America contributed
approximately 48% of revenues and Europe contributed approximately 52%. In
targeted markets where we choose not to maintain our own sales force, we use
distributors to sell our products. We intend to expand our domestic and
international sales coverage in order to penetrate new markets and to increase
our presence in existing markets. We will also seek to expand our sales channels
to utilize the most effective means to reach the various sub-markets for our
products and services.
EXPAND PARTNERING AND STRATEGIC RELATIONSHIPS. Currently, we have strategic
partnerships with leading vendors of complementary products and services such as
Mercury Interactive and Tivoli Systems, Inc., a division of IBM. We plan to
continue to establish strategic relationships with various partners to
supplement and extend our direct sales force, expand the scope of our consulting
and training capabilities, leverage our marketing efforts, enhance our product
suite and establish technology standards. We intend to integrate our products
with those of strategic partners to generate additional license revenues and to
support joint marketing efforts. We also plan to expand our partnerships with
vendors of desktop tools used by software developers, software quality
engineers, designers, content contributors and others to provide better
integrated solutions for our current and potential customers.
PRODUCTS
Continuus provides an integrated suite of applications and a platform for
managing an enterprise's software-related assets, processes, projects and
people. The Continuus Change Management Suite provides a platform for software
developers building technical and embedded software or commercial IT
applications. Continuus WebSynergy Suite extends our solutions to meet the needs
of web masters, content contributors and other members of the Internet
application development community. Used together, the Continuus products provide
a complete solution for building, delivering and managing the full range of
client-server, intranet and e-commerce applications found in today's enterprise.
Our products contain the following five key capabilities:
TASK-BASED CHANGE MANAGEMENT. Our product line's task-based change management
capability provides an intuitive way for developers to interact with our change
management environment. In contrast to most competing products which deal with
each change to each component or file as an independent unit of work, our
task-based approach allows for changes to multiple components or files to be
logically grouped into a single set of changes. Each set of changes is related
to a logical unit of work, which we refer to as a task. Once a set of changes
are associated as a task, they can then be operated on at that level, making the
system both easier to use and also allowing our products to automate greater
levels of integrity checking, impact analysis and quality control. This approach
allows the user to improve software quality and reduce the time it takes to
complete a project by
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<PAGE> 41
reducing bad software builds, wasted developer time and software release cycles.
It also provides management with a non-intrusive ability to monitor and control
the development process.
TEAM DEVELOPMENT SUPPORT. Our product line provides a wide range of features and
capabilities designed to improve the productivity of team-based software
development. We provide a controlled process or workflow to coordinate the work
of multiple developers in a project team and control the actions that
individuals can take based on their role in the project and the stage in the
project life cycle. The Continuus Change Management Suite provides each user
with an insulated personal work area that protects the user from being affected
by the work of other developers, while at the same time notifying the user of
changes or actions by other members of the team. Parallel development support is
a feature that removes development bottlenecks by allowing several developers to
make changes to shared components and enabling multiple projects to
simultaneously share a common base of components.
DISTRIBUTED DEVELOPMENT SUPPORT. Our product line provides distributed
management capabilities. Individual developers and small groups can use our
remote development support to work from copies of components with only
occasional connections to a server without losing the control and collaboration
capabilities of the Continuus solution. Our Distributed Change Management
capability supports distributed development teams of any size by providing
task-based change management across multiple servers and allowing multiple teams
to work in a decentralized mode, while synchronizing shared objects or entire
systems.
SCALABILITY AND FLEXIBILITY. Our product line supports the needs of teams
ranging in size from less than a dozen to over a thousand developers and
organizations with a few to dozens of concurrent projects controlled by many
different teams. Customers can adapt our products to a wide range of operating
configurations, providing individual projects with the ability to adapt
processes and policies to organization-wide standards. Our product line also
supports a wide range of different development languages and tools, as well as
internally developed and externally sourced software and other objects.
OPEN AND EXTENSIBLE ARCHITECTURE. Our product architecture provides a foundation
for the ongoing development of the Continuus product line and enables a highly
scalable, high performance and high availability enterprise solution. Our entire
product line is integrated around a common repository database. This database is
easily extensible by our customers to define new types of e-assets not defined
in the standard repository database shipped by Continuus. An embedded high
performance, industry standard relational database engine supplied by Informix
manages our repository database, helping to ensure our products are able to meet
the performance and reliability standards of enterprise-scale deployment. The
repository database is also open so that users can access it directly to perform
their own querying and reporting. Our products also have an open interface that
allows all interactive functions to be accessed by programs written by other
vendors or by users of our products.
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<PAGE> 42
The following tables describe the products offered by Continuus:
CONTINUUS CHANGE MANAGEMENT SUITE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRODUCTS DESCRIPTION PLATFORMS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
CLIENT PRODUCTS
- ------------------------------------------------------------------------------------------------------
Continuus/CM Provides a task-based, workflow-centric approach to - Windows 3.11
(Change Management) software configuration management that automates manual, Windows for
error-prone development processes yielding more Workgroups
productive teams and higher quality software. - Windows 95/98
- ---------------------- - Windows NT
Continuus/PT Simplifies the process of managing change requests - SUN Solaris
(Problem Tracking) across software development projects. The product's - HP-UX
automated workflow support team collaboration and - IBM AIX
communication. Fully integrated with Continuus/CM, the - SGI IRIX
product provides graphical querying and reporting of - Digital UNIX for
real-time development metrics and status. Alpha
- ---------------------- - Siemens SINIX
Continuus/OM Provides an object-oriented build management facility
(Object Make) that automates software builds and release processes.
The product's distributed architecture enables
management of builds on any network-available platform
providing a high performance, scalable solution for
development teams of any size.
- ------------------------------------------------------------------------------------------------------
SERVER PRODUCTS
- ------------------------------------------------------------------------------------------------------
Workgroup Server Provides a highly scalable platform for managing all - Windows NT
types of e-assets. The product adapts to the growing - SUN Solaris
needs of the organization through a multi-tier - HP-UX
architecture that scales to support any size remote and - IBM AIX
distributed development team, with all team members - SGI IRIX
sharing a central, active repository. Workgroup Server - Digital UNIX for
- ---------------------- manages access to and control of any type of e-asset. Alpha
Continuus/DCM - Siemens SINIX
(Distributed Change Provides distributed change management capabilities
Management) supporting multi-server, geographically dispersed and
remote development efforts. Allows development
organizations to work on a decentralized basis while
providing the full benefits of the task- based
Continuus/CM solution.
- ------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 43
CONTINUUS WEBSYNERGY SUITE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRODUCTS DESCRIPTION PLATFORMS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
CLIENT PRODUCTS
- ----------------------------------------------------------------------------------------------------
WebSynergy Provides a browser-based client for web content Any hardware
Content Client contributors supporting the creation, management and platform with either
deployment of any type of web content. The product's Netscape Navigator
task-based change management capabilities support teams of or Microsoft
software and web content contributors, allowing them to Explorer
collaborate and deliver business critical, e-commerce
applications with higher quality.
- ------------------------------------------------------------------------------
WebPT Automates and simplifies the management of change requests
for web applications. WebPT is fully integrated with
Continuus/PT and supports change management of content and
software components across diverse development teams.
- ----------------------------------------------------------------------------------------------------
SERVER PRODUCTS
- ----------------------------------------------------------------------------------------------------
TeamSynergy As an upgrade to the Continuus Workgroup Server, applies - Sun Solaris
Server the proven capabilities and scalable Continuus server - HP-UX
architecture to the challenge of managing large, - Windows NT
distributed development teams building business critical
web applications.
- ----------------------------------------------------------------------------------------------------
</TABLE>
CONSULTING SERVICES AND SUPPORT
We offer customers a wide range of consulting, training and technical support
services. Given the complexities of Internet and enterprise software application
development, deployment and management, our experienced consultants can help
reduce the time and risk associated with our product deployments. As of March
31, 1999, our consulting services and support organization consisted of 54
employees. Our professional services organization provides the following
services:
PLANNING, CONSULTING AND IMPLEMENTATION SERVICES. We offer a wide range of
customer services to support the implementation requirements of our products to
ensure successful deployment and promote customer self-sufficiency. We offer our
customers planning, consulting and implementation services, including
requirements planning and systems integration, configuration and installation.
Our consultants can also customize our products to reflect the business and
technological needs of the customer with services such as advanced methodology
and process planning and product customization for the customer's environment.
CUSTOMER EDUCATION AND TRAINING. We offer standard and customized training
courses designed to meet the needs of the various classes of users and
administrators of our products. Training classes are provided at our facilities
or on-site at customer locations. Fees for education and training services are
in addition to and separate from software licensing fees and are typically
charged per student, per class or on a per diem basis.
SOFTWARE MAINTENANCE AND SUPPORT. We provide telephone, electronic mail, web and
facsimile customer support through technical support centers located in Irvine,
California and Dublin, Ireland. Software maintenance and support services are
not included in software license fees. These support services include software
updates, maintenance releases and technical support.
CUSTOMERS
Our customer base is divided between the two major segments of the overall
enterprise software asset management market: the technical market segment and
the corporate IT market segment. The
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<PAGE> 44
technical market consists of organizations that develop software as a product or
as a component of a product including independent software vendors, computer
hardware vendors, defense and aerospace organizations, medical instrument
manufacturers, telecommunications equipment suppliers and transportation
equipment manufacturers. The corporate IT market consists of the information
technology departments of Fortune 500 class and government organizations.
The following is a partial representative list of our customers who have
licensed our products in the last three years:
FINANCIAL SERVICES
Deutsche Morgan Grenfell
Dresdner Bank
Lehman Bros.
Liberty Mutual Insurance
Morgan Stanley
Prudential
Union Bank of Switzerland
Westdeutsche Landesbank
TELECOMMUNICATIONS
AT&T
Bell Atlantic
Bouygues Telecom
British Telecom
Deutsche Telekom
GTE
Nokia
Southwestern Bell Communications
Teligent
US West Communication Group
GOVERNMENT
Defense Research Agency (UK)
National Security Agency
OFD (German Ministry of Finance)
Rechenzentrum der Bund esfinanzverwaltung
DEFENSE AND AEROSPACE
Boeing
Dassault Aviation
Hughes
Jeppesen Sanderson
Lockheed Martin
Raytheon
MANUFACTURING AND ELECTRONICS
ABB
ATI Technologies
Baker Hughes
BMW
Compaq
Dialogic
General Motors
Johnson Controls
Magnetti Marelli
Motorola
Philips
Siemens
Texas Instruments
Volkswagen
SOFTWARE AND SERVICES
Cobalt Group
Computer Sciences Corp.
Compuware
Engineering Animation, Inc.
GEAC
ISG Technologies
Kronos
Lawson
New Era of Networks
Novell
QAD
Saville Systems
Telcordia Technologies
USinternetworking
SERVICES
DHL Worldwide Express
United Healthcare
The following examples are representative of how large organizations use our
products and professional services to build and enable enterprise-critical
applications.
E-Commerce Service Company. The e-commerce service company is a leading
provider of e-commerce implementation and hosting services for business critical
applications over the Internet. Customers engage the e-commerce service company
to deliver e-commerce and enterprise software applications that automate core
business processes. The e-commerce service company is typically retained on a
fixed price, fixed time basis, making predictable and rapid application delivery
critical to its success. The e-commerce service company sought to improve
application delivery times, improve internal and external communications and
better manage client deliverables. In addition, the e-commerce service company
also needed a single platform to manage the complexity of both a rapidly
expanding web and application development organization and an increasing
customer base.
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<PAGE> 45
To streamline and automate the application development and deployment process,
the e-commerce service company implemented the Continuus Change Management
solution. Our solution enabled development team members of varying technical
backgrounds to collaborate on the development and management of applications
from multiple locations or on-site at customer facilities. The Continuus Change
Management solution is also used to implement a consistent development process
throughout the organization and improves management's ability to monitor project
status.
Major European Bank. The major European bank is a global financial services
firm with over 45,000 employees operating in over 70 countries. More than eighty
percent of the major European bank's banking services were dependent on its
software. The major European bank's goal was to improve the quality and reduce
delivery time of core banking applications while coordinating its globally
distributed development teams. Concurrently, the major European bank needed to
migrate its legacy systems to client/server and Internet-based applications.
The major European bank implemented our Continuus Change Management solution to
connect distributed development teams and to establish a standard set of best
practices across application development projects. As a result of the
implementation of our solution, the major European bank was able to manage
business critical development processes such as the Euro conversion and year
2000 application efforts. The major European bank used our task-based management
capabilities to streamline or eliminate respective tasks, yielding an increase
in overall developer productivity.
Global Automobile Manufacturer. The global automobile manufacturer is one of
the world leaders in high performance and luxury automobiles. It faced
challenges in managing and developing both software embedded in its automobiles
and corporate IT systems used to run the business. To realize improved
productivity with its automobile-based software development efforts, the global
automobile manufacturer utilizes a series of common software components that are
customized to meet stringent government or market requirements for a specific
model of automobile. Our customer needed a way to manage software teams building
these common components as well as the distributed teams performing
customizations. In its move from legacy application development for internal
systems, the global automobile manufacturer also needed a way to manage its
internal development process across legacy, client/server and web-based
applications.
The global automobile manufacturer implemented our Continuus Change Management
Suite as well as Continuus WebSynergy. The Continuus Change Management Suite
controls the global automobile manufacturer's distributed software development
environment allowing geographically distributed teams to collaborate as if
working in a single location. Component-based development is facilitated as
development teams and managers can quickly locate and modify core software
components across multiple car lines. The product's audit trail, workflow and
security capabilities ensure that the global automobile manufacturer is
delivering software components that meet internal best practices.
SALES AND MARKETING
We sell our products in North America, France, Germany and the United Kingdom,
through our direct sales and services organizations. As of March 31, 1999, our
North American sales staff included 36 people located in California, Colorado,
Georgia, Illinois, Massachusetts, Minnesota, New Jersey, New York, Ontario,
Texas and Virginia. As of March 31, 1999, our international sales and marketing
staff included 31 people located in France, Germany and the United Kingdom.
Typically, each sales person is teamed with an engineer to assist in pre-sales
activities and transitioning new accounts to our professional services
organization for implementation support. The time between initial customer
contact and an actual sales order may span six months or more. We also maintain
telemarketing organizations in North America and the United Kingdom. The
telemarketing groups' primary responsibility is to work closely with the direct
sales teams to proactively identify and qualify
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<PAGE> 46
high quality new prospects for our products. We also have distributors covering
Australia, Denmark, Finland, India, Israel, Italy, the Netherlands, Norway,
Spain and Sweden.
We market our products through public relations activities, user group meetings,
programs to work closely with industry analysts and other influential third
parties, seminars, conference sponsorship, trade shows, telemarketing and direct
mail campaigns. We also utilize the web for advertising campaigns on frequently
visited web sites including those of our strategic partners. We use our web
site, www.continuus.com, to establish our market presence, generate leads and
extend our program offerings to customers and strategic partners.
We also market our products with partners that sell complementary products. Our
current strategic partners include Mercury Interactive and Tivoli Systems, Inc.,
a division of IBM. We integrate our products with our partners' products in
order to provide a comprehensive and flexible solution for our customers. Our
joint sales and marketing efforts with these partners allow us to leverage our
marketing efforts and reach customers we might otherwise not attract.
RESEARCH AND DEVELOPMENT
We have historically made significant investments in research and development
and related activities to maintain and enhance our product lines. We expect that
we will continue to devote a substantial portion of our resources to enhancing
and adding functionality to existing products, developing new products and
integrating our products with products from other leading vendors. We will also
evaluate on an ongoing basis externally developed technologies for integration
into our products.
COMPETITION
The market for Internet and enterprise software asset management products and
services is highly competitive and constantly evolving. We expect competition to
persist and intensify in the future. We have a large number of competitors which
provide some functions of our product line. We do not believe that any of our
competitors offers an integrated product line that addresses as broad a range of
Internet and enterprise software asset management as we provide. We have four
primary sources of competition:
- vendors of point solution software tools that address only a
limited number of enterprise software asset management
functions, including Rational Software and MERANT;
- vendors of point solution software tools that address only a
limited number of Internet asset management functions, such as
Interwoven and MKS;
- in-house development efforts by current and potential customers;
and
- larger vendors such as Computer Associates, IBM and Microsoft
whose product lines include non-integrated components of
Internet and enterprise software asset management, including
software version control, project management, web content
management, change request tracking and/or automated software
distribution.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do and thus
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to our detriment. Such
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies and offer more attractive terms to
purchasers than we can. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their
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<PAGE> 47
products. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We seek to protect our software, documentation and other written materials
primarily through a combination of trademark, trade secret and copyright laws,
confidentiality procedures and contractual provisions. For example, we license
rather than sell our software and require licensees to enter into license
agreements that impose restrictions on the licensees' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets, by,
among other things, requiring those persons with access to our proprietary
information to execute confidentiality agreements with us.
EMPLOYEES
As of March 31, 1999, we had 172 full-time employees, including 37 in research
and development, 54 in professional services, 67 in sales and marketing and 14
in general and administration. Of the total, 110 were based in the United
States, 25 in the United Kingdom, 8 in Ireland, 12 in France and 17 in Germany.
Our employees are not represented by any collective bargaining unit, and we have
never experienced a work stoppage. We believe our relations with our employees
are good.
FACILITIES
Our principal executive offices are located in Irvine, California and consist of
approximately 17,000 square feet under a lease expiring March 31, 2000. We also
lease office space in Paris, France; Munich, Germany; Dublin, Ireland;
Bracknell, United Kingdom; Ottawa, Canada; San Mateo and Laguna Hills,
California; Schaumburg, Illinois; Rockville, Maryland; Cambridge, Massachusetts;
Morristown, New Jersey; White Plains, New York and Dallas, Texas. We believe
that we will require additional space, including in Irvine, California as well
as Germany, within the next 12 months, but that suitable additional space will
be available on commercially reasonable terms.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John R. Wark......................... 47 President, Chief Executive Officer and Chairman of
the Board of Directors
Steven L. Johnson.................... 39 Vice President, Finance and Chief Financial Officer
William A. Philbin................... 39 Vice President, Marketing
James M. Carrigan.................... 47 Vice President, Research and Development
Geoffrey W. Haggart.................. 43 Vice President, European Operations
David McCann......................... 39 Vice President, Americas Operations
Fred B. Cox(1)....................... 61 Director
Kevin G. Hall(2)..................... 40 Director
A. Barry Patmore..................... 58 Director
Stewart A. Schuster(2)............... 53 Director
Sol Zechter.......................... 71 Director
</TABLE>
- -------------------------
(1) Mr. Cox is expected to retire from the board upon completion of this
offering.
(2) Member of the compensation committee and audit committee
John R. Wark has served as our President, Chief Executive Officer and Chairman
of the board of directors since November 1994. Prior to joining Continuus, Mr.
Wark served as Vice President, Marketing and Development at Progress Software
Corporation, a software development tool and database system provider, from
February 1992 to November 1994. Prior to his tenure with Progress Software, he
served as a Vice President of the Applications Software Division of Pansophic
Systems.
Steven L. Johnson has served as our Vice President and Chief Financial Officer
since December 1998. From August 1988 to June 1998, he was employed by
Subscriber Computing, Inc., an application software company serving the wireless
telecommunications market. From June 1993 to June 1998, Mr. Johnson served as
Subscriber Computing's Vice President and Chief Financial Officer.
William A. Philbin has served as our Vice President, Marketing since August
1998. From February 1996 until August 1998, he was our Vice President Research
and Development. Mr. Philbin was employed by Progress Software Corporation from
March 1992 to February 1996, where he served in several positions, including
Director of Midrange Systems.
James M. Carrigan has served as our Vice President, Research and Development
since August 1998. Mr. Carrigan was Vice President, Research and Development for
Quarterdeck Corporation from April 1997 to August 1998. Before Quarterdeck, Mr.
Carrigan was the General Manager for Thuridion, a consulting firm from February
1996 to January 1997. Mr. Carrigan previously served as Director of Software
Services for Locus Computing Corp., a software company, from May 1989 to June
1996.
Geoffrey W. Haggart has served as our Vice President, European Operations since
March 1997 and from September 1995 to February 1997 as Managing Director of our
UK operations. Mr. Haggart was Vice President, Northern European Sales for
Legent Corporation from April 1995 to August 1995 and from January 1993 to March
1995 he served as Legent's Nordic Regional Manager.
David McCann has served as our Vice President, Americas Operations since March
1999. Mr. McCann was President and Chief Executive Officer of SOS Communications
Inc, a wireless services company, from July 1998 to March 1999. He served as
Vice President and General Manager
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<PAGE> 49
of a division of Subscriber Computing, Inc., a telecommunications applications
software company, from January 1998 to June 1998 and Vice President and General
Manager of the Spatialware Division of Mapinfo Corporation from July 1996 to
November 1997. Mr. McCann also served as Vice President of Worldwide Marketing
for the Client Server Division of Unisys Corporation from March 1993 to June
1996.
Fred B. Cox has served as a director of Continuus since 1994, prior to which Mr.
Cox served as our President for four years. He is currently the Chairman of the
board of directors and co-founder of Emulex, a publicly traded designer and
manufacturer of products which enhance access to and storage of electronic data
and applications.
Kevin G. Hall has served as a director of Continuus since 1994. Mr. Hall is a
general partner of Norwest Venture Partners, a private investment firm, where he
focuses on software, communications and semiconductors.
A. Barry Patmore has served as a director of Continuus since April 1999. Mr.
Patmore has been a venture partner of Brentwood Venture Capital, a private
investment firm, since April 1999. Mr. Patmore was employed by Andersen
Consulting from 1966 to February 1999, where he served in several positions,
including Office Managing Partner of Southern California and Worldwide Managing
Partner in two divisions. Mr. Patmore is currently a member of the board of
directors of KCET, a public television station.
Stewart A. Schuster has served as a director of Continuus since May 1997. Dr.
Schuster has been a venture partner of Brentwood Venture Capital, since December
1995. Dr. Schuster served as Executive Vice President of Marketing at Sybase,
Inc., a database solutions company, from 1986 to 1995. He is currently a member
of the board of directors of Edify Corporation, a publicly traded software
company.
Sol Zechter has served as a director of Continuus since 1994, prior to which Mr.
Zechter served as our Chief Executive Officer from 1991 until 1994. Mr. Zechter
served as the Senior Vice President of Emulex from 1982 to 1991.
All directors hold office until our next annual meeting of stockholders and
until their successors have been elected and qualified. Officers serve at the
discretion of the board of directors. There are no family relationships between
any of our directors or executive officers.
BOARD COMPOSITION
The board of directors is comprised of six members, five of whom are
non-employee directors.
BOARD COMMITTEES
Following the offering, the compensation committee will consist of Mr. Hall and
Dr. Schuster. The compensation committee makes recommendations regarding our
1997 Equity Incentive Plan and Employee Stock Purchase Plan, and makes decisions
concerning salaries and incentive compensation for our employees and
consultants.
Following the offering, the audit committee will consist of Mr. Hall and Dr.
Schuster. The audit committee makes recommendations to the board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors and reviews
and evaluates our audit and control functions.
DIRECTOR COMPENSATION
All directors are reimbursed for certain expenses in connection with attendance
at board and committee meetings. Historically, our non-employee directors have
not received cash compensation
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<PAGE> 50
for their services on the board of directors or any committee of the board. Dr.
Schuster and Mr. Hall received options to purchase 28,301 shares of common stock
under our 1997 Equity Incentive Plan. The options granted to Dr. Schuster vest
quarterly over a four-year period. The options granted to Mr. Hall vest annually
over a four-year period.
Beginning upon the closing of this offering, our non-employee directors will
receive $2,000 per board meeting attended and $500 per committee meeting
attended. Non-employee directors will also receive the following automatic
grants of options under our 1997 Equity Incentive Plan:
- a one-time option to purchase 7,500 shares of common stock,
granted on the later to occur of July 1, 1999 and the closing of
this offering, for each non-employee director serving as of the
date of this prospectus; and
- an option to purchase 7,500 shares of common stock, granted on
the date of each annual meeting of our stockholders after the
date of the closing of this offering, for each person who is a
non-employee director following the annual meeting.
The options granted to non-employee directors serving as of the closing of this
offering and the options granted on the date of each annual meeting shall vest
on the anniversary of the date of the grant. The exercise price of options
granted to non-employee directors shall be equal to 100% of the fair market
value of common stock on the date of grant and are generally non-transferable.
See "-- Equity Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee. See
"Certain Transactions" for a description of transactions between Continuus and
entities affiliated with members of the compensation committee.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth certain information for the year ended December
31, 1998, regarding the compensation of our chief executive officer and the four
other most highly compensated executive officers whose salary and bonus during
the fiscal year ended December 31, 1998 were in excess of $100,000. These
officers are referred to as named executive officers elsewhere in this
prospectus. In accordance with the rules of the Securities and Exchange
Commission, the compensation described in this table does not include medical,
group life insurance or other benefits which are available generally to all our
salaried employees and perquisites and other personal benefits received which do
not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table. The Other Annual Compensation column in the table
includes relocation expenses in connection with hiring employees.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#) ($)(1)
- --------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John R. Wark.................... 1998 175,000 50,000 -- 42,453 --
President and Chief Executive
Officer
Joseph S. Campbell.............. 1998 162,582 59,929 -- -- 55,460
Former Senior Vice President,
Worldwide Field Operations(2)
John J. Laskey.................. 1998 136,817 20,000 -- 46,226 --
Former Vice President, Finance
and Chief Financial Officer(3)
William A. Philbin.............. 1998 142,096 -- -- 46,226 --
Vice President, Engineering
Geoffrey W. Haggart............. 1998 124,342 95,739 14,921 47,736 --
Vice President, European
Operations
</TABLE>
- -------------------------
(1) Represents reimbursements for relocation expenses.
(2) Mr. Campbell left Continuus on November 13, 1998.
(3) Mr. Laskey left Continuus on October 23, 1998.
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<PAGE> 52
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to stock options granted
to each of the named executive officers during the year-ended December 31, 1998,
including the potential realizable value over the ten-year term of the options.
These assumed rates of appreciation comply with the rules of the SEC and do not
represent our estimate of future stock price. The potential realizable value is
a hypothetical gain calculated based on the term of the option at its time of
grant and the assumed initial public offering price of $9.00. It is calculated
assuming that the stock price on the date of grant appreciates at the indicated
annual rate, compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price. Actual gains, if any, on stock option exercises will depend on the
future performance of our common stock.
In 1998, we granted options to purchase up to an aggregate of 921,667 shares to
employees. All options were under our 1997 Equity Incentive Plan at an exercise
price equal to the fair market value of our common stock, as determined by the
board of directors, on the date of grant. All options have a term of ten years.
Option shares vest over four years.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM($)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR(%) PER SHARE($) DATE 5% 10%
- ------------------------------ ---------- -------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
John R. Wark.................. 42,453 4.6 1.99 1/15/08 53,155 134,154
Joseph S. Campbell............ -- -- -- -- -- --
John J. Laskey(1)............. 37,736 4.1 1.99 1/25/99 47,249 119,247
8,490 1.0 1.99 1/25/99 10,631 26,829
William A. Philbin............ 37,736 4.1 1.99 7/17/08 47,249 119,247
1,132 * 1.99 4/30/08 1,417 3,577
7,358 1.0 1.99 1/15/08 9,213 23,252
Geoffrey W. Haggart........... 28,302 3.1 1.99 7/17/08 35,437 89,435
19,434 2.1 1.99 1/15/08 24,333 61,411
</TABLE>
- -------------------------
* Represents less than one percent of total options granted to employees in
1998.
(1) Potential Realizable Value for Mr. Laskey is calculated over a one-year
term.
50
<PAGE> 53
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, with respect to each of the named executive
officers, concerning exercisable and unexercisable options held as of December
31, 1998.
The "Value of Unexercised In-the-Money Options at December 31, 1998" is based on
a value of $9.00 per share, the initial public offering price, less the per
share exercise price, multiplied by the number of shares issued upon exercise of
the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN THE
UNDERLYING OPTIONS AT MONEY OPTIONS AT
SHARES ON DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)
ACQUIRED VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Wark................. -- -- 286,357 82,822 2,410,525 688,340
Joseph S. Campbell........... -- -- 37,735 -- 317,729 --
John J. Laskey............... -- -- 72,895 -- 613,656 --
William A. Philbin........... -- -- 52,593 71,932 442,713 597,448
Geoffrey W. Haggart.......... -- -- 25,504 78,265 214,327 649,625
</TABLE>
EMPLOYMENT AGREEMENTS
On May 31, 1997, we entered into a President/CEO Change in Control Severance
Benefits Agreement with John Wark. The severance benefit agreement provides that
upon a change in control of Continuus, and the subsequent termination without
cause of Mr. Wark, he is entitled to a continuation of base salary for twelve
months, payment of his applicable target bonus, accelerated vesting of options,
and continued health care benefit coverage as permitted by COBRA, Internal
Revenue Code Section 4980B.
We have entered into Executive Change in Control Severance Benefits Agreements
with each of William A. Philbin, Steven L. Johnson, David McCann, Geoffrey W.
Haggart and James M. Carrigan. We have also entered into Executive Change in
Control Severance Benefits Agreements with each of John T. Tullie, Vice
President, North American Sales, Paul G. Van Den Berg, Vice President, Business
Development, and Richard L. Rippy, Vice President, Customer Support. The
agreements provide that upon a change in control of Continuus, and if these
executives are subsequently terminated without cause, they are entitled to a
continuation of base salary for between six and nine months, a portion of their
target bonus, continued or accelerated vesting of options, and continued health
care benefit coverage as permitted by COBRA.
Under the terms of the President/CEO Change in Control Severance Benefits
Agreement and the Executive Change in Control Severance Benefits Agreements, a
change in control includes:
- A sale of all substantially all our assets;
- A merger in which we are not the surviving corporation;
- A reverse merger where we are the surviving entity, but our
common stock outstanding immediately prior to the merger is
converted into other property; and
- The acquisition of the securities representing at least the
beneficial ownership of 50% of the combined voting power
entitled to elect our directors.
EQUITY INCENTIVE PLANS
EMPLOYEE STOCK OPTION PLAN AND 1997 EQUITY INCENTIVE PLAN. We adopted our
initial stock option plan, the Employee Stock Option Plan, in November 1991. Of
the 1,754,717 shares of common stock reserved for issuance on the exercise of
grants under the Employee Stock Option Plan, options for
51
<PAGE> 54
1,179,033 shares remain outstanding. We do not intend to make any additional
grants under the Employee Stock Option Plan. The Employee Stock Option Plan
expires in November 2001 unless sooner terminated by the board. We adopted our
current stock option plan, the 1997 Equity Incentive Plan in December 1997. Of
the 2,452,830 shares of our common stock reserved for issuance on the exercise
of grants under the 1997 Equity Incentive Plan, options for 1,257,671 shares are
issued and outstanding as of March 31, 1999. The 1997 Equity Incentive Plan will
terminate in December 2007, unless sooner terminated by the board.
Both plans permit the granting of options intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986.
Under the 1997 Equity Incentive Plan, incentive stock options may be granted to
employees, officers and employee directors. Employee directors are not eligible
for incentive stock options under the Employee Stock Option Plan. Incentive
stock options as well as options that do not qualify for favorable tax
treatment, nonstatutory stock options, may be granted to employees, directors
and consultants under the 1997 Equity Incentive Plan. The Employee Stock Option
Plan permits grants of nonstatutory stock options only to employees, including
officers. The 1997 Equity Incentive Plan also permits the granting of stock
bonuses and rights to purchase restricted stock. Both plans forbid option grants
for more than 377,358 shares of our common stock in any calendar year to any one
person.
The plans are administered by the board of directors of Continuus or a committee
appointed by the board. Subject to the limitations set forth in each of the
plans, the board has the authority to select the persons to whom grants are to
be made, to determine whether an option is to be an incentive stock option or a
nonstatutory stock option, to establish the time or times when a person shall be
permitted to receive stock pursuant to a grant under one of the plans, and the
number of shares granted. Under the 1997 Equity Incentive Plan, the board may
also determine whether a grant will include a stock bonus, a right to purchase
restricted stock, or a combination of both.
The maximum term of options granted under the plans is ten years. The aggregate
fair market value, determined at the time of grant, of the shares of common
stock which incentive stock options are exercisable for by an optionee during
any calendar year may not exceed $100,000. If this amount is exceeded, the
incentive stock options which exceed the limit shall be treated as nonstatutory
stock options. Options granted under the plans generally are non-transferable
and expire three months after the termination of an optionee's service to
Continuus. If an optionee is permanently disabled or dies during his or her
service to Continuus, under the Employee Stock Option Plan the affected person's
options may be exercised up to 12 months following the disability or death.
Under the 1997 Equity Incentive Plan, options may be exercised up to 12 months
following disability and 18 months following death.
The exercise price of options granted under the plans is determined by the board
in accordance with the guidelines set forth in the plans. The exercise price of
an incentive stock option cannot be less than 100% of the fair market value of
the common stock on the date of the grant. The exercise price of a nonstatutory
stock option cannot be less than 85% of the fair market value of the common
stock on the date of grant. Options granted under the plans vest at the rate
specified in the option agreement. The exercise price of incentive stock options
granted to any person who at the time of grant owns stock representing more than
10% of the total combined voting power of all classes of our capital stock must
be at least 110% of the fair market value of the common stock on the date of
grant and the term of the options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the 1997
Equity Incentive plan shall be in the form approved by the board. The purchase
price under any restricted stock purchase agreement will not be less than 85% of
the fair market value of our common stock on the date of grant. Stock bonuses
and restricted stock purchase agreements are generally non-transferable.
52
<PAGE> 55
The plans provide that shares subject to options, stock bonuses and restricted
stock purchases, that have expired or otherwise terminated without having been
exercised in full again become available for grant.
As defined in each of the Plans, upon a change in control all outstanding
options, stock bonuses and restricted stock must either be assumed or
substituted by the surviving entity. In the event the surviving entity does not
assume or substitute them, the vesting of the options, stock bonuses and
restricted stock shall be accelerated prior to the change in control and they
shall be terminated if not exercised prior to the change in control.
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, we adopted the 1999 Employee Stock Purchase Plan covering an
aggregate of 250,000 shares of common stock. The Employee Stock Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code of 1986. Under the Employee Stock
Purchase Plan, the board may authorize participation by eligible employees,
including officers, in periodic offerings. The initial offering under the plan
will commence on the date of this prospectus and terminate on January 31, 2000.
Unless otherwise determined by the board, employees are eligible to participate
in the plan only if they are employed by us or our subsidiary for at least 20
hours per week and for at least five months per calendar year. Employees who
participate in an offering may have up to 15% of their earnings withheld
pursuant to the plan. The amount withheld is then used to purchase shares of our
common stock on dates determined by the board. The price of common stock
purchased under the plan will be equal to 85% of the lower of the fair market
value of the common stock at the commencement date of each offering period or
the fair market value on the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with us.
In the event of a merger, reorganization, consolidation or liquidation involving
Continuus, the board has discretion to provide that each right to purchase
common stock will be assumed or an equivalent right substituted by the successor
corporation, or the board may shorten this offering period and provide for all
sums collected by payroll deductions to be applied to purchase stock immediately
prior to the merger or other transaction. The board has the authority to amend
or terminate the plan, provided that the proposed amendment or termination does
not adversely affect any outstanding rights to purchase common stock.
401(k) PLAN
Effective January 1, 1987, we adopted the Continuus Software Corporation
Retirement Savings Plan, a 401(k) plan, covering employees. Pursuant to the
401(k) plan, eligible employees may elect to reduce their current compensation
by up to the statutorily prescribed annual limit, which was $10,000 in 1998, and
have the amount of this reduction contributed to the 401(k) plan. The 401(k)
plan allows for Continuus to make discretionary matching contributions.
Employees who are 18 years of age or older and who have served at least 1,000
hours with Continuus during a calendar year are eligible for matching
contributions. Our contributions, if any, become 25% vested after one year of
service, with an additional 25% becoming vested for each year of service
thereafter. We made no discretionary contributions in 1998. The 401(k) plan is
intended to qualify under Section 401 of the Internal Revenue Code of 1986 so
that contributions by employees and Continuus to the 401(k) plan, and income
earned on the 401(k) plan contributions, are not taxable to employees until
withdrawn from the 401(k) plan. Qualification under Section 401 also allows us
to deduct our contributions, if any, when we make them. The trustee under the
401(k) plan, at the direction of each participant, invests the employee salary
deferrals in selected investment options.
53
<PAGE> 56
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
Our bylaws provide that we will indemnify our directors and executive officers
and may indemnify our other officers, employees and other agents to the fullest
extent permitted by Delaware law. We are also empowered under our bylaws to
enter into indemnification contracts with our directors and officers and to
purchase insurance on behalf of any person we are required or permitted to
indemnify. Pursuant to this provision, we have entered into indemnification
agreements with each of our directors and executive officers.
In addition, our restated certificate of incorporation provides that our
directors will not be personally liable to Continuus or our stockholders for
monetary damages for any breach of fiduciary duty as a director, except for:
- liability for any breach of the directors' duty of loyalty to
Continuus or our stockholders,
- liability for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law,
- liability under Section 174 of the Delaware General Corporation
Law or
- liability for any transaction from which the director derives an
improper personal benefit.
The restated certificate of incorporation also provides that if the Delaware
General Corporation Law is amended after the approval by our stockholders of the
restated certificate of incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of our directors shall be eliminated or limited to the fullest extent permitted
by the Delaware General Corporation Law. The provision also does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
54
<PAGE> 57
CERTAIN TRANSACTIONS
The following is a description of transactions since January 1, 1996, to which
we have been a party, in which the amount involved in the transaction exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of our capital stock had or will have a direct or indirect material interest
other than compensation arrangements which are otherwise required to be
described under "Management." All of the securities referenced below were sold
and purchased at prices equal to the fair market value of the securities, as
determined by our board of directors on the date of issuance.
Two of our directors, Kevin G. Hall and Stewart A. Schuster, are affiliated with
holders of more than 5% of our capital stock. Mr. Hall is a general partner of
Itasca Partners, the general partner of Norwest Equity Partners V and Norwest
Equity Partners IV. Dr. Schuster is a venture partner of Brentwood Associates
VI, L.P. In the transactions described below, neither Mr. Hall nor Dr. Schuster
received securities as individuals.
In May 1996, we sold in a private placement shares of Series D preferred stock
convertible into 361,178 shares of common stock for an aggregate purchase price
of $2,010,002 under the terms of a Series D Preferred Stock Purchase Agreement
dated May 30, 1996. See Note 8 of Notes to Consolidated Financial Statements for
a description of the Series D preferred stock. Assuming conversion of all shares
of preferred stock into common stock, the following directors and beneficial
owners of more than five percent of our common stock acquired beneficial
ownership of Series D preferred stock in this private placement:
<TABLE>
<CAPTION>
DIRECTORS/5% STOCKHOLDERS NUMBER OF SHARES
- ------------------------- ----------------
<S> <C>
Norwest Equity Partners, V.................................. 123,090
Brentwood Associates VI, L.P................................ 89,847
Accel IV L.P.(1)............................................ 34,139
Advanced Technology Partners III............................ 58,400
Fred B. Cox(2).............................................. 26,954
Sol Zechter(3).............................................. 8,984
</TABLE>
- -------------------------
(1) Includes 1,468 shares held by Accel Investors '95 L.P., 648 shares held by
Accel Keiretsu L.P. and 750 shares held by Ellmore C. Patterson Partners.
(2) Includes 26,954 shares held by the Cox Living Trust dated May 26, 1988 of
which Mr. Cox is the co-Trustee.
(3) Includes 8,984 shares held by the Zechter Family Trust dated March 6, 1996
of which Mr. Zechter is the Trustee.
In January 1997 we issued warrants to purchase shares of Series E preferred
stock at $5.57 per share convertible into 184,938 shares of common stock in
connection with the issuance of promissory notes in the aggregate principal
amount of $1,029,502. In May 1997, we sold in private placements shares of
Series E preferred stock convertible into 470,849 shares of common stock and
warrants to purchase shares of Series E preferred stock convertible into 93,190
shares of common stock in exchange for an aggregate purchase price of $2,623,073
under the terms of a Series E Preferred Stock Purchase Agreement dated May 19,
1997. Upon the closing of this offering, the warrants issued in both January and
May 1997 will terminate if not exercised. See Note 8 of Notes to Consolidated
Financial Statements for a description of the Series E preferred stock. Assuming
conversion of all shares of preferred stock into common stock, the following
directors and beneficial owners of more than five
55
<PAGE> 58
percent of our common stock acquired beneficial ownership of Series E preferred
stock and common stock issuable upon conversion of warrants pursuant to the
Series E purchase agreement:
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS/5% STOCKHOLDERS NUMBER OF SHARES WARRANT SHARES
- ------------------------- ---------------- --------------
<S> <C> <C>
Norwest Equity Partners, V......................... 183,583 106,659
Brentwood Associates VI, L.P....................... 132,052 76,720
Accel IV L.P.(1)................................... 58,359 33,873
Advanced Technology Partners III................... 85,503 49,672
</TABLE>
- -------------------------
(1) Includes 2,509 shares and 1,456 warrant shares held by Accel Investors '95
L.P., 1,108 shares and 643 warrant shares held by Accel Keiretsu L.P. and
1,283 shares and 744 warrant shares held by Ellmore C. Patterson Partners.
In April 1999, we entered into a loan agreement with Silicon Valley Bank for a
revolving line of credit of up to $2,000,000. Four stockholders who beneficially
own more than 5% of our capital stock guaranteed the amounts we borrowed under
the loan agreement. As consideration for the guaranties of the stockholders, we
issued warrants to purchase our common stock in the following amounts:
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS/5% STOCKHOLDERS WARRANT SHARES
- ------------------------- --------------
<S> <C>
Norwest Equity Partners, V(1)............................... 21,538
Brentwood Associates VI, L.P................................ 15,492
Accel IV L.P.(2)............................................ 10,031
Advanced Technology Partners III............................ 6,845
</TABLE>
- -------------------------
(1) Includes 11,815 warrant shares held by Norwest Equity Partners, IV.
(2) Includes 294 warrant shares held by Accel Investors '95 L.P., 130 warrant
shares held by Accel Keiretsu L.P. and 150 warrant shares held by Ellmore C.
Patterson Partners.
In the event the stockholders guaranteeing the amounts borrowed under the loan
agreement must make a payment to Silicon Valley Bank, we will issue each paying
stockholder additional warrants to purchase our common stock in the following
amounts:
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS/5% STOCKHOLDERS WARRANT SHARES
- ------------------------- --------------
<S> <C>
Norwest Equity Partners, V(1)............................... 14,358
Brentwood Associates VI, L.P. .............................. 10,328
Accel IV L.P.(2)............................................ 4,563
Advanced Technology Partners III............................ 6,687
</TABLE>
- -------------------------
(1) Includes 7,876 warrant shares we would issue to Norwest Equity Partners, IV.
(2) Includes 196 warrant shares we would issue to Accel Investors '95 L.P., 86
warrant shares we would issue to Accel Keiretsu L.P. and 100 warrant shares
we would issue to Ellmore C. Patterson Partners.
We have entered into employment letter agreements with John R. Wark, our
President and Chief Executive Officer, Steven L. Johnson, our Vice President,
Finance and Chief Financial Officer, William A. Philbin, our Vice President,
Marketing, Geoffrey W. Haggart, our Vice President, European Operations, James
M. Carrigan, our Vice President, Research and Development and David McCann, our
Vice President, Americas Operations. We have also entered into agreements with
Mr. Wark, Mr. Johnson, Mr. Philbin, Mr. Haggart, Mr. Carrigan and Mr. McCann
providing for severance benefits upon their termination, without cause,
subsequent to a change in control. See "Management -- Employment Agreements."
56
<PAGE> 59
In September 1997, we sold $6.0 million in principal amount of a 12% senior
secured convertible debenture, Due September 23, 2002, to London Pacific Life &
Annuity Company. Interest on the debenture accrues at a rate of 12% and is
payable quarterly in arrears. See "Description of Capital Stock -- Senior
Secured Convertible Debenture."
In 1998, we issued options to purchase shares of our common stock, under our
1997 Equity Incentive Plan, to the following executive officers and directors
and in the following amounts:
<TABLE>
<S> <C>
James M. Carrigan 113,208 shares
Geoffrey W. Haggart 47,736 shares
Kevin G. Hall 28,302 shares
Steven L. Johnson 132,076 shares
William A. Philbin 46,226 shares
John R. Wark 42,453 shares
</TABLE>
The exercise price for each option is $1.99 per share.
In 1999, we issued options to purchase shares of our common stock, under our
1997 Equity Incentive Plan, to the following executive officers in the following
amounts:
<TABLE>
<S> <C>
Geoffrey W. Haggart 9,434
David McCann 141,510
John R. Wark 75,472
</TABLE>
The exercise price for options granted to Mr. Haggart is $3.98 per share and for
options granted to Mr. McCann and Mr. Wark the exercise price is $6.63 per
share. See "Management -- Stock Option Grants in Last Fiscal Year."
We have also entered into indemnification agreements with each of our directors
and executive officers. See "Management -- Limitations on Directors' and
Executive Officers' Liability and Indemnification."
57
<PAGE> 60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of March 31, 1999, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by each holder of more
than 5% of our common stock. The table also sets forth the same information for
our directors and named executive officers individually and all directors and
executive officers as a group. Unless otherwise indicated, the principal address
of each of the persons and entities below is in the care of Continuus Software
Corporation, 108 Pacifica, Irvine, California 94025.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. The number of shares beneficially owned
includes the number of shares subject to warrants or options exercisable within
60 days of March 31, 1999 indicated in the column entitled "Warrants/Options."
Except as indicated by footnote, and subject to community property laws where
applicable, the persons named in the table below have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. Percentage of beneficial ownership is based on:
- 6,258,219 shares of common stock outstanding as of March 31,
1999;
- the effect of a 1-for-2.65 reverse stock split;
- the conversion of all outstanding shares of preferred stock into
4,306,454 post-split shares of common stock;
- the issuance of 278,125 shares of common stock at closing upon
exercise of warrants at $5.57 per share; and
- 8,781,861 shares of common stock outstanding after completion of
this offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING SHARES OFFERING
WARRANTS/ ------------------- BEING --------------------
NAME AND ADDRESS OPTIONS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ --------- --------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Norwest Equity Partners IV(1)..... 310,422 1,911,390 29.1 -- 1,911,390 21.0
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Kevin G. Hall(2).................... 310,422 1,911,390 29.1 -- 1,911,390 21.0
Norwest Equity Partners IV
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Stewart A. Schuster(3).............. 230,557 1,383,709 21.3 -- 1,383,709 15.4
Brentwood Associates VI, L.P.
3000 Sand Hill Road, Building One,
Suite 260
Menlo Park, CA 94025
Entities affiliated with
Brentwood Associates VI,
L.P.(4)........................... 230,557 1,374,865 21.2 -- 1,374,865 15.3
3000 Sand Hill Road, Building One,
Suite 260
Menlo Park, CA 94025
London Pacific Life & Annuity
Company(5)........................ -- 1,078,167 14.7 -- 1,078,167 12.3
3109 Poplarwood Court, Suite 108
Raleigh, NC 27604
Advanced Technology Ventures
III(6)............................ 145,956 890,218 13.9 -- 890,218 10.0
485 Ramona Street, Suite 200
Palo Alto, CA 94301
Fred B. Cox(7)...................... 120,612 712,294 11.2 225,000 591,682 6.6
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING SHARES OFFERING
WARRANTS/ ------------------- BEING --------------------
NAME AND ADDRESS OPTIONS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ --------- --------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Accel IV, L.P.(8)................. 85,892 607,589 9.6 -- 607,589 6.9
428 University Avenue
Palo Alto, CA 94301
Sol Zechter(9)...................... 102,615 548,439 8.6 163,195 385,245 4.3
John R. Wark........................ 310,220 310,220 4.7 -- 310,220 3.4
David H. Bernhardt.................. -- 147,167 2.4 15,094 132,073 1.5
25382 Rainwood
Laguna Niguel, CA 92677
Steven T. Bernhardt................. -- 125,787 2.0 11,320 114,467 1.3
21241 Hillside Lane
Huntington Beach, CA 92646
Fred B. Cox III..................... -- 75,469 1.2 18,867 56,602 1.0
Box 70655
Reno, NV 89570
Eric Cox............................ -- 75,469 1.2 37,735 37,734 *
727 Coastland Drive
Palo Alto, CA 94303
Alicia Cox Stanfill................. -- 75,469 1.2 18,867 56,602 1.0
1025 River Road
Tostin, MT 59643
Richard Harlan Zechter(10).......... -- 64,400 1.0 19,119 45,281 1.0
11136 Cedarwood Drive
N. Bethesda, MD 20852
William A. Philbin.................. 62,382 62,382 1.0 -- 62,382 1.0
Susan Carol Zechter................. -- 49,306 * 19,119 30,187 *
630 S. Masselin Ave., #311
Los Angeles, CA 90036
Lawrence G. Zechter................. -- 48,050 * 17,862 30,188 *
20115 Pingree Way
Yorba Linda, CA 92887
John J. Laskey...................... -- 37,735 * 13,200 24,535 *
1127 Positano
Anaheim Hills, CA 92808
Jennifer Arme Johns................. -- 37,735 * 13,207 24,528 *
1327 Sunset Plaza Drive
Los Angeles, CA 90069
MLW Associates(11).................. -- 36,437 * 3,773 32,664 *
820 Arden Road
Pasadena, CA 91106
Geoffrey W. Haggart................. 31,922 31,922 * -- 31,922 *
A. Barry Patmore.................... -- -- -- -- -- --
All directors and executive officers
as a group (11 persons)........... 1,211,181 5,002,807 67.0 388,195 4,614,612 46.2
</TABLE>
- ---------------
( * ) Represents beneficial ownership of less than one percent.
(1) Includes 681,980 shares held by Norwest Equity Partners V. Itasca Partners
is the general partner of Norwest Equity Partners IV and has sole voting
and investment power of the shares. The managing partners of Itasca
Partners are deemed to beneficially own the shares held by Norwest Equity
Partners IV and therefore have voting and investment power of the shares.
Itasca Partners V, LLP is the general partner of Norwest Equity Partners V
and has sole voting and
59
<PAGE> 62
investment power of the shares. The managing partners of Itasca Partners V,
LLP are deemed to beneficially own the shares held by Norwest Equity
Partners V, and therefore have voting and investment power of the shares.
The general partners of Itasca Partners and Itasca Partners V, LLP disclaim
beneficial ownership of the shares held by Norwest Equity Partners IV and
Norwest Equity Partners V, except to the extent of their direct pecuniary
interest in the shares.
(2) Includes 1,911,390 held by the entities listed in note 1 above. Mr. Hall is
a general partner of Itasca Partners and Itasca Partners V, LLP, the
general partners of these entities. Mr. Hall disclaims beneficial ownership
of the shares held by the entities listed in note 1 above, except to the
extent of his direct pecuniary interest in the shares.
(3) Includes 8,844 shares held by Dr. Schuster and 1,374,865 shares held by the
entities listed in note 4 below. Dr. Schuster disclaims beneficial
ownership of the shares held by the entities listed in note 4 below.
(4) Brentwood VI Ventures, L.P. is the general partner of Brentwood Associates
VI, L.P. The general partners of Brentwood VI Ventures, L.P. are deemed to
beneficially own the shares held by Brentwood Associates VI, L.P. and
therefore have voting and investment power of the shares. The general
partners of Brentwood VI Ventures, L.P. disclaim beneficial ownership of
the shares, except to the extent of their direct pecuniary interest in the
shares. Dr. Schuster, a director of Continuus, is affiliated with Brentwood
VI Ventures, L.P.
(5) All 1,078,167 shares are subject to a senior secured convertible debenture
with a conversion price of $5.57 per share which may be converted at any
time at the option of London Pacific.
(6) ATV Associates III L.P. is the general partner of Advanced Technology
Ventures III. The general partners of ATV Associates III L.P. are deemed to
beneficially own the shares held by Advanced Technology Ventures III L.P.
and therefore have voting and investment power of the shares. The general
partners of ATV Associates III L.P. disclaim beneficial ownership of the
shares, except to the extent of their direct pecuniary interest in the
shares.
(7) Includes 424,551 shares held by the Cox Living Trust.
(8) Includes 26,124 shares held by Accel Investors '95 L.P., 11,542 shares held
by Accel Keiretsu L.P. and 13,363 shares held by Ellmore C. Patterson
Partners. The general partner of Accel IV L.P. is Accel IV Associates L.P.
The general partners of Accel IV Associates L.P. are deemed to beneficially
own the shares held by Accel IV L.P. and therefore have voting and
investment power of the shares. The general partners of Accel IV Associates
L.P. disclaim beneficial ownership of the shares, except to the extent of
their direct pecuniary interest in the shares. The general partner of Accel
Keiretsu L.P. is Accel Partners & Co. The co-owners of Accel Partners & Co.
are deemed to beneficially own the shares held by Accel Keiretsu L.P. and
therefore have voting and investment power of the shares. The general
partners of Accel Investors '95 L.P. are deemed to beneficially own the
shares held by Accel Investors '95 L.P. and therefore have voting and
investment power of the shares. The general partners of Accel Investors '95
L.P. disclaim beneficial ownership of the shares, except to the extent of
their direct pecuniary interest in the shares. The general partner of
Ellmore C. Patterson Partners has sole voting and investment power of the
shares held by Ellmore C. Patterson Partners.
(9) Includes 137,966 shares held by Sol Zechter as Trustee of the Sheila Claire
Zechter Annuity Trust, 137,966 shares held by Sol Zechter as Trustee of the
Sol Zechter Annuity Trust and 272,508 shares held by Sol Zechter as Trustee
of the Sol Zechter Family Trust.
(10) Includes 7,547 shares held by Richard Harlan Zechter, as Custodian of
Caroline Elisa Zechter, UGMA and 7,547 shares held by Richard Harlan
Zechter as Custodian of Mariela Adrienna Zechter, UGMA.
(11) Includes 3,733 held by Nywood Wu. The general partners of MLW Associates
have voting and investment power of the shares held by MLW Associates.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, our authorized capital stock will
consist of 30,000,000 shares of common stock, $.001 par value, and 5,000,000
shares of preferred stock, $.001 par value.
COMMON STOCK
As of March 31, 1999, there were 6,258,219 shares of common stock outstanding,
after giving effect to the conversion of all outstanding shares of preferred
stock into 4,306,454 shares of common stock and assuming the issuance of 278,125
shares of common stock upon the conversion and exercise of warrants to purchase
our Series E preferred stock we issued on January 23, 1997 and on May 19, 1997
upon the completion of this offering.
The holders of common stock are entitled to one vote per share on all matters to
be voted on by the stockholders. Subject to preferences that may be applicable
to any outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available for dividends. In the event we
liquidate, dissolve or wind up, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock. Holders of common
stock have no preemptive, conversion, subscription or other rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The shares
of common stock to be sold in the offering will be fully paid and
non-assessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 4,306,454 shares of common stock. See Note 8 of Notes to
Consolidated Financial Statements for a description of the currently outstanding
preferred stock. Following the conversion, our certificate of incorporation will
be amended and restated to delete all references to our currently outstanding
shares of preferred stock. Under the certificate of incorporation we will
operate under upon our reincorporation in Delaware, the Board has the authority,
without further action by stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges, qualifications and restrictions granted to or imposed upon this
"blank-check" preferred stock, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preference and
sinking fund terms, any or all of which may be greater than the rights of the
common stock. The issuance of preferred stock could adversely affect the voting
power of holders of common stock and reduce the likelihood that the holders of
our common stock will receive dividend payments and payments upon liquidation.
Such issuance could have the effect of decreasing the market price of the common
stock. The issuance of preferred stock could have the effect of delaying,
deterring or preventing a change in control. We have no present plans to issue
any shares of preferred stock.
WARRANTS
Warrants outstanding to purchase shares of our common stock are listed below:
- 720,148 shares at an exercise price of $0.66 per share,
terminating December 31, 2001;
- 221,736 shares at an exercise price of $1.53 per share,
terminating May 29, 2003;
- 15,849 shares at an exercise price of $3.47 per share,
terminating five years from the closing of this offering;
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<PAGE> 64
- 38,268 shares of an exercise price of $5.57 per share,
terminating five years from the closing of this offering;
- 37,735 shares at an exercise price of $5.57 per share,
terminating June 4, 2001;
- 278,125 shares at an exercise price of $5.57 per share,
terminating upon the closing of this offering;
- 53,906 shares at an exercise price of $3.40 per share,
terminating April 22, 2002; and
- 20,753 shares at an exercise price of $3.40 per share,
terminating April 30, 2006.
The holder of the warrant to purchase 37,735 shares of common stock at an
exercise price of $5.57 per share is entitled to an adjustment in the exercise
price and the number of shares issuable upon its exercise, pursuant to the
Antidilution Agreement dated June 4, 1996. Under the terms of the Antidilution
Agreement, if we issue additional common stock for consideration less than the
then-effective exercise price of the warrant, subject to certain exceptions, the
exercise price of the warrant shall be reduced and the number of shares issuable
upon exercise shall be increased. The holders of the warrants to purchase 53,906
shares at an exercise price of $3.40 per share are entitled to an aggregate of
35,936 additional warrants to purchase common stock in the event the holders are
required to make a payment to Silicon Valley Bank in connection with the Loan
Agreement dated April 22, 1999.
SENIOR SECURED CONVERTIBLE DEBENTURE
We have outstanding a Senior Secured Convertible Debenture in principal amount
of $6,000,000, due September 23, 2002, held by London Pacific Life & Annuity
Company. Interest on the debenture, which accrues at a rate of 12%, is payable
quarterly in arrears. Upon the earlier to occur of (i) the closing of an
underwritten public offering with an aggregate offering price of at least
$15,000,000 and at a per share offering price of at least $13.91 and (ii) a
change in control, we must repay all outstanding principal of the debenture plus
any accrued interest on the debenture, or, at the discretion of London Pacific,
convert the debenture into our common stock at a purchase price of $5.57 per
share. If the debenture is converted upon a change in control, we are required
to pay London Pacific an additional fee equal to 12% of the outstanding
principal amount of the debenture for each year or portion of a year the
debenture has been in existence until the date our stockholders receive a
distribution from the change in control. The debenture is otherwise convertible
at the option of London Pacific at the same conversion price, $5.57 per share,
subject to adjustment upon the occurrence of a reverse stock split or the
issuance of securities at a price per share less than the conversion price. The
debenture is secured by all our assets. Under the debenture, a change of control
is:
- The merger or consolidation of Continuus with or into another
corporation;
- The merger of any corporation into Continuus resulting in a
distribution to our shareholders of cash or the securities of
another corporation; or
- A sale of all or substantially all our assets.
REGISTRATION RIGHTS
After this offering, the holders of 6,047,701 shares of common stock and common
stock issuable upon conversion of a debenture and upon exercise of warrants will
be entitled to rights with respect to the registration of the 6,047,701 shares
under the Securities Act and under the terms of the Amended and Restated
Investor Rights Agreement dated March 4, 1994, as last amended on December 30,
1997. Commencing with the date that is 180 days after this offering, the holders
may require us to file a registration statement under the Securities Act with
respect to their shares, and we are required
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<PAGE> 65
to use our best efforts to effect this required registration. Furthermore, the
holders may require us to register their shares on Form S-3 when Form S-3
becomes available to us. Such registration rights terminate on the seventh
anniversary of the effective date of this offering. Under the terms of the
Investors' Rights Agreement, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, the holders of 7,022,844 shares
of common stock and common stock issuable upon conversion of a debenture and
exercise of warrants are entitled to notice of our intent to register shares and
are entitled to include shares in the registration. The Investors' Rights
Agreement limits registration rights in some situations.
In addition, the holder of a warrant to purchase 37,735 shares of common stock
is entitled to rights with respect to the registration of the 37,735 shares
under the Securities Act, pursuant to the Registration Rights Agreement dated
June 4, 1998. Under the terms of the Registration Rights Agreement, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, the holder of the warrant is entitled to notice of the
proposed registration and to include shares in the registration. The
Registration Rights Agreement limits registration rights in some situations.
Generally, we must bear all registration and selling expenses incurred in
connection with any of the registrations described above. The registration
rights under the Investors' Rights Agreement are also subject to conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in the proposed registration and the right of the
board of directors to defer registration for up to six months because a deferral
is in our best interests.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years, did own, 15% or more of the
corporation's outstanding voting stock. The existence of this provision would be
expected to have anti-takeover effects with respect to transactions not approved
in advance by the board of directors, such as discouraging takeover attempts
that might result in a premium over the market price of the common stock.
Our certificate of incorporation provides that any action required or permitted
to be taken by our stockholders must be effected at a duly called annual or
special meeting of stockholders and may not be effected by any consent in
writing. Our certificate of incorporation also specifies that the authorized
number of directors may be changed only by resolution of the board of directors.
In addition, our bylaws provide that special meetings of our stockholders may be
called only by the chairman of the board, president or the board of directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors. These and other provisions in our certificate of incorporation and
bylaws could delay or make more difficult transactions involving an actual or
potential change in control or our management which include transactions in
which stockholders might otherwise receive a premium for their shares over then
current prices. Additionally, Delaware law and our charter documents may limit
the ability of stockholders to remove our current management or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of our common stock.
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<PAGE> 66
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Norwest Bank Minnesota,
N.A.
LISTING
We have applied to list our common stock on the Nasdaq National Market under the
trading symbol "CNSW." We have not applied to list our common stock on any other
exchange or quotation system.
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<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after the offering because
of the contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 9,358,219 shares of common stock
outstanding, assuming no exercise of currently outstanding options or warrants,
but including warrants to purchase an aggregate of 278,125 shares of convertible
Series E preferred stock to be exercised upon the closing of this offering. Of
these shares:
- The 3,100,000 shares sold in this offering, plus any additional
shares sold upon exercise of the underwriters' over-allotment
option, will be freely transferable without restriction under
the Securities Act of 1933, unless they are held by our
"affiliates" as that term is used under the Securities Act and
the regulations promulgated under the Securities Act.
- Approximately 5,688,326 shares of common stock plus
approximately 1,177,735 shares issuable upon exercise of vested
options will be eligible for sale under Securities Act Rules 144
and 701 on the ninety-first day after the effectiveness of this
offering. Our stockholders holding an aggregate of 5,430,681 of
these 5,688,326 shares of common stock and our stockholders who
beneficially own 1,159,582 shares issuable upon exercise of
vested options have agreed pursuant to lock-up agreements with
the underwriters, subject to limited exceptions including bona
fide gifts to individuals or distributions to affiliated limited
partners or stockholders who agree to the terms of the lock-up
agreements, not to sell or otherwise dispose of any of the
shares held by them for a period of 180 days after the effective
date of this offering without the prior written consent of U.S.
Bancorp Piper Jaffray.
- At the end of such 180-day period, 5,430,681 shares of common
stock together with approximately 1,279,322 shares issuable upon
exercise of vested options, will be eligible for immediate
resale, subject to compliance with Rule 144 and Rule 701.
The holders of 6,047,701 shares of common stock and common stock issuable upon
conversion of a debenture and exercise of all warrants outstanding as of the
effective date of this offering may require Continuus to register their shares
under the Securities Act for resale to the public beginning 180 days from the
effective date of this offering. If these holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, the sales could have an adverse effect on the market price
for our common stock. The holders of 7,060,579 shares of common stock and common
stock issuable upon conversion of a debenture and exercise of warrants may
require us to include some shares when we register shares for resale to the
public for the benefit of Continuus or the benefit of another security holder
exercising its demand registration rights. If we were required to include some
shares held by holders pursuant to the exercise of their piggyback registration
rights in a future registration, the holders' sales may have an adverse effect
on our ability to raise needed capital. In addition, we expect to file a
registration statement on Form S-8 registering a total of approximately
4,457,547 shares of common stock subject to outstanding stock options or
reserved for issuance under our stock option plans. Such registration statement
is expected to be filed and to become effective as soon as practicable after the
effective date of this offering. Shares registered under the Form S-8
registration statement will, subject to Rule 144 volume limitations
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<PAGE> 68
applicable to our affiliates, be available for sale in the open market, unless
such shares are subject to vesting restrictions or the lock-up agreements
described above.
In general, under Rule 144 as in effect on the date of this prospectus,
beginning 90 days after the effective date of the offering, one of our
affiliates, a person, or persons whose shares are aggregated, who has
beneficially owned restricted shares, as defined under Rule 144, for at least
one year is entitled to sell within any three-month period a number of shares
that does not exceed greater of:
- one percent of the then outstanding shares of our common stock
or
- the average weekly trading volume of our common stock in the
Nasdaq National Market during the four calendar weeks
immediately preceding the date on which notice of the sale is
filed with the Commission.
Sales pursuant to Rule 144 are subject to requirements relating to the manner of
sale, notice, and the availability of current public information about
Continuus. A person, or persons whose shares are aggregated, who was not one of
our affiliates at any time during the 90 days immediately preceding the sale and
who has beneficially owned restricted shares for at least two years is entitled
to sell the restricted shares under Rule 144(k) without regard to the
limitations described above.
One of our employees, officers, directors or consultants who purchased or was
awarded shares or options to purchase shares pursuant to a written compensatory
plan or contract is entitled to rely on the resale provisions of Rule 701 under
the Securities Act, which permits our affiliates and non-affiliates to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the date of this prospectus.
In addition, non-affiliates may sell Rule 701 shares without complying with the
public information, volume and notice provisions of Rule 144.
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UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray Inc. and CIBC
Oppenheimer Corp. are acting as representatives have agreed to buy, subject to
the terms of the purchase agreement, the number of shares listed opposite their
names below. The underwriters are committed to purchase and pay for all of the
shares if any are purchased, other than those shares covered by the
over-allotment option below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
U.S. Bancorp Piper Jaffray Inc..............................
CIBC Oppenheimer Corp.......................................
---------
Total............................................. 3,100,000
=========
</TABLE>
The underwriters have advised us and the selling stockholders that they propose
to offer the shares to the public at $ per share. The underwriters propose
to offer the shares to dealers at the same price less a concession of not more
than $0. per share. The underwriters may allow and the dealers may
reallow a concession of not more than $0. per share on sales to
other brokers and dealers. After the offering, these figures may be changed by
the underwriters.
We have granted to the underwriters an option to purchase up to an additional
465,000 shares of common stock from us, at the same price to the public, and
with the same underwriting discount, as set forth in the table above. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus, but only to cover over-allotments, if any. To the
extent the underwriters exercise the option, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to purchase under the
purchase agreement.
The following table shows the underwriting fees to be paid to the underwriters
in connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share........................................ $ $
Total............................................ $ $
</TABLE>
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect of those liabilities.
We and each of our directors, executive officers, certain stockholders and the
selling stockholders have agreed to restrictions on our ability to sell
additional shares of our common stock for a period of 180 days after the date of
this prospectus. We have agreed not to directly or indirectly offer for sale,
sell, contract to sell, grant any option for the sale of, or otherwise issue or
dispose of, any shares of common stock, options or warrants to acquire shares of
common stock, or any related security or instrument, without the prior written
consent of U.S. Bancorp Piper Jaffray. The agreements provide exceptions for:
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<PAGE> 70
- sales to underwriters pursuant to the purchase agreement,
- our sales in connection with the exercise of options granted and
the granting of options to purchase shares of common stock under
the our existing stock option plans and
- certain other exceptions.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus was negotiated by us and the underwriters. Among the
factors considered in determining the initial public offering price include:
- the history of and the prospects for the industry in which we
compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future earnings;
- the recent market prices of securities of generally comparable
companies; and
- the general condition of the securities markets at the time of
the offering.
There can be no assurance that the initial public offering price of the common
stock will correspond to the price at which the common stock will trade in the
public market subsequent to this offering or that an active public market for
the common stock will develop and continue after this offering.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during and
after the offering. Specifically, the underwriters may over-allot or otherwise
create a short position in the common stock for their own account by selling
more shares of common stock than have been sold to them by us and the selling
stockholders. The underwriters may elect to cover their short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids. If penalty bids are imposed, selling concessions allowed to syndicate
members or other broker-dealers participating in the offering are reclaimed if
shares of common stock previously distributed in the offering are repurchased,
whether in connection with stabilization transactions or otherwise. The effect
of these transactions may be to stabilize or maintain the market price of the
common stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also effect the price of the common
stock to the extent that it discourages resales of the common stock. The
magnitude or effect of any stabilization or other transactions is uncertain.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered in this prospectus will be passed upon
for Continuus by Cooley Godward LLP, San Diego, California. Certain legal
matters in connection with the offering will be passed upon for the underwriters
by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
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<PAGE> 71
EXPERTS
The Consolidated Financial Statements and related financial schedule as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this prospectus and registration statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which we have included in this prospectus and registration statement
and are given upon the authority of Deloitte & Touche LLP as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the stock we
are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities. Our
SEC filings are also available at the office of the Nasdaq National Market. For
further information on obtaining copies of our public filings at the Nasdaq
National Market, you should call (212) 656-5060.
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<PAGE> 72
CONTINUUS SOFTWARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997, 1998
and March 31, 1999 (Unaudited)............................ F-3
Consolidated Statements of Operations for the Years ended
December 31, 1996, 1997 and 1998 and the Three months
ended March 31, 1998 and 1999 (Unaudited)................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years ended December 31, 1996, 1997 and 1998 and
the Three months ended March 31, 1999 (Unaudited)......... F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1997 and 1998 and the Three months
ended March 31, 1998 and 1999 (Unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Continuus Software Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of Continuus
Software Corporation and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Continuus Software
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Costa Mesa, California
January 26, 1999, except for Note 14 as to
which the date is April 30, 1999 and
paragraphs 3 and 4 of Note 1 and
paragraph 1 of Note 10, as to
which the date is July , 1999
The accompanying consolidated financial statements include the effects of a
reverse stock split in connection with the reincorporation in the State of
Delaware approved by the Company's Board of Directors on April 20, 1999,
anticipated to be effective prior to the closing of this offering. The above
opinion is in the form which will be signed by Deloitte & Touche LLP upon
consummation of the reverse stock split and reincorporation in the State of
Delaware which is described in Note 1 of the notes to the consolidated financial
statements and assuming that from January 26, 1999 to the date of such reverse
stock split and reincorporation, no other events have occurred that would affect
the accompanying financial statements and notes thereto.
Deloitte & Touche LLP
Costa Mesa, California
July 9, 1999
F-2
<PAGE> 74
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999 PRO FORMA
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 6,175 $ 2,452 $ 2,357
Accounts receivable, less allowance for doubtful
accounts of $134 (1997), $339 (1998), and $397
(1999)............................................ 7,667 7,067 7,858
Prepaid expenses and other current assets........... 876 777 843
-------- -------- -------
Total current assets.............................. 14,718 10,296 11,058
Property, net....................................... 1,982 1,691 1,553
Other Assets........................................ 953 761 712
-------- -------- -------
Total assets...................................... $ 17,653 $ 12,748 $13,323
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.................................... $ 1,270 $ 796 $ 1,116
Accrued liabilities................................. 3,207 3,568 3,639
Deferred revenue.................................... 4,809 4,400 4,785
Current portion of capital lease obligations........ 980 699 692
-------- -------- -------
Total current liabilities................. 10,266 9,463 10,232
Capital Lease Obligations, net of current portion... 723 440 376
Convertible Note Payable............................ 6,000 6,000 6,000
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding
Series A convertible preferred stock, no par value;
2,291,518 shares authorized, 2,275,659 shares
issued and outstanding at December 31, 1997, 1998
and March 31, 1999................................ 7,900 7,900 7,900
Series B convertible preferred stock, no par value;
451,243 shares authorized, issued and outstanding
at December 31, 1997, 1998 and March 31, 1999..... 1,769 1,769 1,769
Series C convertible preferred stock, no par value;
804,667 shares authorized, 747,525 shares issued
and outstanding at December 31, 1997, 1998 and
March 31, 1999.................................... 4,118 4,118 4,118
Series D convertible preferred stock, no par value;
361,178 shares authorized, issued and outstanding
at December 31, 1997, 1998 and March 31, 1999..... 1,879 1,879 1,879
Series E convertible preferred stock, no par value;
783,019 shares authorized, 470,849 issued and
outstanding at December 31, 1997, 1998 and March
31, 1999.......................................... 2,352 2,352 2,352
Common stock $.001 par value; 30,000,000 shares
authorized, 1,604,272, 1,630,320 and 1,673,640
shares issued and outstanding at December 31,
1997, 1998 and March 31, 1999, actual, 6,258,219
pro forma shares.................................. 2 2 2 $ 6
Additional paid in capital.......................... 1,851 1,898 2,007 21,817
Warrants to purchase common stock................... 114 114 114 114
Warrants to purchase Series E convertible preferred
stock............................................. 248 248 248 --
Accumulated deficit................................. (19,569) (23,435) (23,674) (23,674)
-------- -------- ------- -------
Total stockholders' equity (deficit)...... 664 (3,155) $(3,285) $(1,737)
-------- -------- ------- =======
Total liabilities and stockholders' equity
(deficit)............................... $ 17,653 $ 12,748 $13,323
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 75
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................................. $ 9,611 $13,829 $14,429 $3,745 $4,172
Services.......................................... 6,488 9,434 13,007 3,065 4,067
------- ------- ------- ------ ------
Total revenues............................ 16,099 23,263 27,436 6,810 8,239
Cost of revenues:
Software licenses................................. 775 650 654 167 156
Services.......................................... 4,207 6,007 7,446 1,681 1,945
------- ------- ------- ------ ------
Total cost of revenues.................... 4,982 6,657 8,100 1,848 2,101
------- ------- ------- ------ ------
Gross profit........................................ 11,117 16,606 19,336 4,962 6,138
Operating expenses:
Sales and marketing............................... 11,776 12,079 15,469 3,577 4,098
Research and development.......................... 3,473 3,574 4,493 1,065 1,233
General and administrative........................ 1,720 1,896 2,483 749 704
Compensation expense related to stock option
grants......................................... -- -- -- -- 41
------- ------- ------- ------ ------
Total operating expenses.................. 16,969 17,549 22,445 5,391 6,076
------- ------- ------- ------ ------
Income (loss) from operations....................... (5,852) (943) (3,109) (429) 62
Other expense, net.................................. (198) (637) (750) (207) (296)
------- ------- ------- ------ ------
Loss before income tax provision.................... (6,050) (1,580) (3,859) (636) (234)
Income tax provision................................ 3 3 7 13 5
------- ------- ------- ------ ------
Net loss............................................ $(6,053) $(1,583) $(3,866) $ (649) $ (239)
======= ======= ======= ====== ======
Basic and diluted net loss per share................ $ (4.06) $ (1.00) $ (2.39) $(0.40) $(0.15)
======= ======= ======= ====== ======
Weighted average shares outstanding................. 1,491 1,576 1,618 1,605 1,640
======= ======= ======= ====== ======
Pro forma basic and diluted net loss per share...... $ (0.62) $(0.04)
======= ======
Pro forma weighted average shares outstanding....... 6,202 6,222
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 76
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
WARRANTS
TO PURCHASE
CONVERTIBLE WARRANTS SERIES E
PREFERRED STOCK(1) COMMON STOCK TO PURCHASE CONVERTIBLE
------------------- ------------------- COMMON PREFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK STOCK DEFICIT TOTAL
--------- ------- ---------- ------ ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........ 3,474,427 $13,787 1,479,117 $1,702 $ -- $ -- $(11,933) $ 3,556
Issuance of preferred stock and
warrants........................ 199,684 980 -- -- 114 -- -- 1,094
Issuance of common stock.......... -- 34,642 46 -- -- -- 46
Conversion of debt to equity...... 161,494 899 -- -- -- -- -- 899
Net loss.......................... -- -- -- -- -- -- (6,053) (6,053)
--------- ------- ---------- ------ -------- -------- -------- -------
Balance at December 31, 1996...... 3,835,605 15,666 1,513,759 1,748 114 -- (17,986) (458)
Issuance of preferred stock and
warrants........................ 93,190 415 -- -- -- 83 -- 498
Issuance of common stock.......... -- -- 90,443 105 -- -- -- 105
Conversion of debt to equity...... 377,659 1,937 -- -- -- 165 -- 2,102
Net loss.......................... -- -- -- -- -- -- (1,583) (1,583)
--------- ------- ---------- ------ -------- -------- -------- -------
Balance at December 31, 1997...... 4,306,454 18,018 1,604,202 1,853 114 248 (19,569) 664
Issuance of common stock.......... -- -- 26,048 47 -- -- -- 47
Net loss.......................... -- -- -- -- -- -- (3,866) (3,866)
--------- ------- ---------- ------ -------- -------- -------- -------
Balance at December 31, 1998...... 4,306,454 18,018 1,630,250 1,900 114 248 (23,435) (3,155)
Unaudited:
Issuance of common stock.......... -- -- 43,390 68 -- -- -- 68
Compensation expense related to
stock option grants............. -- -- -- 41 -- -- -- 41
Net loss.......................... -- -- -- -- -- -- (239) (239)
--------- ------- ---------- ------ -------- -------- -------- -------
Balance at March 31, 1999......... 4,306,454 $18,018 1,673,640 $2,009 $ 114 $ 248 $(23,674) $(3,285)
========= ======= ========== ====== ======== ======== ======== =======
</TABLE>
- ---------------
(1) See Note 8 of Notes to the Consolidated Financial Statements for the details
of each series of convertible preferred stock.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 77
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................... $(6,053) $(1,583) $(3,866) $ (649) $ (239)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for doubtful accounts........................... 44 62 205 13 58
Depreciation and amortization............................. 1,296 1,480 1,632 391 308
Loss (gain) on disposition of property.................... 13 (2) (1) (1) --
Compensation expense related to stock option grants....... -- -- -- -- 41
Changes in operating assets and liabilities: -- -- -- -- --
Accounts receivable..................................... (1,398) (3,798) 395 1,711 (849)
Inventories............................................. 273 -- -- -- --
Prepaid expenses and other assets....................... (44) (672) (69) (138) (17)
Accounts payable........................................ (264) 94 (474) 42 320
Accrued liabilities..................................... 291 1,573 361 (622) 71
Deferred revenue........................................ 849 2,396 (409) (544) 385
Other long-term liabilities............................. (77) -- -- -- --
------- ------- ------- ------ ------
Net cash provided by (used in) operating activities... (5,070) (450) (2,226) 203 78
Cash Flows From Investing Activities:
Purchases of property....................................... (208) (105) (452) (23) (29)
Proceeds from disposition of property....................... 33 12 13 6 --
------- ------- ------- ------ ------
Net cash used in investing activities................. (175) (93) (439) (17) (29)
Cash Flows From Financing Activities:
Repayments on notes payable................................. $ (100) $ (100) $ -- $ -- $ --
Borrowings (payments) on line of credit..................... 1,043 (1,043) -- -- --
Payments on obligations under capital leases................ (556) (961) (1,105) (282) (212)
Proceeds from issuance of convertible debt.................. 1,889 1,030 -- -- --
Proceeds from issuance of common stock...................... 46 105 47 17 68
Proceeds from issuance of preferred stock and warrants...... 1,094 498 -- -- --
Proceeds from issuance of note payable...................... -- 6,000 -- -- --
------- ------- ------- ------ ------
Net cash provided by (used in) financing activities... 3,416 5,529 (1,058) (265) (144)
------- ------- ------- ------ ------
Net (Decrease) Increase In Cash and Cash Equivalents........ (1,829) 4,986 (3,723) (79) (95)
Cash and Cash Equivalents, beginning of period.............. 3,018 1,189 6,175 6,175 2,452
------- ------- ------- ------ ------
Cash and Cash Equivalents, end of period.................... $ 1,189 $ 6,175 $ 2,452 $6,096 $2,357
======= ======= ======= ====== ======
Supplementary Disclosures of Cash Flow Information
Cash paid during the year for:
Interest.............................................. $ 167 $ 278 $ 880 $ 226 $ 215
======= ======= ======= ====== ======
Income taxes.......................................... $ 6 $ 282 $ 18 $ 13 $ 5
======= ======= ======= ====== ======
Noncash Items:
Acquisition of property through capital lease............... $ 1,234 $ 1,080 $ 541 $ 136 $ 141
Conversion of notes payable and accrued interest to
preferred stock........................................... $ 899 $ 2,102 $ -- $ -- $ --
Issuance of warrants to purchase common stock............... $ 114 $ -- $ -- $ -- $ --
Issuance of warrants to purchase Series E convertible
preferred stock........................................... $ -- $ 248 $ -- $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 78
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Continuus Software Corporation and subsidiaries (the
Company) is a leading provider of software products and services for e-asset
management, an emerging market segment that enables organizations to more
effectively develop, enhance, deploy and manage their Internet and enterprise
software systems. The Company's product line consists of the Continuus
WebSynergy Suite and the Continuus Change Management Suite which simplify the
development of complex and demanding Internet and software applications.
Products are sold direct, as well as through resellers, to both commercial and
government markets. The Company also offers Continuus Professional Services
which include consulting, training and maintenance services. The Company grants
credit to its customers in a variety of industries.
Unaudited Information -- The information set forth in these consolidated
financial statements as of March 31, 1999 and for the three months ended March
31, 1998 and March 31, 1999 is unaudited and reflects all adjustments,
consisting only of normal recurring adjustments, that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company for the period. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full fiscal year.
Stock Split -- In connection with a proposed public offering of the Company's
common stock, on April , 1999 the Company's Board of Directors and on June ,
1999 the Company's stockholders, approved a 1-for-2.65 reverse stock split of
the Company's common stock. All share, per share and conversion amounts relating
to common stock, preferred stock, warrants and stock options included in the
accompanying consolidated financial statements and footnotes have been restated
to reflect the reverse stock split for all periods presented.
Reincorporation -- The Company reincorporated in the State of Delaware on July
, 1999.
Principles of Consolidation -- The consolidated financial statements include the
accounts of Continuus Software Corporation (Continuus) and its wholly owned
subsidiaries, Continuus Software Limited (UK), Continuus Software GmbH
(Germany), Continuus Software SARL (France), and Continuus Software Company
Limited (Ireland). All intercompany balances and transactions have been
eliminated in the accompanying consolidated financial statements.
Foreign Currency Translation -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the United
States dollar is considered to be the functional currency for the Company's
foreign subsidiaries, and translation adjustments are included in the Company's
consolidated statements of operations. Historically, such translation
adjustments have not been significant.
Cash and Cash Equivalents -- Cash and cash equivalents represent highly liquid
securities consisting primarily of United States treasury bills, with original
maturities of less than 90 days.
Property -- Computer equipment, furniture and fixtures, and leasehold
improvements are stated at cost, net of accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over
estimated useful lives of the related assets, generally ranging from three to
five years. Leasehold improvements are amortized using the straight-line method
over the life of the lease.
Other Assets -- At March 31, 1999 and December 31, 1998, other assets consist
primarily of the long-term portion of financing costs as well as refundable
deposits. The Company is amortizing
F-7
<PAGE> 79
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
deferred financing costs using the effective interest method over the term of
the related financing agreement, which is five years.
Long-Lived Assets -- The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. In accordance with
SFAS No. 121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be recoverable.
There was no impairment of the value of such assets for the year ended December
31, 1998 or the three months ended March 31, 1999.
Fair Value of Financial Instruments -- The recorded amounts of financial assets
and liabilities at December 31, 1997 and 1998 and March 31, 1999 approximate
fair value, based on the Company's incremental borrowing rate or due to the
relatively short period of time between origination of the instruments and their
expected realization.
Revenue Recognition:
During October 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which provides
guidance in recognizing revenue on software transactions. SOP 97-2 is effective
for transactions entered into in fiscal years beginning after December 15, 1997,
and supersedes SOP 91-1. The Company adopted this statement, as amended, for the
year ended December 31, 1998.
Software Licenses, Services and Post-Contract Customer Support -- Revenues from
sales of software licenses, which generally do not contain multiple elements,
are recognized upon shipment of the related product if the requirements of SOP
97-2, as amended, are met. If the requirements of SOP 97-2, including evidence
of an arrangement, client acceptance, a fixed or determinable fee,
collectibility or vendor specific objective evidence about the value of an
element, are not met at the date of shipment, revenue recognition is deferred
until such items are known or resolved. Revenues from sales to distributors are
recognized upon shipment when the distributor has a sales agreement with an
end-user. Revenue from service and post-contract customer support is deferred
and recognized ratably over the term of the contract.
License Agreements -- The Company's products include software licensed from
third parties. A five-year license agreement with a third party which grants the
Company the right to embed the licensor's database software into the Company's
products is scheduled to expire in December 1999. The cost of the license has
been amortized on a straight line basis over five years beginning in fiscal year
1995. At March 31, 1999, $360,000 of such costs are included in other current
assets and will be fully amortized by December 31, 1999. Termination of this
license agreement could have a material adverse effect on the Company's ability
to deliver its products and a material effect on the Company's operating results
and financial condition until alternative database software is selected and
integrated into the Company's products.
Software Development Costs -- Costs incurred in the research and development of
new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased or Otherwise Marketed. Because the Company believes that its
current process for developing software is essentially completed concurrently
with the establishment of technological
F-8
<PAGE> 80
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
feasibility, no software development costs have been capitalized as of December
31, 1997, 1998 and March 31, 1999.
Income Taxes -- Income taxes are recorded in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement requires the recognition of deferred
tax assets and liabilities to reflect the future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and tax
bases of the Company's assets and liabilities result in a deferred tax asset,
SFAS No. 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
Stock-based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Net Loss Per Share and Pro Forma Net Loss Per Share -- The Company has adopted
SFAS No. 128, Earnings per Share, which replaces the presentation of "primary"
earnings per share with "basic" earnings per share and the presentation of
"fully diluted" earnings per share with "diluted" earnings per share. Basic
earnings per share is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
by including other common stock equivalents, including stock options, warrants
and convertible preferred stock, in the weighted average number of common shares
outstanding for a period, if dilutive.
Pro forma basic earnings per share are based upon the weighted average number of
common shares outstanding and the pro forma effect of the conversion of all
outstanding shares of preferred stock into common stock and the exercise of
warrants to purchase 278,125 shares of Series E preferred stock that will
convert to shares of common stock (Note 8). Pro forma diluted earnings per share
is based upon the weighted average number of common and common equivalent shares
for each period presented and the pro forma effect of the conversion of all
outstanding shares of preferred stock into common stock and the Series E
warrants discussed above (Note 8). Common equivalent shares include stock
options and warrants using the treasury stock method but have been excluded from
the diluted earnings per share calculation as the impact would be antidilutive.
Pro Forma Information -- The Company is preparing for an initial public offering
of its common stock which, upon completion, will result in the conversion of all
outstanding shares of preferred stock into shares of common stock (Note 8). The
accompanying pro forma information, which is unaudited, gives effect to the
conversion of all outstanding shares of preferred stock into common stock at or
prior to the closing of the offering and the receipt of $1,548 from holders of
warrants to purchase 278,125 shares of Series E preferred stock, which is
convertible to common stock, upon the exercise of such warrants upon the closing
of the initial public offering.
Concentration of Credit Risk -- The Company sells its products primarily to
large commercial companies. Credit is extended based on an evaluation of the
customer's financial condition, and collateral is generally not required. The
Company also evaluates its credit customers for potential credit losses.
F-9
<PAGE> 81
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Use of Estimates -- The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
New Accounting Pronouncements:
For the year ended December 31, 1998, the Company adopted SFAS No. 131,
Reporting Comprehensive Income. There was no difference between the net loss and
the comprehensive net loss for the years ended December 31, 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999.
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company
has disclosed in Note 11 certain information about operating segments and
certain information about the Company's revenue types, geographic areas to which
the Company sells its products, and major customers.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company is required to adopt
effective in its fiscal year 2000. SFAS No. 133 will require the Company to
record all derivatives on the balance sheet at fair value. The Company does not
currently engage in hedging activities but will continue to evaluate the effects
of adopting SFAS No. 133. The Company will adopt SFAS No. 133 in its fiscal year
2000.
2. PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment............................... $ 4,045 $ 4,732 $4,896
Furniture and fixtures........................... 364 498 504
Leasehold improvements........................... 72 213 212
------- ------- ------
4,481 5,443 5,612
Less accumulated depreciation and amortization... (2,499) (3,752) (4,059)
------- ------- ------
Property, net.................................... $ 1,982 $ 1,691 $1,553
======= ======= ======
</TABLE>
F-10
<PAGE> 82
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid contract costs........................... $ 360 $ -- $ --
Refundable deposits.............................. 169 450 430
Deferred financing costs, net.................... 424 311 282
------- ------- ------
$ 953 $ 761 $ 712
======= ======= ======
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation and related expense......... $ 1,958 $ 2,230 $2,498
Other liabilities................................ 1,249 1,338 1,141
------- ------- ------
$ 3,207 $ 3,568 $3,639
======= ======= ======
</TABLE>
5. CONVERTIBLE NOTES PAYABLE
Convertible Note Payable Agreement -- During September 1997, the Company entered
into a note payable agreement with a third party. Under terms of this agreement,
the Company borrowed $6,000. The note bears interest at an annual rate of 12%.
Interest is due and payable on the first day of January, April, July, and
October, commencing on October 1, 1997. Any unpaid principal and interest shall
become due and payable at the earliest of the following circumstances: (1)
September 2002, (2) the closing of a public offering of the Company's common
stock at an aggregate valuation of not less than $15,000 and a public offering
price equal or exceeding $13.91 per share, or (3) merger or consolidation of the
Company with or into any other corporation. If either (2) or (3) occur prior to
September 2002, the holder of the note may convert the amount due into 1,078,167
shares of the Company's common stock at a conversion price of $5.57 per share.
This agreement does not allow for prepayment of the note and includes certain
financial covenants including annual capital expenditure limitations. The
Company was in compliance with all financial covenants as of December 31, 1998
and March 31, 1999.
Convertible Promissory Notes -- On April 23, 1996, the Company issued $889 of
convertible promissory notes. The notes bore interest at 8%, and principal and
interest were due on demand. The notes were convertible into shares of Series D
preferred stock, if and when the Company completed an equity financing. The
conversion price was equal to the price per share of preferred stock issued in
such financing. On May 30, 1996, in connection with an equity financing, the
$889 of convertible promissory notes, plus accrued interest of $10, was
converted into 161,494 shares of Series D preferred stock at a conversion rate
of $5.57 per share (Note 8).
On October 16, 1996, the Company issued $1,000 of convertible promissory notes.
The notes were convertible into shares of Series E preferred stock, if and when
the Company completed an equity
F-11
<PAGE> 83
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
financing. The conversion price was equal to the price per share of preferred
stock issued in such financing. On May 19, 1997, in conjunction with an equity
financing, the $1,000 of convertible promissory notes, plus accrued interest of
$46, was converted into 188,042 shares of Series E preferred stock at a
conversion rate of $5.57 per share (Note 8).
On January 22, 1997, the Company issued $1,030 of convertible promissory notes.
The notes were convertible into shares of Series E preferred stock, if and when
the Company completed an equity financing in which the Company received an
aggregate of at least $2,000. The conversion price was equal to the price per
share of preferred stock, issued in such financing. On May 19, 1997, in
connection with an equity financing, the $1,030 of convertible promissory notes,
plus accrued interest of $26, was converted into 189,617 shares of Series E
preferred stock at a conversion rate of $5.57 per share (Note 8).
6. LEASES
Capital lease obligations have been recorded in the accompanying consolidated
financial statements at the present value of future minimum lease payments.
Assets financed under capital leases included in property are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................................... $ 3,289 $ 3,802 $ 3,943
Less accumulated amortization........................ (1,539) (2,675) (2,919)
------- ------- -------
$ 1,750 $ 1,127 $ 1,024
======= ======= =======
</TABLE>
Amortization expense of property financed under capital leases was $603, $883,
$1,094, $261 and $245 for the years ended December 31, 1996, 1997 and 1998 and
the three months ended March 31, 1998 and 1999, respectively.
Future minimum lease payments under capital leases and the present value of
future minimum lease payments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
1999........................................................ $ 766
2000........................................................ 395
2001........................................................ 79
------
Total future minimum lease payments......................... 1,240
Less amount representing interest........................... (101)
------
Present value of future minimum lease payments.............. 1,139
Less current portion........................................ (699)
------
$ 440
======
</TABLE>
F-12
<PAGE> 84
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
The Company also leases office space and equipment under operating leases which
expire on various dates through June 2003. Future annual minimum lease payments
under noncancelable operating lease arrangements at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 648
2000........................................................ 281
2001........................................................ 172
2002........................................................ 109
2003........................................................ 70
------
$1,280
======
</TABLE>
Rental expense under operating leases was approximately $849, $929, $1,031, $292
and $286 for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1998 and 1999, respectively.
7. COMMITMENTS AND CONTINGENCIES
In November 1991, the Company entered into an agreement with two former
shareholders of the Company, which required the Company to pay an aggregate of
1% of gross revenues subject to certain time limitations and maximum amounts.
Beginning June 1993, the Company began making quarterly payments and the last
payment was made in March 1998. The total amount paid in connection with the
agreement was $605. Accrued fees were $78 at December 31, 1997, and expense
related to this agreement was $159 and $179 for the years ended December 31,
1996 and 1997, respectively.
The Company is subject to certain litigation matters which arise in the normal
course of business. Management does not believe that the outcome of any of these
matters will have a material adverse effect on the Company's financial position
or results of operations.
8. STOCKHOLDERS' EQUITY
Preferred Stock -- Series A preferred stock (Series A) shares are convertible at
the holder's option into shares of common stock, on a share-for-share basis. The
conversion ratio may be adjusted from time to time in the event of certain
diluting events, as defined. Conversion is automatic in the event of a public
offering of the Company's common stock, meeting certain specified criteria.
Dividends on Series A are noncumulative and may be declared at the discretion of
the Board of Directors. The dividend rate is $.2777 per share per annum. Series
A shareholders have the right to elect one director and veto rights over certain
management decisions. In the event of liquidation, dissolution or merger of the
Company, each Series A shareholder has a liquidation preference equal to $3.47
per share, an amount per share of Series A then held by them equal to $.347
multiplied by the number of years between the date upon which the Series C
preferred stock shares were first issued by the Company and the date of the
distribution of any assets or surplus funds of the Company, plus an amount equal
to all declared but unpaid dividends. The increase in the Series A liquidation
preference as a result of this provision was $2,489 and $2,684 at December 31,
1998 and March 31, 1999, respectively. Such increase in the liquidation
preference will not be recognized upon the conversion of the preferred stock
into common stock upon an initial public offering. The total liquidation
preference at December 31, 1998 and March 31, 1999 was $10,389 and $10,584,
respectively.
F-13
<PAGE> 85
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Series B preferred stock (Series B) shares are convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio may be adjusted from time to time in the event of certain diluting events,
as defined. Conversion is automatic in the event of a public offering of the
Company's common stock, meeting certain specified criteria. Dividends on Series
B are noncumulative and may be declared at the discretion of the Board of
Directors. The dividend rate is $.318 per share per annum. Series B shareholders
have the right to elect one director and veto rights over certain management
decisions. In the event of liquidation, dissolution or merger of the Company,
each Series B shareholder has a liquidation preference equal to $3.98 per share,
an amount per share of Series B then held by them equal to $.398 multiplied by
the number of years between the date upon which the Series B preferred stock
shares were first issued by the Company and the date of the distribution of any
assets or surplus funds of the Company, plus an amount equal to all declared but
unpaid dividends. The increase in the Series B liquidation preference as a
result of this provision was $565 and $609 at December 31, 1998 and March 31,
1999, respectively. Such increase in the liquidation preference will not be
recognized upon the conversion of the preferred stock into common stock upon an
initial public offering. The total liquidation preference at December 31, 1998
and March 31, 1999 was $2,361 and $2,405, respectively.
Series C preferred stock (Series C) shares are convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio may be adjusted from time to time in the event of certain diluting events,
as defined. Conversion is automatic in the event of a public offering of the
Company's common stock, meeting certain specified criteria. Dividends on Series
C are noncumulative and may be declared at the discretion of the Board of
Directors. The dividend rate is $.445 per share per annum. Series C shareholders
have veto rights over certain management decisions. In the event of liquidation,
dissolution or merger of the Company, each Series C shareholder has a
liquidation preference equal to $5.57 per share, an amount per share of Series C
then held by them equal to $.557 multiplied by the number of years between the
date upon which the Series C preferred stock shares were first issued by the
Company and the date of the distribution of any assets or surplus funds of the
Company, plus an amount equal to all declared but unpaid dividends. The increase
in the Series C liquidation preference as a result of this provision was $1,310
and $1,412 at December 31, 1998 and March 31, 1999, respectively. Such increase
in the liquidation preference will not be recognized upon the conversion of the
preferred stock into common stock upon an initial public offering. The total
liquidation preference as of December 31, 1998 and March 31, 1999 was $5,474 and
$5,576, respectively.
Series D preferred stock (Series D) shares are convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio may be adjusted from time to time in the event of certain diluting events,
as defined. Conversion is automatic in the event of a public offering of the
Company's common stock, meeting certain specified criteria. Dividends on Series
D are noncumulative and may be declared at the discretion of the Board of
Directors. The dividend rate is $.445 per share per annum. Series D shareholders
have veto rights over certain management decisions. In the event of liquidation,
dissolution or merger of the Company, each Series D shareholder has a
liquidation preference equal to $5.57 per share, an amount per share of Series D
then held by them equal to $.557 multiplied by the number of years between the
date upon which the Series D preferred stock shares were first issued by the
Company and the date of the distribution of any assets or surplus funds of the
Company, plus an amount equal to all declared but unpaid dividends. The increase
in the Series D liquidation preference as a result of this provision was $521
and $571 at December 31, 1998 and March 31, 1999, respectively. Such increase in
the liquidation
F-14
<PAGE> 86
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
preference will not be recognized upon the conversion of the preferred stock
into common stock upon an initial public offering. The total liquidation
preference at December 31, 1998 and March 31, 1999 was $2,533 and $2,583,
respectively.
Series E preferred stock (Series E) shares are convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio may be adjusted from time to time in the event of certain diluting events,
as defined. Conversion is automatic in the event of a public offering of the
Company's common stock, meeting certain specified criteria. Dividends on Series
E are noncumulative and may be declared at the discretion of the Board of
Directors. The dividend rate is $.445 per share per annum. Series E shareholders
have veto rights over certain management decisions. In the event of liquidation,
dissolution or merger of the Company, each Series E shareholder has a
liquidation preference equal to $5.57 per share, an amount per share of Series E
then held by them equal to $.557 multiplied by the number of years between the
date upon which the Series E preferred shares were first issued by the Company
and the date of the distribution of any assets or surplus funds of the Company,
plus an amount equal to all declared but unpaid dividends. The increase in the
Series E liquidation preference as a result of this provision was $590 and $655
at December 31, 1998 and March 31, 1999, respectively. Such increase in the
liquidation preference will not be recognized upon the conversion of the
preferred stock into common stock upon an initial public offering. The total
liquidation preference at December 31, 1998 and March 31, 1999 was $3,213 and
$3,278, respectively.
On May 30, 1996, the Company sold 199,684 shares of Series D preferred stock at
$5.57 per share, with net proceeds of $1,094. In connection with the financing,
the $889 of convertible promissory notes issued in April 1996 and $10 of accrued
interest were converted into 161,494 shares of Series D preferred stock at a
conversion rate of $5.57 per share (Note 5).
On May 19, 1997, the Company sold 93,190 shares of Series E preferred stock at
$5.57 per share, with net proceeds of $499. In connection with the financing,
the $1,000 and $1,030 of convertible promissory notes issued in October 1996 and
January 1997, respectively, and accrued interest on the convertible promissory
notes of $46 and $26, respectively, were converted into 377,659 shares of Series
E preferred stock at a conversion rate of $5.57 per share (Note 5).
Warrants To Purchase Common Stock -- In connection with the Series A financing,
the Company issued 720,148 warrants which can be used to purchase common stock
at an exercise price of $.66 per share. The warrants are exercisable immediately
and expire seven years from the date of grant. The fair value of these warrants
was determined to be insignificant, using the Black-Scholes option-pricing
model, and no value was ascribed to these warrants. All warrants are outstanding
at December 31, 1998 and March 31, 1999.
On May 30, 1996, in connection with Series D equity financing, the Company
granted warrants to the holders to purchase 221,736 common stock shares at $1.53
per share. The warrants are exercisable immediately and expire seven years from
the date of grant. The warrants were allocated to the holders of the Series D on
a pro rata basis based on the consideration received by the Company. The fair
value allocated to the warrants at the date of grant, using the Black-Scholes
option-pricing model, was estimated to be $114. All warrants are outstanding as
of December 31, 1998 and March 31, 1999.
Warrants to Purchase Series C Preferred Stock -- During June 1996, the Company
granted warrants to a bank to purchase 37,735 shares of Series C preferred stock
at $5.57 per share. The fair value of
F-15
<PAGE> 87
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
these warrants were determined to be insignificant, using the Black-Scholes
option-pricing model, and no value was ascribed to such warrants. These warrants
expire on June 4, 2001, and remain outstanding as of December 31, 1998 and March
31, 1999.
Warrants to Purchase Series E Preferred Stock -- On January 22, 1997, the
Company granted warrants to the holders of the convertible promissory notes
issued on January 22, 1997, to purchase 184,938 Series E preferred stock shares
at $5.57 per share. The warrants expire three years from the date of grant or
immediately subsequent to an initial public offering. All warrants are
outstanding as of December 31, 1998 and March 31, 1999. The warrants were
allocated to the holders of the convertible promissory notes on a pro rata basis
based on the consideration received by the Company. The fair value allocated to
the warrants using the Black-Scholes pricing model at the date of grant was
$165.
On May 19, 1997, in connection with the Series E equity financing, the Company
granted warrants to purchase 93,187 Series E preferred stock shares at $5.57 per
share to the Series E investors. The warrants expire three years from the date
of grant or immediately subsequent to an initial public offering. The warrants
were allocated to the holders of the Series E preferred stock on a pro rata
basis based on the consideration received by the Company. The fair value
allocated to the warrants using the Black-Scholes pricing model at the date of
grant was estimated to be $83. All warrants are outstanding as of December 31,
1998 and March 31, 1999.
The Company over the last several years granted warrants to a related party
(Note 13) to purchase 15,849 shares of Series A preferred stock at $3.47 per
share, 19,402 shares of Series C preferred stock at $5.57 per share and 18,866
shares of Series E preferred stock. These warrants are exercisable immediately
and expire ten years from the date of grant or five years after an initial
public offering, whichever is shorter. The fair value of these warrants were
determined to be insignificant, using the Black-Scholes option-pricing model,
and no value was ascribed to such warrants. All of these warrants remain
outstanding at December 31, 1998 and March 31, 1999.
9. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current -- State........................................... $3 $3 $7
== == ==
</TABLE>
The Company's net deferred income taxes consist of the following as of December
31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 5,791 $ 8,304
Deferred revenue.......................................... 1,025 --
Basis difference in fixed assets.......................... 159 270
Vacation accrual.......................................... 97 124
Other..................................................... 347 63
------- -------
Total deferred tax assets................................... 7,419 8,761
Valuation allowance......................................... (7,419) (8,761)
------- -------
Net deferred income taxes................................... $ -- $ --
======= =======
</TABLE>
F-16
<PAGE> 88
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $15,753 and $6,637 for federal and California income tax purposes,
respectively, which will begin expiring in 2007 and 1999, respectively.
Additionally, at December 31, 1998, the Company has foreign net operating loss
carryforwards totaling approximately $5,370 in the U.K., Germany, France, and
Ireland. Portions of the foreign net operating losses will expire beginning in
2001. Pursuant to Section 382 of the Internal Revenue Code, use of the Company's
domestic net operating loss carryforwards and other tax attributes in the future
has been limited due to a cumulative change in ownership of greater than 50%,
which change in ownership has occurred in a moving three-year period. Further
ownership changes could also impact the Company's ability to utilize net
operating losses generated in the year ended December 31, 1998.
10. STOCK OPTION PLANS
EMPLOYEE STOCK PURCHASE PLAN
On April 20, 1999, the Company adopted the 1999 Employee Stock Purchase Plan
covering an aggregate of 250,000 shares of common stock. The Employee Stock
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.
Under the Employee Stock Purchase Plan, the board may authorize participation by
eligible employees, including officers, in periodic offerings following the
commencement of the plan. The initial offering under the plan will commence on
the date of this prospectus and terminate on January 31, 2000.
Unless otherwise determined by the board, employees are eligible to participate
in the plan only if they are employed for at least 20 hours per week and for at
least five months per calendar year. Employees who participate in an offering
may have up to 15% of their earnings withheld pursuant to the plan. The amount
withheld will then be used to purchase shares of the common stock on specified
dates determined by the board. The price of common stock purchased under the
plan will be equal to 85% of the lower of the fair market value of the common
stock at the commencement date of each offering period or the relevant purchase
date. Employees may end their participation in this offering at any time during
this offering period, and participation ends automatically on termination of
employment.
In the event of a merger, reorganization, consolidation or liquidation involving
Continuus, the board has discretion to provide that each right to purchase
common stock will be assumed or an equivalent right substituted by the successor
corporation, or the board may shorten this offering period and provide for all
sums collected by payroll deductions to be applied to purchase stock immediately
prior to such merger or other transaction. The board has the authority to amend
or terminate the plan, however, the board may not amend or terminate the plan if
it may adversely affect any outstanding rights to purchase common stock.
The Company's 1991 Stock Option Plan and 1997 Equity Incentive Plan (the Plans),
as amended, provide for the issuance to officers and key employees of up to a
total of 4,207,547 options to purchase common stock through the grant of
incentive stock or nonqualified stock options. Options expire no later than ten
years from the date of grant and generally become exercisable over a four-year
period.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has chosen to continue
to account for its employee stock-
F-17
<PAGE> 89
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
based compensation plans under APB Opinion No. 25 and provide the expanded
disclosures specified in SFAS No. 123.
Had compensation cost been determined using the provisions of SFAS No. 123, the
Company's net loss would have been increased to the amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported........................................ $(6,053) $(1,583) $(3,866) $ (649) $ (239)
Pro forma.......................................... (6,210) (1,842) (4,104) (695) (309)
Basic and diluted net loss per share:
As reported........................................ $ (4.06) $ (1.00) $ (2.39) $(0.40) $(0.15)
======= ======= ======= ====== ======
Pro forma.......................................... $ (4.16) $ (1.17) $ (2.54) $(0.43) $(0.19)
======= ======= ======= ====== ======
</TABLE>
For purposes of estimating the compensation cost of the Company's option grants
in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions used for grants in the years
1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999: expected
volatility of zero; risk-free interest rates of 6%; and expected lives of ten
years.
A summary of the status of the Plans is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------- ---------------------
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FIXED EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------- ---------- -------- ---------- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period......... 1,120,218 $1.46 1,577,469 $1.62 2,151,778 $1.78
Granted.................................. 799,584 1.70 1,285,306 3.07 481,050 5.24
Exercised................................ (90,443) 1.16 (26,048) 1.78 (43,390) 1.56
Canceled................................. (251,890) 1.40 (684,949) 3.79 (152,734) 1.88
---------- ---------- ----------
Balance, end of period................... 1,577,469 $1.62 2,151,778 $1.78 2,436,704 $2.45
========== ========== ==========
Weighted average fair value of options
granted during the year................ $0.77 $0.64 $1.09
========== ========== ==========
</TABLE>
F-18
<PAGE> 90
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
The following tables summarize information about stock options outstanding as of
December 31, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01 - .66......................... 6,225 2.87 $0.34 6,225 $0.34
.67 - 1.33......................... 7,547 3.27 0.95 7,547 0.95
1.34 - 1.99......................... 2,110,260 7.97 1.75 959,470 1.56
2.00 - 6.63......................... 27,746 9.03 4.58 3,114 3.92
--------- -------
2,151,778 976,356
========= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999 (UNAUDITED)
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01 - .66......................... 6,225 2.63 $0.34 6,225 $0.34
.67 - 1.33......................... 7,547 3.03 0.95 7,547 0.95
1.34 - 1.99......................... 1,923,988 7.72 1.75 944,953 1.58
2.00 - 6.63......................... 498,944 9.58 5.23 5,640 4.64
--------- -------
2,436,704 964,365
========= =======
</TABLE>
Effective August 25, 1998, the Company's Board of Directors approved a proposal
allowing the Company's employees to reprice any existing stock option grants to
a new exercise price of $1.99 per share, which was the estimated fair market
value of the Company's common stock on August 25, 1998. A total of 363,639
options were repriced with exercise prices ranging from $3.31 to $6.63 per
share.
During December 1998 to March 1999, the Company granted a total of 544,633
options to purchase shares of common stock at exercise prices below the
estimated fair market value of the Company's common stock. As a result, the
Company will record a total of $906 in compensation expenses related to these
options over the related vesting periods. The Company has recorded $41 of
compensation expense related to these stock options during the three months
ended March 31, 1999.
11. OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
F-19
<PAGE> 91
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
The Company's reportable operating segments include Software Licenses and
Services. The Software Licenses operating segment develops and markets the
Company's process-oriented software development management products. The
Services segment provides after-sale support for software products and fee-based
training and consulting services related to the Company products.
The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of sales and gross profit.
Operating segment data for the three years in the period ended December 31, 1998
and the three months ended March 31, 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
SOFTWARE
LICENSES SERVICES TOTAL
-------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1996:
Revenues.................................................. $ 9,600 $ 6,500 $16,100
Cost of revenues.......................................... 800 4,200 5,000
------- ------- -------
Gross profit........................................... $ 8,800 $ 2,300 $11,100
======= ======= =======
Year ended December 31, 1997:
Revenues.................................................. $13,800 $ 9,500 $23,300
Cost of revenues.......................................... 700 6,000 6,700
------- ------- -------
Gross profit........................................... $13,100 $ 3,500 $16,600
======= ======= =======
Year ended December 31, 1998:
Revenues.................................................. $14,400 $13,000 $27,400
Cost of revenues.......................................... 700 7,400 8,100
------- ------- -------
Gross profit........................................... $13,700 $ 5,600 $19,300
======= ======= =======
Three months ended March 31, 1998
Revenues.................................................. $ 3,700 $ 3,100 $ 6,800
Cost of revenues.......................................... 200 1,700 1,900
------- ------- -------
Gross profit........................................... $ 3,500 $ 1,400 $ 4,900
======= ======= =======
Three months ended March 31, 1999
Revenues.................................................. $ 4,200 $ 4,100 $ 8,300
Cost of revenues.......................................... 200 1,900 2,100
------- ------- -------
Gross profit........................................... $ 4,000 $ 2,200 $ 6,200
======= ======= =======
</TABLE>
F-20
<PAGE> 92
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Revenues are attributed to geographic areas based on the location of the entity
to which the products or services were sold. North American information is
derived primarily from U.S. and Canadian operations. Revenues to Canadian
entities was $400, $400, $1,400, $300 and $700 for the years ended December 31,
1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999,
respectively. Amounts shown for international income (loss) from operations do
not include any amounts incurred by the parent company that could have been
allocated to those operations.
<TABLE>
<CAPTION>
NORTH
AMERICA INTERNATIONAL ELIMINATIONS TOTAL
------- ------------- ------------ -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenues......................................... $12,400 $ 5,400 $(1,700) $16,100
Gross profit..................................... 8,600 2,500 11,100
Loss from operations............................. (3,700) (2,200) (5,900)
Long-lived assets................................ 2,500 300 2,800
Year ended December 31, 1997:
Revenues......................................... 16,900 11,200 (4,800) 23,300
Gross profit..................................... 12,900 3,700 16,600
Income (loss) from operations.................... 1,000 (1,900) (900)
Long-lived assets................................ 2,400 500 2,900
Year ended December 31, 1998:
Revenues......................................... 17,700 14,900 (5,200) 27,400
Gross profit..................................... 13,400 5,900 19,300
Loss from operations............................. (2,000) (1,100) (3,100)
Long-lived assets................................ 1,400 1,100 2,500
Three months ended March 31, 1998:
Revenues......................................... 4,400 3,400 (1,000) 6,800
Gross profit..................................... 3,400 1,600 5,000
Income (loss) from operations.................... (500) 100 (400)
Long-lived assets................................ 2,100 600 2,700
Three months ended March 31, 1999:
Revenues......................................... 5,300 4,300 (1,400) 8,200
Gross profit..................................... 4,200 1,900 6,100
Income from operations........................... -- 100 100
Long-lived assets................................ 1,200 1,100 2,300
</TABLE>
During the year ended December 31, 1996, sales to a single customer accounted
for approximately 12% of total revenue for the year. In fiscal 1997 and 1998 and
the three months ended March 31, 1998 and 1999, no single customer accounted for
10% or more of total revenue.
12. DEFINED CONTRIBUTION SAVINGS AND INVESTMENT PLAN
The Company has a defined contribution savings and investment plan which covers
substantially all employees. The plan provides for the deferral of up to 20% of
an employee's qualifying compensation under Section 401(k) of the Internal
Revenue Code. Company contributions may be made to the plan at the discretion of
the Company's Board of Directors. To date, no such contributions have been made.
F-21
<PAGE> 93
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
13. RELATED-PARTY TRANSACTIONS
On April 20, 1995, the Company entered into a lease agreement with a preferred
shareholder who owns approximately 3% of the Company's total outstanding
preferred stock as of December 31, 1998. Under the amended lease agreement, the
Company was able to lease certain qualified capital equipment through June 30,
1998, up to an aggregate purchase price of $3,600. On June 30, 1998, the lease
agreement expired and was not renewed by the Company. The Company's remaining
capital lease obligation is being amortized over a three-year period, with
interest of 8.95% per annum.
14. SUBSEQUENT EVENTS
On April 22, 1999, the Company entered into a revolving line of credit agreement
with a bank, which provides for borrowings up to $2,000. Borrowings accrue
interest at a per annum rate equal to the bank's prime rate. The revolving line
of credit does not provide for any financial covenants and expires on April 22,
2001. On the same date, the Company entered into a Contribution Agreement, which
requires that certain preferred shareholders guarantee outstanding amounts under
the revolving line of credit agreement. Under terms of the Contribution
Agreement, the Company granted warrants to purchase 53,910 shares of common
stock at $9.01 per share to the guarantors on a pro rata basis. The warrants are
immediately exercisable and expire on April 22, 2002. The fair value allocated
to the warrants using the Black-Scholes pricing model was $23. This amount shall
be recorded as deferred financing costs and amortized over the term of the
revolving line of credit. The Company is also obligated to grant additional
warrants to purchase 35,940 shares of common stock at $9.01 per share to the
guarantors on a pro rata basis in the event they are required to make a payment
on the revolving line of credit.
On April 30, 1999, the Company entered into an agreement with a third party to
lease certain qualified capital equipment. The agreement expires on December 1,
1999. In connection with this lease agreement, the Company granted warrants to
purchase 20,755 shares of common stock at $9.01 per share. The warrants are
immediately exercisable and expire on April 30, 2006. The fair value allocated
to the warrants using the Black-Scholes pricing model was $42. This amount shall
be recorded as deferred financing costs and amortized over the term of the lease
agreement.
F-22
<PAGE> 94
3,100,000 SHARES
CONTINUUS SOFTWARE CORPORATION
COMMON STOCK
CONTINUUS LOGO
---------------------------
PROSPECTUS
---------------------------
UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
U.S. BANCORP PIPER JAFFRAY
CIBC WORLD MARKETS
, 1999
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 11,254
NASD filing fee............................................. 4,600
Nasdaq Stock Market Listing Application fee................. 72,875
Blue sky qualification fees and expenses.................... 5,000
Director and Officer Liability Insurance.................... 375,000
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 175,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 91,271
----------
Total............................................. $1,170,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act.
The Registrant's Restated Certificate of Incorporation and Bylaws include
provisions to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware
Law") and (ii) require the Registrant to indemnify its directors and executive
officers to the fullest extent permitted by Section 145 of the Delaware Law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the Delaware Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for improper
transactions between the director and the Registrant and for improper
distributions to stockholders
II-1
<PAGE> 96
and loans to directors and officers. The provision also does not affect a
director's responsibilities under any other law, such as the federal securities
law or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its directors
and executive officers that require the Registrant to indemnify such persons
against any and all expenses (including attorneys' fees), witness fees, damages,
judgments, fines, settlements and other amounts incurred (including expenses of
a derivative action) in connection with any action, suit or proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a director, an officer or an employee of the
Registrant or any of its affiliated enterprises, provided that such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a director,
officer or key employee of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The Registrant has an insurance policy covering the officers and directors of
the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1996, the Registrant has sold and issued the following
unregistered securities:
1. On May 30, 1996, we sold 361,178 shares of Series D preferred stock
and issued warrants to purchase an additional 221,736 shares of Series E
preferred stock for an aggregate purchase price of $1,111,261 to a total of
twelve investors. On June 4, 1996, we issued a warrant to purchase 37,735 shares
of Series C preferred stock, to one entity in connection with an equipment
lease. On January 23, 1997, we issued warrants to a total of eight investors to
purchase up to an aggregate of 184,939 shares of Series E preferred stock in
connection with the issuance of promissory notes in the aggregate amount of
$1,029,502. On May 19, 1997, we sold 93,186 shares of Series E preferred stock
and warrants to purchase an additional 93,186 shares of Series E Stock for an
aggregate purchase price of $518,610 to a total of nine investors. On July 22,
1997, December 10, 1997 and February 20, 1998, we issued warrants to purchase
6,738, 4,043 and 2,695 shares of Series E preferred stock, respectively, to one
entity in connection with equipment leases. On April 30, 1999 we issued warrants
to purchase 20,753 shares of common stock in connection with an equipment lease.
On April 22, 1999 we issued warrants to purchase an aggregate of 53,906 shares
of common stock in connection with guaranties on a bank line of credit.
2. On September 23, 1997, we sold $6,000,000 in principal amount of a
12% senior secured convertible debenture, due September 23, 2002, to London
Pacific Life & Annuity Company.
The offers, sales and issuances of the above securities were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and/or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through employment or other relationships,
to information about Continuus.
II-2
<PAGE> 97
14. SUBSEQUENT EVENTS
On April 22, 1999, the Company entered into a revolving line of credit agreement
with a bank, which provides for borrowings up to $2,000,000. Borrowings accrue
interest at a per annum rate equal to the banks prime rate. The revolving line
of credit does not provide for any financial covenants and expires on April 22,
2001. On the same date, the Company entered into a Contribution Agreement, which
requires that certain preferred shareholders guarantee outstanding amounts under
the revolving line of credit agreement. Under terms of the Contribution
Agreement, the Company granted warrants to purchase 142,861 shares of common
stock at $3.40 per share to the guarantors on a pro rata basis. The warrants are
immediately exercisable. The Company is also obligated to grant additional
warrants to purchase 95,242 shares of common stock $3.40 per share to the
guarantors on a pro rata basis in the event they are required to make a payment
on the revolving line of credit.
On April 30, 1999 the Company entered into an agreement with a third party to
lease certain qualified capital equipment. In connection with this lease
agreement, the Company granted warrants to purchase 55,000 shares of common
stock at $3.40 per share. The warrants are immediately exercisable and expire on
April 20, 2006.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------
<C> <S>
1.1 Form of Purchase Agreement.
**3.1 Certificate of Amendment of Certificate of Amendment and
Restatement of Articles of Incorporation and Certificate of
Amendment and Restatement of Articles of Incorporation
effective prior to Registrant's reincorporation in Delaware.
**3.2 Bylaws effective prior to Registrant's reincorporation in
Delaware.
**3.3 Certificate of Incorporation, to become effective upon the
Registrant's reincorporation in Delaware.
**3.4 Amended and Restated Certificate of Incorporation, to be
filed and become effective immediately following this
offering.
**3.5 Form of Bylaws to become effective upon the Registrant's
reincorporation in Delaware.
**4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5,
10.10, 10.11, 10.22 and 10.23.
+4.2 Form of Common Stock Certificate.
+5.1 Opinion of Cooley Godward LLP.
**10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
**10.2 Registrant's Employee Stock Option Plan (the "1991 Plan").
**10.3 Form of Incentive Stock Option Agreement under the 1991
Plan.
**10.4 Form of Incentive Stock Option Certificate under the 1991
Plan.
**10.5 Form of Non-Qualified Stock Option Agreement under the 1991
Plan.
**10.6 Form of Non-Qualified Stock Option Certificate under the
1991 Plan.
**10.7 Registrant's 1997 Equity Incentive Plan (the "1997 Plan").
**10.8 Form of Incentive Stock Option Grant Certificate under the
1997 Plan.
**10.9 Registrant's 1998 Employee Stock Purchase Plan and related
offering documents.
**10.10 Investors' Rights Agreement, dated March 4, 1994, as last
amended on December 30, 1997, among Registrant and certain
investors.
**10.11 Co-Sale Agreement, dated March 4, 1994, as last amended on
May 19, 1997, among Registrant and certain investors.
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------
<C> <S>
**,*10.12 President/CEO Change in Control Severance Benefits
Agreement, dated May 31, 1997, among Registrant and John R.
Wark.
**,*10.13 Form of Executive Change in Control Severance Benefits
Agreement, dated May 31, 1997, between Registrant and each
of Steve L. Johnson, William A. Philbin. Geoffrey W.
Haggart, James M. Carrigan, and David McCann.
**10.14 Stock Purchase Agreement, dated May 30, 1996, among
Registrant and certain investors.
**10.15 Stock Purchase Agreement, dated May 19, 1997, among
Registrant and certain investors.
**10.16 Master Lease Agreement, dated April 20, 1995, among
Registrant and Comdisco, Inc.
**10.17 Global Master Rental Agreement, dated September 1, 1995,
among Registrant and Comdisco, Inc.
**10.18 Warrant Agreement, dated April 20, 1995, among Registrant
and Comdisco, Inc.
**10.19 Warrant Agreement, dated November 8, 1995, among Registrant
and Comdisco, Inc.
**10.20 Warrant Agreement, dated February 14, 1996, among Registrant
and Comdisco, Inc.
**10.21 Warrant to Purchase Stock, dated June 4, 1996, among
Registrant and Silicon Valley Bank.
**10.22 Registration Rights Agreement, dated June 4, 1996, among
Registrant and Silicon Valley Bank.
**10.23 Antidilution Agreement, dated June 4, 1996, among Registrant
and Silicon Valley Bank
**10.24 Master Purchase Terms and Conditions, dated February 27,
1997, as amended March 27, 1997, among Registrant and Royal
Bank of Canada Europe Limited.
**10.25 Form of Warrant to Purchase Shares of Common Stock, dated
December 23, 1994 among Registrant and certain investors.
**10.26 Form of Warrant to Purchase Shares of Common Stock, dated
May 30, 1996, among Registrant and certain investors.
**10.27 Form of Warrant to Purchase Shares of Series E preferred
stock, dated January 23, 1997, among Registrant and certain
investors.
**10.28 Form of Warrant to Purchase Shares of Series E preferred
stock, dated May 19, 1997, among Registrant and certain
investors.
**10.29 Senior Secured Convertible Debenture Purchase Agreement,
dated September 23, 1997, among Registrant and London
Pacific Life & Annuity Company.
**10.30 Senior Secured Convertible Debenture, dated September 23,
1997, among Registrant and London Pacific Life & Annuity
Company.
**10.31 Security Agreement, dated September 23, 1997, among
Registrant and London Pacific Life & Annuity Company.
**10.32 Standard Office Lease -- Gross, dated March 5, 1992, as last
amended September 15, 1998, among Registrant, The French
Company and certain individuals.
**,++10.33 Value Added Reseller License Agreement, dated September 24,
1992, as last amended March 31, 1995, among Registrant and
Informix Software, Inc.
**10.34 Warrant Agreement, dated May 20, 1997, among Registrant and
Comdisco, Inc.
**10.35 Warrant Agreement, dated July 22, 1997, among Registrant and
Comdisco, Inc.
**10.36 Warrant Agreement, dated December 10, 1997, among Registrant
and Comdisco, Inc.
**10.37 Warrant Agreement, dated February 20, 1998, among Registrant
and Comdisco, Inc.
10.38 Master Lease Agreement, dated April 30, 1999, among
Registrant and Transamerica Business Credit Corporation.
10.39 Stock Subscription Warrant, dated April 30, 1999, among
Registrant and TBCC Funding Trust I.
</TABLE>
II-4
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------
<C> <S>
10.40 Stock Subscription Warrant, dated April 30, 1999, among
Registrant and Priority Capital Resources.
10.41 Loan Agreement, dated April 22, 1999, among Registrant and
Silicon Valley Bank.
10.42 Contribution Agreement, dated April 22, 1999, among
Registrant and certain investors.
10.43 Form of Warrant to Purchase Shares of Common Stock, dated
April 22, 1999, among Registrant and certain investors.
**21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
+23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
23.3 Consent of the Standish Group International, Inc.
**24.1 Power of Attorney. Reference is made to page II-6.
**27 Financial Data Schedule.
</TABLE>
- -------------------------
* Indicates management compensatory plan, contract or agreement.
** Previously filed.
+ To be filed by amendment.
++ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules, with the exception of Schedule II (Valuation and Qualifying
Account) have been omitted because they are not required, are not applicable or
the information is included in the consolidated financial statements or notes to
the consolidated financial statements.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to provisions described in Item 14 of this Registration Statement, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) That, for purposes of determining any liability under the Act,
each filing of the registrant's annual report to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of employee benefits
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 100
(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Irvine, County of Orange, State of
California, on the 9th day of July 1999.
By: /s/ JOHN R. WARK
---------------------------------------
John R. Wark
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN R. WARK President, Chief Executive and Director July 9, 1999
- ------------------------------------------ (Principal Executive Officer)
John R. Wark
* Vice President, Finance and Chief July 9, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Steven L. Johnson and Accounting Officer)
* Director July 9, 1999
- ------------------------------------------
Kevin G. Hall
* Director July 9, 1999
- ------------------------------------------
Stewart A. Schuster
* Director July 9, 1999
- ------------------------------------------
Fred B. Cox
* Director July 9, 1999
- ------------------------------------------
Sol Zechter
* Director July 9, 1999
- ------------------------------------------
A. Barry Patmore
*By: /s/ JOHN R. WARK
- -----------------------------------------
John R. Wark
</TABLE>
II-7
<PAGE> 102
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
BALANCE AT CHARGES, BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts............... $ 92 $ 24 $ (5) $111
Year ended December 31, 1997:
Allowance for doubtful accounts............... $111 $ 63 $(40) $134
Year ended December 31, 1998:
Allowance for doubtful accounts............... $134 $250 $(45) $339
</TABLE>
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Purchase Agreement.
**3.1 Certificate of Amendment of Certificate of Amendment and
Restatement of Articles of Incorporation and Certificate of
Amendment and Restatement of Articles of Incorporation
effective prior to Registrant's reincorporation in Delaware.
**3.2 Bylaws effective prior to Registrant's reincorporation in
Delaware.
**3.3 Certificate of Incorporation, to become effective upon the
Registrant's reincorporation in Delaware.
**3.4 Amended and Restated Certificate of Incorporation, to be
filed and become effective immediately following this
offering.
**3.5 Form of Bylaws to become effective upon the Registrant's
reincorporation in Delaware.
**4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5,
10.10, 10.11, 10.22 and 10.23.
+4.2 Form of Common Stock Certificate.
+5.1 Opinion of Cooley Godward LLP.
**10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
**10.2 Registrant's Employee Stock Option Plan (the "1991 Plan").
**10.3 Form of Incentive Stock Option Agreement under the 1991
Plan.
**10.4 Form of Incentive Stock Option Certificate under the 1991
Plan.
**10.5 Form of Non-Qualified Stock Option Agreement under the 1991
Plan.
**10.6 Form of Non-Qualified Stock Option Certificate under the
1991 Plan.
**10.7 Registrant's 1997 Equity Incentive Plan (the "1997 Plan").
**10.8 Form of Incentive Stock Option Grant Certificate under the
1997 Plan.
**10.9 Registrant's 1998 Employee Stock Purchase Plan and related
offering documents.
**10.10 Investors' Rights Agreement, dated March 4, 1994, as last
amended on December 30, 1997, among Registrant and certain
investors.
**10.11 Co-Sale Agreement, dated March 4, 1994, as last amended on
May 19, 1997, among Registrant and certain investors.
**,*10.12 President/CEO Change in Control Severance Benefits
Agreement, dated May 31, 1997, among Registrant and John R.
Wark.
**,*10.13 Form of Executive Change in Control Severance Benefits
Agreement, dated May 31, 1997, between Registrant and each
of Steve L. Johnson, William A. Philbin. Geoffrey W.
Haggart, James M. Carrigan, and David McCann.
**10.14 Stock Purchase Agreement, dated May 30, 1996, among
Registrant and certain investors.
**10.15 Stock Purchase Agreement, dated May 19, 1997, among
Registrant and certain investors.
**10.16 Master Lease Agreement, dated April 20, 1995, among
Registrant and Comdisco, Inc.
**10.17 Global Master Rental Agreement, dated September 1, 1995,
among Registrant and Comdisco, Inc.
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
**10.18 Warrant Agreement, dated April 20, 1995, among Registrant
and Comdisco, Inc.
**10.19 Warrant Agreement, dated November 8, 1995, among Registrant
and Comdisco, Inc.
**10.20 Warrant Agreement, dated February 14, 1996, among Registrant
and Comdisco, Inc.
**10.21 Warrant to Purchase Stock, dated June 4, 1996, among
Registrant and Silicon Valley Bank.
**10.22 Registration Rights Agreement, dated June 4, 1996, among
Registrant and Silicon Valley Bank.
**10.23 Antidilution Agreement, dated June 4, 1996, among Registrant
and Silicon Valley Bank.
**10.24 Master Purchase Terms and Conditions, dated February 27,
1997, as amended March 27, 1997, among Registrant and Royal
Bank of Canada Europe Limited.
**10.25 Form of Warrant to Purchase Shares of Common Stock, dated
December 23, 1994 among Registrant and certain investors.
**10.26 Form of Warrant to Purchase Shares of Common Stock, dated
May 30, 1996, among Registrant and certain investors.
**10.27 Form of Warrant to Purchase Shares of Series E preferred
stock, dated January 23, 1997, among Registrant and certain
investors.
**10.28 Form of Warrant to Purchase Shares of Series E preferred
stock, dated May 19, 1997, among Registrant and certain
investors.
**10.29 Senior Secured Convertible Debenture Purchase Agreement,
dated September 23, 1997, among Registrant and London
Pacific Life & Annuity Company.
**10.30 Senior Secured Convertible Debenture, dated September 23,
1997, among Registrant and London Pacific Life & Annuity
Company.
**10.31 Security Agreement, dated September 23, 1997, among
Registrant and London Pacific Life & Annuity Company.
**10.32 Standard Office Lease -- Gross, dated March 5, 1992, as last
amended September 15, 1998, among Registrant, The French
Company and certain individuals.
**,++10.33 Value Added Reseller License Agreement, dated September 24,
1992, as last amended March 31, 1995, among Registrant and
Informix Software, Inc.
**10.34 Warrant Agreement, dated May 20, 1997, among Registrant and
Comdisco, Inc.
**10.35 Warrant Agreement, dated July 22, 1997, among Registrant and
Comdisco, Inc.
**10.36 Warrant Agreement, dated December 10, 1997, among Registrant
and Comdisco, Inc.
**10.37 Warrant Agreement, dated February 20, 1998, among Registrant
and Comdisco, Inc.
10.38 Master Lease Agreement, dated April 30, 1999, among
Registrant and Transamerica Business Credit Corporation.
10.39 Stock Subscription Warrant, dated April 30, 1999, among
Registrant and TBCC Funding Trust I.
10.40 Stock Subscription Warrant, dated April 30, 1999, among
Registrant and Priority Capital Resources.
10.41 Loan Agreement, dated April 22, 1999, among Registrant and
Silicon Valley Bank.
10.42 Contribution Agreement, dated April 22, 1999, among
Registrant and certain investors.
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.43 Form of Warrant to Purchase Shares of Common Stock, dated
April 22, 1999, among Registrant and certain investors.
**21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
+23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
23.3 Consent of the Standish Group International, Inc.
**24.1 Power of Attorney. Reference is made to page II-6.
**27 Financial Data Schedule.
</TABLE>
- -------------------------
* Indicates management compensatory plan, contract or agreement.
** Previously filed.
+ To be filed by amendment.
++ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
<PAGE> 1
EXHIBIT 1.1
3,100,000 SHARES(1)
CONTINUUS SOFTWARE CORPORATION
COMMON STOCK
PURCHASE AGREEMENT
__________, 1999
U.S. BANCORP PIPER JAFFRAY INC.
CIBC OPPENHEIMER CORP.
As Representatives of the several
Underwriters named in Schedule II hereto
c/o U.S. Bancorp Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Continuus Software Corporation, a Delaware corporation (the "Company"),
and the stockholders of the Company listed in Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the several Underwriters named in
Schedule II hereto (the "Underwriters") an aggregate of 3,100,000 shares (the
"Firm Shares") of Common Stock, $.001 par value per share (the "Common Stock"),
of the Company. The Firm Shares consist of 2,523,642 authorized but unissued
shares of Common Stock to be issued and sold by the Company and 576,358
outstanding shares of Common Stock to be sold by the Selling Stockholders. The
Company has also granted to the several Underwriters an option to purchase up to
465,000 additional shares of Common Stock on the terms and for the purposes set
forth in Section 3 hereof (the "Option Shares"). The Firm Shares and any Option
Shares purchased pursuant to this Purchase Agreement are herein collectively
called the "Securities."
The Company and the Selling Stockholders hereby confirm their agreement
with respect to the sale of the Securities to the several Underwriters, for whom
you are acting as Representatives (the "Representatives").
1. Registration Statement and Prospectus. A registration statement
on Form S-1 (File No. 333-76893) with respect to the Securities, including a
preliminary form of prospectus, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations ("Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission; one or more amendments to such registration statement have also been
so prepared and have been, or will be, so filed; and, if the Company has elected
to rely upon Rule 462(b) of the Rules and Regulations to increase the size of
the offering registered
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(1) Plus an option to purchase up to 465,000 additional shares to cover
over-allotments.
<PAGE> 2
under the Act, the Company will prepare and file with the Commission a
registration statement with respect to such increase pursuant to Rule 462(b).
Copies of such registration statement(s) and amendments and each related
preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus (including a term sheet meeting
the requirements of Rule 434 of the Rules and Regulations). If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and
file a prospectus (or a term sheet meeting the requirements of Rule 434)
pursuant to Rule 424(b) that discloses the information previously omitted from
the prospectus in reliance upon Rule 430A. Such registration statement as
amended at the time it is or was declared effective by the Commission, and, in
the event of any amendment thereto after the effective date and prior to the
First Closing Date (as hereinafter defined), such registration statement as so
amended (but only from and after the effectiveness of such amendment), including
a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and
Regulations increasing the size of the offering registered under the Act and
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rules 430A(b) and 434(d) of the Rules and
Regulations, is hereinafter called the "Registration Statement." The prospectus
included in the Registration Statement at the time it is or was declared
effective by the Commission is hereinafter called the "Prospectus," except that
if any prospectus (including any term sheet meeting the requirements of Rule 434
of the Rules and Regulations provided by the Company for use with a prospectus
subject to completion within the meaning of Rule 434 in order to meet the
requirements of Section 10(a) of the Rules and Regulations) filed by the Company
with the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) of the
Rules and Regulations or any other such prospectus provided to the Underwriters
by the Company for use in connection with the offering of the Securities
(whether or not required to be filed by the Company with the Commission pursuant
to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file
at the time the Registration Statement is or was declared effective by the
Commission, the term "Prospectus" shall refer to such differing prospectus
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations) from and after the time such prospectus is filed with the
Commission or transmitted to the Commission for filing pursuant to such Rule
424(b) (and Rule 434, if applicable) or from and after the time it is first
provided to the Underwriters by the Company for such use. The term "Preliminary
Prospectus" as used herein means any preliminary prospectus included in the
Registration Statement prior to the time it becomes or became effective under
the Act and any prospectus subject to completion as described in Rule 430A or
434 of the Rules and Regulations.
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with,
the several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; except that the foregoing shall not apply to statements
in or omissions from any Preliminary Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by you, or
by any Underwriter through you, specifically for use in the preparation
thereof.
(ii) As of the time the Registration Statement (or
any post-effective amendment thereto, including a registration statement
(if any) filed pursuant to Rule 462(b) of the Rules and
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Regulations increasing the size of the offering registered under the
Act) is or was declared effective by the Commission, upon the filing or
first delivery to the Underwriters of the Prospectus (or any supplement
to the Prospectus (including any term sheet meeting the requirements of
Rule 434 of the Rules and Regulations)) and at the First Closing Date
and Second Closing Date (as hereinafter defined), (A) the Registration
Statement and Prospectus (in each case, as so amended and/or
supplemented) conformed or will conform in all material respects to the
requirements of the Act and the Rules and Regulations, (B) the
Registration Statement (as so amended) did not or will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (C) the Prospectus (as so supplemented) did
not or will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they
are or were made, not misleading; except that the foregoing shall not
apply to statements in or omissions from any such document in reliance
upon, and in conformity with, written information furnished to the
Company by you, or by any Underwriter through you, specifically for use
in the preparation thereof. If the Registration Statement has been
declared effective by the Commission, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission.
(iii) The consolidated financial statements of the
Company, together with the notes thereto, set forth in the Registration
Statement and the Prospectus comply in all material respects with the
requirements of the Act and fairly present the financial condition of
the Company and its consolidated subsidiaries as of the dates indicated
and the results of operations and changes in cash flows for the periods
therein specified in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except
as otherwise stated therein); and the supporting schedules included in
the Registration Statement present fairly the information required to be
stated therein. No other financial statements or schedules are required
to be included in the Registration Statement or the Prospectus. Deloitte
& Touche LLP, which has expressed its opinion with respect to the annual
financial statements filed as a part of the Registration Statement and
included in the Registration Statement and the Prospectus, are
independent public accountants as required by the Act and the Rules and
Regulations.
(iv) Each of the Company and the subsidiaries of the
Company listed in Exhibit 21 to the Registration Statement (the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation. Each of the Company and its Subsidiaries has full
corporate power and authority to own its properties and conduct its
business as currently being carried on and as described in the
Registration Statement and the Prospectus, and is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction
in which it owns or leases real property or in which the conduct of its
business makes such qualification necessary and in which the failure to
so qualify would have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company and its Subsidiaries, taken as a
whole (a "Material Adverse Effect").
(v) Except as contemplated in the Registration
Statement and the Prospectus, subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its Subsidiaries has incurred
any material liabilities or obligations, direct or contingent, or
entered into any material transactions, or declared or paid any
dividends or made any distribution of any kind with respect to its
capital stock; and there has not been any change in the capital stock
(other than a change in the number of outstanding shares of Common Stock
due to the issuance of shares upon the exercise of
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outstanding options or warrants), or any material change in the
short-term or long-term debt outstanding, or any material issuance of
options, warrants, convertible securities or other rights to purchase
the capital stock, of the Company or any of its Subsidiaries, or any
change that had a Material Adverse Effect.
(vi) Except as set forth in the Registration
Statement and the Prospectus, there is not pending or, to the knowledge
of the Company, threatened or contemplated, any action, suit or
proceeding to which the Company or any of its Subsidiaries is a party
before or by any court or governmental agency, authority or body, or any
arbitrator, which might result in any change having a Material Adverse
Effect.
(vii) There are no contracts or documents of the
Company or any of its Subsidiaries that are required to be filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations that have not been so filed.
(viii) This Agreement has been duly authorized,
executed and delivered by the Company, and constitutes a valid, legal
and binding obligation of the Company, enforceable in accordance with
its terms, except as rights to indemnity hereunder may be limited by
federal or state securities laws and except as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws
affecting the rights of creditors generally and subject to general
principles of equity. The execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any agreement
or instrument to which the Company is a party or by which it is bound or
to which any of its property is subject, the Company's charter or
by-laws, or any order, rule, regulation or decree of any court or
governmental agency or body having jurisdiction over the Company or any
of its properties; no consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is required for
the execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby, including the
issuance or sale of the Securities by the Company, except such as may be
required under the Act or state securities or blue sky laws; and the
Company has full power and authority to enter into this Agreement and to
authorize, issue and sell the Securities (other than the Firm Shares to
be sold by the Selling Stockholders) as contemplated by this Agreement.
(ix) All of the issued and outstanding shares of
capital stock of the Company, including the outstanding shares of Common
Stock, are duly authorized and validly issued, fully paid and
nonassessable, have been issued in compliance in all material respects
with all federal and state securities laws, were not issued in violation
of or subject to any preemptive rights or other rights to subscribe for
or purchase securities, and the holders thereof are not subject to
personal liability by reason of being such holders; the Securities which
may be sold hereunder by the Company have been duly authorized and, when
issued, delivered and paid for in accordance with the terms hereof, will
have been validly issued and will be fully paid and nonassessable, and
the holders thereof will not be subject to personal liability by reason
of being such holders; and the capital stock of the Company, including
the Common Stock, conforms to the description thereof in the
Registration Statement and the Prospectus. Except as otherwise stated in
the Registration Statement and the Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's charter, by-laws or any agreement or other
instrument to which the Company is a party or by which the Company is
bound. Neither the filing of the Registration Statement nor the offering
or sale of the Securities as contemplated by this Agreement gives rise
to any rights for or relating to the registration of any shares of
Common Stock or other securities of the Company other than such rights
as have been
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<PAGE> 5
waived with respect to such offering and sale. All of the issued and
outstanding shares of capital stock of each of the Company's
Subsidiaries have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise described in the
Registration Statement and the Prospectus and except for any directors'
qualifying shares, the Company owns of record and beneficially, free and
clear of any security interests, claims, liens, proxies, equities or
other encumbrances, all of the issued and outstanding shares of such
stock. Except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or
other rights in existence to purchase or acquire from the Company or any
subsidiary of the Company any shares of the capital stock of the Company
or any subsidiary of the Company. The Company has an authorized and
outstanding capitalization as set forth in the Registration Statement
and the Prospectus, except for option grants made in the ordinary course
of business and subject to option exercises.
(x) The Company and each of its Subsidiaries holds,
and is operating in compliance in all material respects with, all
material franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and all
such franchises, grants, authorizations, licenses, permits, easements,
consents, certifications and orders are valid and in full force and
effect; and the Company and each of its Subsidiaries is in compliance in
all material respects with all applicable federal, state, local and
foreign laws, regulations, orders and decrees.
(xi) The Company and its Subsidiaries have good and
marketable title to all property described in the Registration Statement
and the Prospectus as being owned by them, in each case free and clear
of all liens, claims, security interests or other encumbrances except
such as are described in the Registration Statement and the Prospectus;
the property held under lease by the Company and its Subsidiaries is
held by them under valid, subsisting and enforceable leases with only
such exceptions with respect to any particular lease as do not interfere
in any material respect with the conduct of the business of the Company
or its Subsidiaries; to the knowledge of the Company, the Company and
each of its Subsidiaries owns or possesses all patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and rights necessary for the conduct of the
business of the Company and its Subsidiaries as currently carried on and
as described in the Registration Statement and the Prospectus; except as
stated in the Registration Statement and the Prospectus, to the
knowledge of the Company, no name which the Company or any of its
Subsidiaries uses and no other aspect of the business of the Company or
any of its Subsidiaries will involve or give rise to any infringement
of, or license or similar fees for, any patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights, licenses, inventions, trade secrets or
other similar rights of others material to the business or prospects of
the Company and neither the Company nor any of its Subsidiaries has
received any notice alleging any such infringement or fee.
(xii) Neither the Company nor any of its Subsidiaries
is in violation of its respective charter or by-laws or in breach of or
otherwise in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note,
indenture, loan agreement or any other material contract, lease or other
instrument to which it is subject or by which any of them may be bound,
or to which any of the material property or assets of the Company or any
of its Subsidiaries is subject.
(xiii) The Company and its Subsidiaries have filed all
federal, state, local and foreign income and franchise tax returns
required to be filed and are not in default in the payment of
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<PAGE> 6
any taxes which were payable pursuant to said returns or any assessments
with respect thereto, other than any which the Company or any of its
Subsidiaries is contesting in good faith.
(xiv) The Company has not distributed and will not
distribute any prospectus or other offering material in connection with
the offering and sale of the Securities other than any Preliminary
Prospectus or the Prospectus or other materials permitted by the Act to
be distributed by the Company.
(xv) The Securities have been duly authorized for
quotation on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market System and, on the date the
Registration Statement became or becomes effective, the Company's
Registration Statement on Form 8-A or other applicable form under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), became
or will become effective.
(xvi) The Company has no subsidiary or subsidiaries
and owns no capital stock or other equity or ownership or proprietary
interest in any corporation, partnership, limited liability company,
joint venture, association, trust or other business organization except
for the Subsidiaries listed in Exhibit 21 to the Registration Statement.
(xvii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(xviii) Other than as contemplated by this Agreement,
the Company has not incurred any liability for any finder's or broker's
fee or agent's commission in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated
hereby.
(xix) No labor dispute with the employees of the
Company or any of its Subsidiaries exists or, to the knowledge of the
Company, is threatened; and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal
suppliers or contractors which could have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries has violated any
applicable safety or similar law applicable to its business nor any
federal or state law relating to discrimination in the hiring, promotion
or pay of employees, nor any applicable federal or state wage and hours
law, nor any provisions of the Employee Retirement Income Security Act
or the rules and regulations promulgated thereunder, the violation of
any of which could have a Material Adverse Effect. The Company is not
aware of any threatened or pending litigation between the Company or any
of its Subsidiaries and any of its executive officers which, if
adversely determined, could have a Material Adverse Effect, and has no
reason to believe that such officers will not remain in the employment
of the Company during the next twelve months.
(xx) No transaction has occurred between or among the
Company or any of its Subsidiaries and any of their officers or
directors or any affiliate or affiliates of any such officer or director
that is required to be described in and is not described in the
Registration Statement and the Prospectus.
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<PAGE> 7
(xxi) The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such
losses and risks in such amounts as are customary in the business in
which they are engaged; and neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
their business at a cost that would not have a Material Adverse Effect.
(xxii) There are no affiliations with the National
Association of Securities Dealers, Inc. (the "NASD") among the Company's
officers, directors or, to the best knowledge of the Company, any five
percent or greater shareholder of the Company, except as set forth in
the Registration Statement and the Prospectus or otherwise disclosed in
writing to the Representatives.
(xxiii) Neither the Company nor any of its Subsidiaries
is an "investment company" within the meaning of the Investment Company
Act of 1940, as amended (the "Investment Company Act").
(xxiv) Neither the Company nor any of its Subsidiaries
or, to the knowledge of the Company, any other person associated with or
acting on behalf of the Company or any of its Subsidiaries including,
without limitation, any director, officer, agent or employee of the
Company or any of its Subsidiaries has, directly or indirectly, while
acting on behalf of the Company or any of its Subsidiaries, (i) used any
corporate funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity; (ii) made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; (iii) violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any other unlawful
payment.
(xxv) To the extent stated in the Prospectus, the
Company has reviewed its operations and that of its Subsidiaries and any
third parties with which the Company or any of its Subsidiaries has a
material relationship to evaluate the extent to which the business or
operations of the Company or any of its Subsidiaries will be affected by
the Year 2000 Problem (defined below). As a result of such review, the
Company has no reason to believe, and does not believe, that the Year
2000 Problem will have a Material Adverse Effect. The "Year 2000
Problem" as used herein means any significant risk that computer
hardware or software used in the receipt, transmission, processing,
manipulation, storage, retrieval, retransmission or other utilization of
data or in the operation of mechanical or electrical systems of any kind
will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or
time periods occurring prior to January 1, 2000.
(b) Each Selling Stockholder severally and not jointly
represents and warrants to, and agrees with, the several Underwriters as
follows:
(i) Such Selling Stockholder is the record and
beneficial owner of, and has, and on the First Closing Date will have,
valid and marketable title to the Securities to be sold by such Selling
Stockholder, free and clear of all security interests, claims, liens,
restrictions on transferability, legends, proxies, equities or other
encumbrances; and upon delivery of and payment for such Securities
hereunder, the several Underwriters will acquire valid and marketable
title thereto, free and clear of any security interests, claims, liens,
restrictions on transferability, legends, proxies, equities or other
encumbrances (except for any such encumbrances created by the
Underwriters). Such Selling Stockholder is selling the Securities to be
sold by such Selling Stockholder for such Selling Stockholder's own
account and is not selling such Securities, directly or
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<PAGE> 8
indirectly, for the benefit of the Company, and no part of the proceeds
of such sale received by such Selling Stockholder will inure, either
directly or indirectly, to the benefit of the Company other than as
described in the Registration Statement and the Prospectus.
(ii) Such Selling Stockholder has duly authorized,
executed and delivered a Custody Agreement ("Custody Agreement"), which
Custody Agreement is a valid and binding obligation of such Selling
Stockholder, to Norwest Bank Minnesota, N.A., as Custodian (the
"Custodian"); pursuant to the Custody Agreement the Selling Stockholder
has placed in custody with the Custodian, for delivery under this
Agreement, the certificates representing the Securities to be sold by
such Selling Stockholder; such certificates represent validly issued,
outstanding, fully paid and nonassessable shares of Common Stock; and
such certificates were duly and properly endorsed in blank for transfer,
or were accompanied by all documents duly and properly executed that are
necessary to validate the transfer of title thereto, to the
Underwriters, free of any legend, restriction on transferability, proxy,
lien or claim, whatsoever.
(iii) Such Selling Stockholder has the power and
authority to enter into this Agreement and to sell, transfer and deliver
the Securities to be sold by such Selling Stockholder; and such Selling
Stockholder has duly authorized, executed and delivered to Steven L.
Johnson and John R. Wark, as attorneys-in-fact (the
"Attorneys-in-Fact"), an irrevocable power of attorney (a "Power of
Attorney") authorizing and directing the Attorneys-in-Fact, or either of
them, to effect the sale and delivery of the Securities being sold by
such Selling Stockholder, to enter into this Agreement and to take all
such other action as may be necessary hereunder.
(iv) This Agreement, the Custody Agreement and the
Power of Attorney have each been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder and each constitutes a valid
and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnity hereunder or
thereunder may be limited by federal or state securities laws and except
as such enforceability may be limited by bankruptcy, insolvency,
reorganization or laws affecting the rights of creditors generally and
subject to general principles of equity. The execution and delivery of
this Agreement, the Custody Agreement and the Power of Attorney and the
performance of the terms hereof and thereof and the consummation of the
transactions herein and therein contemplated will not result in a breach
or violation of any of the terms and provisions of, or constitute a
default under, any agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound, or
any law, regulation, order or decree applicable to such Selling
Stockholder; no consent, approval, authorization or order of, or filing
with, any court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Custody
Agreement and the Power of Attorney or for the consummation of the
transactions contemplated hereby and thereby, including the sale of the
Securities being sold by such Selling Stockholder, except such as may be
required under the Act or state securities laws or blue sky laws.
(v) Such Selling Stockholder has not distributed and
will not distribute any prospectus or other offering material in
connection with the offering and sale of the Securities other than any
Preliminary Prospectus or the Prospectus or other materials permitted by
the Act to be distributed by such Selling Stockholder.
(vi) Such Selling Stockholder has reviewed the
Registration Statement and the Prospectus and to the best knowledge of
such Selling Stockholder neither the Registration Statement nor the
Prospectus contains any untrue statement of a material fact or omits to
state any material fact
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<PAGE> 9
required to be stated therein or necessary to make the statements
therein not misleading regarding such Selling Stockholder, the other
Selling Stockholders, the Company or otherwise.
(vii) To the best knowledge of such Selling
Stockholder, the representations and warranties of the Company contained
in paragraph (a) of this Section 2 are true and correct.
(viii) Such Selling Stockholder is not prompted to sell
any of the Shares hereunder by any material adverse information
concerning the Company which is not set forth in the Registration
Statement and the Prospectus.
(c) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby; any certificate signed by or on behalf of any Selling
Stockholder as such and delivered to you or to counsel for the Underwriters
shall be deemed a representation and warranty by such Selling Stockholder to
each Underwriter as to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell 2,500,000 Firm Shares, and each
Selling Stockholder agrees, severally and not jointly, to sell the number of
Firm Shares set forth opposite the name of such Selling Stockholder in Schedule
I hereto, to the several Underwriters, and each Underwriter agrees, severally
and not jointly, to purchase from the Company and the Selling Stockholders the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto. The purchase price for each Firm Share shall be $ per share.
The obligation of each Underwriter to each of the Company and the Selling
Stockholders shall be to purchase from each of the Company and the Selling
Stockholders that number of Firm Shares (to be adjusted by the Representatives
to avoid fractional shares) which represents the same proportion of the number
of Firm Shares to be sold by each of the Company and the Selling Stockholders
pursuant to this Agreement as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule II hereto represents to the total number of
Firm Shares to be purchased by all Underwriters pursuant to this Agreement. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraph (c) of this Section 3 and in Section 8
hereof, the agreement of each Underwriter is to purchase only the respective
number of Firm Shares specified in Schedule II.
The Firm Shares will be delivered by the Company and the
Custodian to you for the accounts of the several Underwriters against payment of
the purchase price therefor by certified or official bank check or other next
day funds payable to the order of the Company and the Custodian, as appropriate,
at the offices of U.S. Bancorp Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable, at 9:00 a.m. Central time on the third (or if the
Securities are priced, as contemplated by Rule 15c6-1(c) under the Exchange Act,
after 4:30 p.m. Eastern time, the fourth) full business day following the date
hereof, or at such other time and date as you and the Company determine pursuant
to Rule 15c6-1(a) under the Exchange Act, such time and date of delivery being
herein referred to as the "First Closing Date." If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
Certificates representing the Firm Shares, in definitive form and in such
denominations and registered in such names as you may request upon at least two
business days' prior notice to the Company and the Custodian, will be made
available for checking and packaging not later than 10:30 a.m., Central time, on
the business day next preceding the First Closing Date at the offices of U.S.
Bancorp
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<PAGE> 10
Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable.
(b) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters an option to
purchase all or any portion of the Option Shares at the same purchase price as
the Firm Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option granted
hereunder may be exercised at any time (but not more than once) within 30 days
after the effective date of this Agreement upon notice (confirmed in writing) by
the Representatives to the Company setting forth the aggregate number of Option
Shares as to which the several Underwriters are exercising the option, the names
and denominations in which the certificates for the Option Shares are to be
registered and the date and time, as determined by you, when the Option Shares
are to be delivered, such time and date being herein referred to as the "Second
Closing" and "Second Closing Date", respectively; provided, however, that the
Second Closing Date shall not be earlier than the First Closing Date nor earlier
than the second business day after the date on which the option shall have been
exercised. The number of Option Shares to be purchased by each Underwriter shall
be the same percentage of the total number of Option Shares to be purchased by
the several Underwriters as the number of Firm Shares to be purchased by such
Underwriter is of the total number of Firm Shares to be purchased by the several
Underwriters, as adjusted by the Representatives in such manner as the
Representatives deem advisable to avoid fractional shares. No Option Shares
shall be sold and delivered unless the Firm Shares previously have been, or
simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company to you for
the accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company at the offices of U.S. Bancorp Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such
other location as may be mutually acceptable at 9:00 a.m., Central time, on the
Second Closing Date. If the Representatives so elect, delivery of the Option
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives. Certificates
representing the Option Shares in definitive form and in such denominations and
registered in such names as you have set forth in your notice of option
exercise, will be made available for checking and packaging not later than 10:30
a.m., Central time, on the business day next preceding the Second Closing Date
at the office of U.S. Bancorp Piper Jaffray Inc., Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually
acceptable.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company or the Selling Stockholders, on behalf of any
Underwriter for the Securities to be purchased by such Underwriter. Any such
payment by you shall not relieve any such Underwriter of any of its obligations
hereunder. Nothing herein contained shall constitute any of the Underwriters an
unincorporated association or partner with the Company or any Selling
Stockholder.
4. Covenants.
(a) The Company covenants and agrees with the several
Underwriters as follows:
(i) If the Registration Statement has not already
been declared effective by the Commission, the Company will use its best
efforts to cause the Registration Statement and any post-effective
amendments thereto to become effective as promptly as possible; the
Company will notify you promptly of the time when the Registration
Statement or any post-effective amendment to
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the Registration Statement has become effective or any supplement to the
Prospectus (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations) has been filed and of any request by the
Commission for any amendment or supplement to the Registration Statement
or the Prospectus or additional information; if the Company has elected
to rely on Rule 430A of the Rules and Regulations, the Company will
prepare and file a Prospectus (or term sheet within the meaning of Rule
434 of the Rules and Regulations) containing the information omitted
therefrom pursuant to Rule 430A of the Rules and Regulations with the
Commission within the time period required by, and otherwise in
accordance with the provisions of, Rules 424(b), 430A and 434, if
applicable, of the Rules and Regulations; if the Company has elected to
rely upon Rule 462(b) of the Rules and Regulations to increase the size
of the offering registered under the Act, the Company will prepare and
file a registration statement with respect to such increase with the
Commission within the time period required by, and otherwise in
accordance with the provisions of, Rule 462(b); the Company will prepare
and file with the Commission, promptly upon your request, any amendments
or supplements to the Registration Statement or the Prospectus
(including any term sheet within the meaning of Rule 434 of the Rules
and Regulations) that, in your reasonable opinion, may be necessary or
advisable in connection with the distribution of the Securities by the
Underwriters; and the Company will not file any amendment or supplement
to the Registration Statement or the Prospectus (including any term
sheet within the meaning of Rule 434 of the Rules and Regulations) to
which you shall reasonably object by notice to the Company after having
been furnished a copy a reasonable time prior to the filing.
(ii) The Company will advise you, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceeding for any such purpose; and
the Company will promptly use its best efforts to prevent the issuance
of any stop order or to obtain its withdrawal if such a stop order
should be issued.
(iii) Within the time during which a prospectus
(including any term sheet within the meaning of Rule 434 of the Rules
and Regulations) relating to the Securities is required to be delivered
under the Act, the Company will comply as far as it is able with all
requirements imposed upon it by the Act, as now and hereafter amended,
and by the Rules and Regulations, as from time to time in force, so far
as necessary to permit the continuance of sales of or dealings in the
Securities as contemplated by the provisions hereof and the Prospectus.
If during such period any event occurs as a result of which the
Prospectus would include an untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in
the light of the circumstances then existing, not misleading, or if
during such period it is necessary to amend the Registration Statement
or supplement the Prospectus to comply with the Act, the Company will
promptly notify you and will amend the Registration Statement or
supplement the Prospectus (at the expense of the Company) so as to
correct such statement or omission or effect such compliance.
(iv) The Company will use its best efforts to qualify
the Securities for sale under the securities laws of such jurisdictions
as you reasonably designate and to continue such qualifications in
effect so long as required for the distribution of the Securities,
except that the Company shall not be required in connection therewith to
qualify as a foreign corporation or to execute a general consent to
service of process in any state.
(v) The Company will furnish to the Underwriters
copies of the Registration Statement (three of which will be signed and
will include all exhibits), each Preliminary Prospectus, the Prospectus,
and all amendments and supplements (including any term sheet within the
meaning
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<PAGE> 12
of Rule 434 of the Rules and Regulations) to such documents, in each
case as soon as available and in such quantities as you may from time to
time reasonably request.
(vi) During a period of five years commencing with
the date hereof, the Company will furnish to the Representatives, and to
each Underwriter who may so request in writing, copies of all periodic
and special reports furnished to the stockholders of the Company and all
information, documents and reports filed with the Commission, the NASD,
NASDAQ or any securities exchange, other than documents filed by EDGAR.
(vii) The Company will make generally available to its
security holders as soon as practicable, but in any event not later than
15 months after the end of the Company's current fiscal quarter, an
earnings statement (which need not be audited) covering a 12-month
period beginning after the effective date of the Registration Statement
that shall satisfy the provisions of Section 11(a) of the Act and Rule
158 of the Rules and Regulations.
(viii) The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented
from becoming effective under the provisions of Section 9(a) hereof or
is terminated, will pay or cause to be paid (A) all expenses (including
transfer taxes allocated to the respective transferees) incurred in
connection with the delivery to the Underwriters of the Securities, (B)
all expenses and fees (including, without limitation, fees and expenses
of the Company's accountants and counsel but, except as otherwise
provided below, not including fees of the Underwriters' counsel) in
connection with the preparation, printing, filing, delivery, and
shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits thereto),
the Securities, each Preliminary Prospectus, the Prospectus, and any
amendment thereof or supplement thereto, and the printing, delivery, and
shipping of this Agreement and other underwriting documents, including
Blue Sky Memoranda, (C) all filing fees and fees and disbursements of
the Underwriters' counsel incurred in connection with the qualification
of the Securities for offering and sale by the Underwriters or by
dealers under the securities or blue sky laws of the states and other
jurisdictions which you shall designate in accordance with Section 4(d)
hereof, (D) the fees and expenses of any transfer agent or registrar,
(E) the filing fees incident to any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the
Securities, (F) listing fees, if any, and (G) all other costs and
expenses incident to the performance of its obligations hereunder that
are not otherwise specifically provided for herein. If the sale of the
Securities provided for herein is not consummated by reason of action by
the Company pursuant to Section 9(a) hereof which prevents this
Agreement from becoming effective, or by reason of any failure, refusal
or inability on the part of the Company or the Selling Stockholders to
perform any agreement on its or their part to be performed, or because
any other condition of the Underwriters' obligations hereunder required
to be fulfilled by the Company or the Selling Stockholders is not
fulfilled, the Company will reimburse the several Underwriters for all
out-of-pocket disbursements (including fees and disbursements of
counsel) incurred by the Underwriters in connection with their
investigation, preparing to market and marketing the Securities or in
contemplation of performing their obligations hereunder. The Company
shall not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from the
sale of the Securities to be sold by it hereunder for the purposes set
forth in the Prospectus and will file such reports with the Commission
with respect to the sale of the Securities and the application of the
proceeds therefrom as may be required in accordance with Rule 463 of the
Rules and Regulations.
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<PAGE> 13
(x) The Company will not, without your prior written
consent, offer for sale, sell, contract to sell, grant any option for
the sale of or otherwise issue or dispose of any Common Stock or any
securities convertible into or exchangeable for, or any options or
rights to purchase or acquire, Common Stock, except to the Underwriters
pursuant to this Agreement and except for the issuance of options
pursuant to the Company's 1997 Equity Incentive Plan and 1999 Employee
Stock Purchase Plan or shares of Common Stock upon the exercise of such
options or other already outstanding options or warrants, for a period
of 180 days after the commencement of the public offering of the
Securities by the Underwriters.
(xi) The Company either has caused to be delivered to
you or will cause to be delivered to you prior to the effective date of
the Registration Statement a letter from each of the Company's directors
and officers, and from each of the Company's shareholders and
optionholders holding outstanding shares or options to purchase shares
representing [___%] or more of the Company's Common Stock (each, a
"Lock-Up Agreement"), substantially in the form attached hereto as
Exhibit A.
(xii) The Company has not taken and will not take,
directly or indirectly, any action designed to or which might reasonably
be expected to cause or result in, or which has constituted, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities, and has not
effected any sales of Common Stock which are required to be disclosed in
response to Item 701 of Regulation S-K under the Act which have not been
so disclosed in the Registration Statement.
(xiii) The Company will not incur any liability for any
finder's or broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(b) Each Selling Stockholder, severally and not jointly,
covenants and agrees with the several Underwriters as follows:
(i) Except as otherwise agreed to by the Company and
the Selling Stockholder, such Selling Stockholder will pay all taxes, if
any, on the transfer and sale, respectively, of the Securities being
sold by such Selling Stockholder, the fees of such Selling Stockholder's
counsel and such Selling Stockholder's proportionate share (based upon
the number of Securities being offered by such Selling Stockholder
pursuant to the Registration Statement) of all costs and expenses
(except for legal and accounting expenses and fees of the registrar and
transfer agent) incurred by the Company pursuant to the provisions of
Section 4(a)(viii) of this Agreement; provided, however, that each
Selling Stockholder severally agrees to reimburse the Company for any
reimbursement made by the Company to the Underwriters pursuant to
Section 4(a)(viii) hereof to the extent such reimbursement resulted from
the failure or refusal on the part of such Selling Stockholder to comply
under the terms or fulfill any of the conditions of this Agreement.
(ii) If this Agreement shall be terminated by the
Underwriters because of any failure, refusal or inability on the part of
such Selling Stockholder to perform any agreement on such Selling
Stockholder's part to be performed, or because any other condition of
the Underwriters' obligations hereunder required to be fulfilled by such
Selling Stockholder is not fulfilled, such Selling Stockholder agrees to
reimburse the several Underwriters for all out-of-pocket disbursements
(including fees and disbursements of counsel for the Underwriters)
incurred by the Underwriters in connection with their investigation,
preparing to market and marketing the Securities or in contemplation of
performing their obligations hereunder. The Selling Stockholder shall
not in any
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<PAGE> 14
event be liable to any of the Underwriters for loss of anticipated
profits from the transactions covered by this Agreement.
(iii) The Securities to be sold by such Selling
Stockholder, represented by the certificates on deposit with the
Custodian pursuant to the Custody Agreement of such Selling Stockholder,
are subject to the interest of the several Underwriters and the other
Selling Stockholders; the arrangements made for such custody are, except
as specifically provided in the Custody Agreement, irrevocable; and the
obligations of such Selling Stockholder hereunder shall not be
terminated, except as provided in this Agreement or in the Custody
Agreement, by any act of such Selling Stockholder, by operation of law,
by the death of such Selling Stockholder, or by the occurrence of any
other event. If any such event should occur before the delivery of the
Securities hereunder, certificates for the Securities deposited with the
Custodian shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such event had not
occurred, whether or not the Custodian shall have received notice
thereof.
(iv) Such Selling Stockholder shall abide by the
terms of the Lock-Up Agreement delivered to you by such Selling
Stockholder.
(v) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities, and has not effected any sales of
Common Stock which, if effected by the Company, would be required to be
disclosed in response to Item 701 of Regulation S-K.
(vi) Such Selling Stockholder shall immediately
notify you if any event occurs, or of any change in information relating
to such Selling Stockholder or the Company or any new information
relating to the Company or relating to any matter stated in the
Prospectus or any supplement thereto (including any term sheet within
the meaning of Rule 434 of the Rules and Regulations), which results in
the Prospectus (as supplemented) including an untrue statement of a
material fact or omitting to state any material fact necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading.
5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company and the Selling Stockholders contained
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 p.m., Central time, on the date of this Agreement, or such
later time and date as you, as Representatives of the several Underwriters,
shall approve and all filings required by Rules 424, 430A and 434 of the Rules
and Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) No Underwriter shall have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto (including any term sheet within the
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<PAGE> 15
meaning of Rule 434 of the Rules and Regulations), contains an untrue statement
of fact which, in your opinion, is material, or omits to state a fact which, in
your opinion, is material and is required to be stated therein or necessary to
make the statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent to
the respective dates as of which information is given in the Registration
Statement and the Prospectus, neither the Company nor any of its Subsidiaries
shall have incurred any material liabilities or obligations, direct or
contingent, or entered into any material transactions, or declared or paid any
dividends or made any distribution of any kind with respect to its capital
stock; and there shall not have been any change in the capital stock (other than
a change in the number of outstanding shares of Common Stock due to the issuance
of shares upon the exercise of outstanding options or warrants), or any material
change in the short-term or long-term debt outstanding of the Company, any
material issuance of options, or any material issuance of warrants, convertible
securities or other rights to purchase the capital stock of the Company or any
of its Subsidiaries, or any change having a Material Adverse Effect or any
development involving a prospective change that would have a Material Adverse
Effect, that, in your judgment, makes it impractical or inadvisable to offer or
deliver the Securities on the terms and in the manner contemplated in the
Registration Statement and the Prospectus.
(d) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, the opinion of Cooley
Godward LLP, counsel for the Company, dated such Closing Date and addressed to
you, to the effect that:
(i) Each of the Company and its Subsidiaries has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation. Each of
the Company and its Subsidiaries has full corporate power and authority
to own its properties and conduct its business as currently being
carried on and as described in the Registration Statement and
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which it
owns or leases real property or in which the conduct of its business
makes such qualification necessary and in which the failure to so
qualify would have a Material Adverse Effect.
(ii) The capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus
under the caption "Description of Capital Stock." All of the issued and
outstanding shares of the capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. The
Securities to be issued and sold by the Company hereunder have been duly
authorized and, when issued, delivered and paid for in accordance with
the terms of this Agreement, will have been validly issued and will be
fully paid and nonassessable. Except as otherwise stated in the
Registration Statement and Prospectus, there are no preemptive rights or
other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument known to
such counsel to which the Company is a party or by which the Company is
bound. To the best of such counsel's knowledge, neither the filing of
the Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights for or relating
to the registration of any shares of Common Stock or other securities of
the Company that have not been waived.
(iii) All of the issued and outstanding shares of
capital stock of each of the Company's Subsidiaries have been duly and
validly authorized and issued and are fully paid and nonassessable, and,
to the best of such counsel's knowledge, except as otherwise described
in the Registration Statement and Prospectus and except for directors'
qualifying shares, the Company owns of record and beneficially, free and
clear of any security interests, claims, liens, proxies,
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<PAGE> 16
equities or other encumbrances, all of the issued and outstanding shares
of such stock. To the best of such counsel's knowledge, except as
described in the Registration Statement and Prospectus, there are no
options, warrants, agreements, contracts or other rights in existence to
purchase or acquire from the Company or any Subsidiary any shares of the
capital stock of the Company or any Subsidiary.
(iv) The Registration Statement has become effective
under the Act and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose has been instituted or
threatened by the Commission.
(v) The descriptions in the Registration Statement
and Prospectus of statutes, legal and governmental proceedings,
contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel does not know of any
statutes or legal or governmental proceedings required to be described
in the Prospectus that are not described as required, or of any
contracts or documents of a character required to be described in the
Registration Statement or Prospectus or included as exhibits to the
Registration Statement that are not described or included as required.
(vi) The Company has full corporate power and
authority to enter into this Agreement, and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes a
valid, legal and binding obligation of the Company enforceable in
accordance with its terms (except as rights to indemnity hereunder may
be limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting the rights of creditors generally and subject
to general principles of equity); the execution, delivery and
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any statute,
rule or regulation, any agreement or instrument known to such counsel to
which the Company is a party or by which it is bound or to which any of
its property is subject, the Company's charter or by-laws, or any order
or decree known to such counsel of any court or governmental agency or
body having jurisdiction over the Company or any of its respective
properties; and no consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is required for
the execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby, including the
issuance or sale of the Securities by the Company, except such as may be
required under the Act or state securities laws.
(vii) The Registration Statement and the Prospectus,
and any amendment thereof or supplement thereto (including any term
sheet within the meaning of Rule 434 of the Rules and Regulations),
comply as to form in all material respects with the requirements of the
Act and the Rules and Regulations; and on the basis of conferences with
officers of the Company, examination of documents referred to in the
Registration Statement and Prospectus and such other procedures as such
counsel deemed appropriate, nothing has come to the attention of such
counsel that causes such counsel to believe that the Registration
Statement or any amendment thereof, at the time the Registration
Statement became effective and as of such Closing Date (including any
Registration Statement filed under Rule 462(b) of the Rules and
Regulations), contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (as of its date and as of such Closing Date), as amended or
supplemented, includes any untrue statement of material fact or omits to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they
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<PAGE> 17
were made, not misleading; it being understood that such counsel need
express no opinion as to the financial statements or other financial
data included in any of the documents mentioned in this clause.
(viii) The registration of the Common Stock under
Section 12(g) of the Exchange Act has become effective.
(ix) The Company is not an "investment company" or an
entity "controlled" by an "investment company" as such terms are defined
in the Investment Company Act.
In rendering such opinion such counsel may rely (i) as to
matters of law other than California and federal law, upon the opinion or
opinions of local counsel provided that the extent of such reliance is specified
in such opinion and that such counsel shall state that such opinion or opinions
of local counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, to the extent such
counsel deems reasonable upon certificates of officers of the Company and its
Subsidiaries provided that the extent of such reliance is specified in such
opinion.
(e) On the First Closing Date, there shall have been
furnished to you, as Representatives of the several Underwriters, the opinion of
Cooley Godward LLP, counsel for the Selling Stockholders, dated the First
Closing Date and addressed to you, to the effect that:
(i) Each of the Selling Stockholders is the sole
record owner of the Securities to be sold by such Selling Stockholder
and delivery of the certificates for the Securities to be sold by each
Selling Stockholder pursuant to this Agreement, upon payment therefor by
the Underwriters, will pass marketable title to such Securities to the
Underwriters and the Underwriters will acquire all the rights of such
Selling Stockholder in the Securities (assuming the Underwriters have no
knowledge of an adverse claim), free and clear of any security
interests, claims, liens or other encumbrances (except for any such
encumbrances created by the Underwriters).
(ii) This Agreement, the Custody Agreements and the
Powers of Attorney have been duly and validly executed and delivered by
(or by the Attorneys-in-Fact, or either of them, on behalf of) the
Selling Stockholders and are valid and binding agreements of the Selling
Stockholders, enforceable in accordance with their respective terms
(except as rights to indemnity hereunder or thereunder may be limited by
federal or state securities laws and except as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and subject to general principles
of equity).
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<PAGE> 18
In rendering such opinion such counsel may rely (i) as to
matters of law other than California and federal law, upon the opinion or
opinions of local counsel provided that the extent of such reliance is specified
in such opinion and that such counsel shall state that such opinion or opinions
of local counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, to the extent such
counsel deems reasonable upon certificates of officers of the Selling
Stockholders provided that the extent of such reliance is specified in such
opinion.
(f) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, such opinion or opinions
from Wilson Sonsini Goodrich & Rosati, counsel for the several Underwriters,
dated such Closing Date and addressed to you, with respect to the formation of
the Company, the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as you reasonably may request, and such
counsel shall have received such papers and information as they request to
enable them to pass upon such matters.
(g) On each Closing Date you, as Representatives of the
several Underwriters, shall have received a letter of Deloitte & Touche LLP,
dated such Closing Date and addressed to you, confirming that they are
independent public accountants within the meaning of the Act and are in
compliance with the applicable requirements relating to the qualifications of
accountants under Rule 2-01 of Regulation S-X of the Commission, and stating, as
of the date of such letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five days
prior to the date of such letter), the conclusions and findings of said firm
with respect to the financial information and other matters covered by its
letter delivered to you concurrently with the execution of this Agreement, and
the effect of the letter so to be delivered on such Closing Date shall be to
confirm the conclusions and findings set forth in such prior letter.
(h) On each Closing Date, there shall have been furnished to
you, as Representatives of the Underwriters, a certificate, dated such Closing
Date and addressed to you, signed by the chief executive officer and by the
chief financial officer of the Company, to the effect that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, in all material
respects, as if made at and as of such Closing Date, and the Company has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof or
the qualification of the Securities for offering or sale has been
issued, and no proceeding for that purpose has been instituted or, to
the best of their knowledge, is contemplated by the Commission or any
state or regulatory body; and
(iii) The signers of said certificate have carefully
examined the Registration Statement and the Prospectus, and any
amendments thereof or supplements thereto (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations), and (A)
such documents contain all statements and information required to be
included therein, the Registration Statement, or any amendment thereof,
does not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Prospectus, as
amended or supplemented, does not include any untrue statement of
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, (B) since the effective date of the Registration
Statement, there has occurred no event required to be
-18-
<PAGE> 19
set forth in an amended or supplemented prospectus which has not been so
set forth, (C) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its Subsidiaries has incurred any
material liabilities or obligations, direct or contingent, or entered
into any material transactions, not in the ordinary course of business,
or declared or paid any dividends or made any distribution of any kind
with respect to its capital stock, and except as disclosed in the
Registration Statement and the Prospectus, there has not been any change
in the capital stock (other than a change in the number of outstanding
shares of Common Stock due to the issuance of shares upon the exercise
of outstanding options or warrants), or any material change in the
short-term or long-term debt outstanding, or any material issuance of
options or of any warrants, convertible securities or other rights to
purchase the capital stock, of the Company, or any of its Subsidiaries,
or any change having a Material Adverse Effect or any development
involving a prospective change that would have a Material Adverse
Effect, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the best of their knowledge,
threatened or contemplated, any action, suit or proceeding to which the
Company or any of its Subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, which might
result in any change having a Material Adverse Effect.
(i) On the First Closing Date, there shall have been
furnished to you, as Representatives of the several Underwriters, a certificate
or certificates, dated the First Closing Date and addressed to you, signed by
each of the Selling Stockholders or either of such Selling Stockholder's
Attorneys-in-Fact to the effect that the representations and warranties of such
Selling Stockholder contained in this Agreement are true and correct as if made
at and as of the First Closing Date, and that such Selling Stockholder has
complied with all the agreements and satisfied all the conditions on such
Selling Stockholder's part to be performed or satisfied at or prior to the First
Closing Date.
(j) The Company shall have furnished to you and counsel for
the Underwriters such additional documents, certificates and evidence as you or
they may have reasonably requested.
(k) The Common Stock, including the Securities, shall have
been authorized for quotation on the NASDAQ National Market.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you and counsel for the Underwriters. The Company will
furnish you with such conformed copies of such opinions, certificates, letters
and other documents as you shall reasonably request.
6. Indemnification and Contribution.
(a) The Company and each Selling Stockholder, jointly and
severally, agree to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise (including in
settlement of any litigation if such settlement is effected with the written
consent of the Company and/or such Selling Stockholders, as the case may be),
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
the information deemed to be a part of the Registration Statement at the time of
effectiveness pursuant to Rules 430A and 434(d) of the Rules and Regulations, if
applicable, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or
-19-
<PAGE> 20
necessary to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending against such loss, claim, damage,
liability or action; provided, however, that neither the Company nor any Selling
Stockholder shall be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof; and further provided, however,
that in no event shall any Selling Stockholder be liable under the provisions of
this Section 6 for any amount in excess of the aggregate amount of proceeds such
Selling Stockholder received from the sale of the Securities pursuant to this
Agreement.
In making a claim for indemnification or for contribution under
this Section 6 (including, without limitation, under the immediately preceding
paragraph) and subject to the further provisions of this paragraph, the
Underwriters may proceed against either (i) both the Company and the Selling
Stockholders jointly or (ii) the Company only, but may not proceed solely
against the Selling Stockholders. Notwithstanding anything in this Agreement to
the contrary, no claim for indemnification shall be made against any Selling
Stockholder pursuant to this Agreement until a claim shall first have been made
against the Company by an Underwriter and either (i) the Company shall have
refused to pay any portion of the amount claimed or (ii) ninety (90) days shall
have elapsed from the date of such claim against the Company.
In addition to their other obligations under this Section 6(a),
the Company and each Selling Stockholder, jointly and severally, agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 6(a),
they will reimburse each Underwriter on a monthly basis for all reasonable legal
fees or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's and/or the Selling Stockholder's obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriter that received such payment shall
promptly return it to the party or parties that made such payment, together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Silicon Valley Bank (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request.
This indemnity agreement shall be in addition to any liabilities
which the Company or the Selling Stockholders may otherwise have.
(b) The Company agrees to indemnify and hold harmless each
Selling Stockholder and each person, if any, who controls such Selling
Stockholder within the meaning of either Section 15 of the Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
-20-
<PAGE> 21
misleading, including any such losses, claims, damages and liabilities incurred
by such Selling Stockholder pursuant to Section 6(a) hereof, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to such Selling Stockholder furnished to the Company in
writing by such Selling Stockholder expressly for use therein.
(c) Each Underwriter will indemnify and hold harmless the
Company and each Selling Stockholder against any losses, claims, damages or
liabilities to which the Company and/or any Selling Stockholder may become
subject, under the Act or otherwise (including in settlement of any litigation,
if such settlement is effected with the written consent of such Underwriter),
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by you, or by such Underwriter through you, specifically for use in the
preparation thereof, and will reimburse the Company and the Selling Stockholders
for any legal or other expenses reasonably incurred by the Company or any such
Selling Stockholder in connection with investigating or defending against any
such loss, claim, damage, liability or action.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that it may have to any indemnified party. In case any such action shall be
brought against any indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that if, in the sole judgment of the Representatives, it is advisable for the
Underwriters to be represented as a group by separate counsel, the
Representatives shall have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability arising
from any claim in respect of which indemnity may be sought by the Underwriters
under subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party or
parties and reimbursed to the Underwriters as incurred (in accordance with the
provisions of the second paragraph in subsection (a) above). An indemnifying
party shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(e) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or (c)
above, (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters
-21-
<PAGE> 22
on the other from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company, the Selling
Stockholders and the Underwriters in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relevant intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
Company, the Selling Stockholders and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (e) were to
be determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the first sentence
of this subsection (e). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending against any action or claim which is the subject of this subsection
(e). Notwithstanding the provisions of this subsection (e), no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section 6 shall be in addition to any liability which
the Company and the Selling Stockholders may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 6 shall be in addition to any liability that the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company (including any person who, with
his consent, is named in the Registration Statement as about to become a
director of the Company), to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company or
any Selling Stockholder within the meaning of the Act.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the several
Underwriters, the Company and the Selling Stockholders contained in Section 6
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any controlling person
thereof, or the Company or any of its officers, directors, or controlling
persons, or any Selling Stockholders or any controlling person thereof, and
shall survive delivery of, and payment for, the Securities to and by the
Underwriters hereunder.
-22-
<PAGE> 23
8. Substitution of Underwriters.
(a) If any Underwriter or Underwriters shall fail to take up
and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters
to be purchased hereunder, upon tender of such Firm Shares in accordance with
the terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule II
hereto, the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule II hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up
and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters
to be purchased hereunder, upon tender of such Firm Shares in accordance with
the terms hereof, and the amount of Firm Shares not purchased aggregates more
than 10% of the total amount of Firm Shares set forth in Schedule II hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination neither the Company nor any Selling
Stockholder shall be under any liability to any Underwriter (except to the
extent provided in Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof)
nor shall any Underwriter (other than an Underwriter who shall have failed,
otherwise than for some reason permitted under this Agreement, to purchase the
amount of Firm Shares agreed by such Underwriter to be purchased hereunder) be
under any liability to the Company or the Selling Stockholders (except to the
extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, the Prospectus and any other documents,
as well as any other arrangements, may be effected. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8.
9. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at 10:00 a.m.,
Central time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you, as Representatives of the
several Underwriters, or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the First Closing Date, and the option
referred to in Section 3(b), if exercised, may be cancelled at any time prior to
the Second Closing Date, if (i) the Company shall have failed, refused or been
unable, at or prior to such Closing Date, to perform any agreement on its part
to be performed hereunder, (ii) any other condition of the Underwriters'
obligations hereunder is not fulfilled, (iii) trading on the New York Stock
Exchange or the American Stock
-23-
<PAGE> 24
Exchange shall have been wholly suspended, (iv) minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities shall
have been required, on the New York Stock Exchange or the American Stock
Exchange, by such Exchange or by order of the Commission or any other
governmental authority having jurisdiction, (v) a banking moratorium shall have
been declared by any state or federal authority, or (vi) there has occurred any
material adverse change in the financial markets in the United States or an
outbreak of major hostilities (or an escalation thereof) in which the United
States is involved, a declaration of war by Congress, any other substantial
national or international calamity or any other event or occurrence of a similar
character shall have occurred since the execution of this Agreement that, in
your judgment, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities. Any such termination
shall be without liability of any party to any other party except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section, the
Company and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be
notified promptly by you by telephone or telegram, confirmed by letter. If the
Company elects to prevent this Agreement from becoming effective, you and an
Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified by
the Company by telephone or telegram, confirmed by letter.
10. Default by One or More of the Selling Stockholders or the
Company. If one or more of the Selling Stockholders shall fail at the First
Closing Date to sell and deliver the number of Securities which such Selling
Stockholder or Selling Stockholders are obligated to sell hereunder, and the
remaining Selling Stockholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number of Securities to be sold by all Selling
Stockholders as set forth in Schedule I, then the Underwriters may at your
option, by notice from you to the Company and the non-defaulting Selling
Stockholders, either (a) terminate this Agreement without any liability on the
part of any non-defaulting party or (b) elect to purchase the Securities which
the Company and the non-defaulting Selling Stockholders have agreed to sell
hereunder.
In the event of a default by any Selling Stockholder as referred
to in this Section, either you or the Company or, by joint action only, the
non-defaulting Selling Stockholders shall have the right to postpone the First
Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
If the Company shall fail at the First Closing Date to sell and
deliver the number of Securities which it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any
non-defaulting party.
No action taken pursuant to this Section shall relieve the
Company or any Selling Stockholders so defaulting from liability, if any, in
respect of such default.
11. Information Furnished by Underwriters. The statements set forth
in the last paragraph of the cover page and under the caption "Underwriting" in
any Preliminary Prospectus and in the Prospectus constitute the written
information furnished by or on behalf of the Underwriters referred to in Section
2 and Section 6 hereof.
12. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing and, if to the Underwriters, shall be mailed,
faxed or delivered to the Representatives c/o U.S. Bancorp Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402,
except that notices given to an Underwriter pursuant to Section 6 hereof shall
be sent to such Underwriter at
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<PAGE> 25
the address stated in the Underwriters' Questionnaire furnished by such
Underwriter in connection with this offering; if to the Company, shall be
mailed, faxed or delivered to it at 108 Pacifica, Irvine, California 92618,
Attention: President; if to any of the Selling Stockholders, at the address of
the Attorneys-in-Fact as set forth in the Powers of Attorney, or in each case to
such other address as the person to be notified may have requested in writing.
All notices given by fax shall be promptly confirmed by letter. Any party to
this Agreement may change such address for notices by sending to the parties to
this Agreement written notice of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended or
shall be construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
14. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 26
Please sign and return to the Company the enclosed duplicates of
this letter whereupon this letter will become a binding agreement between the
Company, the Selling Stockholders and the several Underwriters in accordance
with its terms.
Very truly yours,
CONTINUUS SOFTWARE CORPORATION
By ___________________________________________
John R. Wark
President and Chief Executive Officer
SELLING STOCKHOLDERS
By ___________________________________________
Attorney-in-Fact
Confirmed as of the date first above mentioned,
on behalf of themselves and the other several
Underwriters named in Schedule II hereto.
U.S. BANCORP PIPER JAFFRAY INC.
By________________________________
Managing Director
CIBC OPPENHEIMER CORP.
By________________________________
Managing Director
<PAGE> 27
SCHEDULE I
Selling Stockholders
<TABLE>
<CAPTION>
Number of
Firm Shares
Name to be Sold
- ---- -----------
<S> <C>
Lawrence G. Zechter 17,862
John J. Laskey 13,200
Alicia Cox Stanfill 18,867
Steven T. Bernhardt 11,320
David W. Bernhardt 15,094
Nywood Wu 3,773
Fred B. Cox III 18,867
Fred B. Cox (Cox Living Trust, Dated 5/26/88) 225,000
Zechter Family Trust 79,329
Sol Zechter Annuity Trust 45,597
Sheila Annuity Trust 38,269
Richard Harlan Zechter 19,119
Susan Carol Zechter/Susan Zechter 19,119
Jennifer Arme Johns 13,207
Eric Cox 37,735
-------
Total. . . . . . . . 576,358
=======
</TABLE>
-2-
<PAGE> 28
SCHEDULE II
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares (1)
- ----------- -------------------------
<S> <C>
U.S. Bancorp Piper Jaffray Inc.
CIBC Oppenheimer Corp.
---------------
Total. . . . . . . . . . . . . . . . . . . . .
===============
</TABLE>
- ----------
(1) The Underwriters may purchase up to an additional 450,000 Option
Shares, to the extent the option described in Section 3(b) of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
-3-
<PAGE> 29
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
-4-
<PAGE> 1
Exhibit 10.38
Customer No. 1256
MASTER LEASE AGREEMENT
Lessor: TRANSAMERICA BUSINESS CREDIT CORPORATION
RIVERWAY II
WEST OFFICE TOWER
WEST HIGGINS
ROSEMONT, ILLINOIS 60018
Lessee: CONTINUUS SOFTWARE CORPORATION
108 PACIFICA
IRVINE, CALIFORNIA 92618
The lessor pursuant to this Master Lease Agreement ("Agreement") dated as of
April 30, 1999, is Transamerica Business Credit Corporation ("Lessor"). All
equipment, together with all present and future additions, parts, accessories,
attachments, substitutions, repairs, improvements, and replacements thereof or
thereto, which are the subject of a Lease (as defined in the next sentence)
shall be referred to as "Equipment." Simultaneous with the execution and
delivery of this Agreement, the parties are entering into one or more Lease
Schedules (each, a "Schedule") which refer to and incorporate by reference this
Agreement, each of which constitutes a lease (each, a "Lease") for the Equipment
specified therein. Additional details pertaining to each Lease are specified in
the applicable Schedule. Each Schedule that the parties hereafter enter into
shall constitute a Lease. In the event of a conflict of terms between this
Agreement and a Schedule, such Schedule shall prevail over this Agreement.
Lessor has no obligation to enter into any additional leases with, or extend any
future financing to, Lessee.
1. LEASE. Subject to and upon all of the terms and conditions of
this Agreement and each Schedule, Lessor hereby agrees to lease to Lessee and
Lessee hereby agrees to lease from Lessor the Equipment for the Term (as defined
in Paragraph 2 below) thereof. The timing and financial scope of Lessor's
obligation to enter into Leases hereunder are limited as set forth in the
Commitment Letter executed by Lessor and Lessee, dated as of March 26, 1999 and
attached hereto as Exhibit A (the "Commitment Letter").
2. TERM. Each Lease shall be effective and the term of each Lease
("Term") shall commence on the commencement date specified in the applicable
Schedule and, unless sooner terminated (as hereinafter provided), shall expire
at the end of the term specified in such Schedule; provided, however, that
obligations due to be performed by Lessee during the Term shall continue until
they have been performed in full. Schedules will only be executed after the
delivery of the Equipment to Lessee or upon completion of deliveries of items of
such Equipment with aggregate cost of not less than $50,000.
3. RENT. Lessee shall pay as rent to Lessor, for use of the
Equipment during the Term, rental payments equal to the sum of all rental
payments including, without limitation, security deposits, advance rents, and
interim rents payable in the amounts and on the dates specified in the
applicable Schedule ("Rent"). If any Rent or other amount payable by Lessee is
not paid within five days after the day on which it becomes payable, Lessee will
pay on demand, as a late charge, an amount equal to 5% of such unpaid Rent or
other amount but only to the extent permitted by applicable law. All payments
provided for herein shall be payable to
1.
<PAGE> 2
Lessor at its address specified above, or at any other place designated by
Lessor.
4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No Lease
may be canceled or terminated except as expressly provided herein. Lessee's
obligation to pay all Rent due or to become due hereunder shall be absolute and
unconditional and shall not be subject to any delay, reduction, set-off,
defense, counterclaim, or recoupment for any reason whatsoever, including any
failure of the Equipment or any representations by the manufacturer or the
vendor thereof. If the Equipment is unsatisfactory for any reason, Lessee shall
make any claim solely against the manufacturer or the vendor thereof and shall,
nevertheless, pay Lessor all Rent payable hereunder.
5. SELECTION AND USE OF EQUIPMENT. Lessee agrees that it shall be
responsible for the selection and use of, and results obtained from, the
Equipment and any other associated equipment or services.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION,
THE DESIGN OR CONDITION OF THE EQUIPMENT OR ITS MERCHANTABILITY, SUITABILITY,
QUALITY, OR FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH
WARRANTY. LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR
FOR BREACH OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE EQUIPMENT "AS IS." IN
NO EVENT SHALL LESSOR HAVE ANY LIABILITY, NOR SHALL LESSEE HAVE ANY REMEDY
AGAINST LESSOR, FOR ANY LIABILITY, CLAIM, LOSS, DAMAGE, OR EXPENSE CAUSED
DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY DEFICIENCY OR DEFECT THEREOF OR
THE OPERATION, MAINTENANCE, OR REPAIR THEREOF OR ANY CONSEQUENTIAL DAMAGES AS
THAT TERM IS USED IN SECTION 2-719(3) OF THE MODEL UNIFORM COMMERCIAL CODE, AS
AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee, for the sole purpose
of prosecuting a claim, the benefits of any and all warranties made available by
the manufacturer or the vendor of the Equipment to the extent assignable.
7. DELIVERY. Lessor hereby appoints Lessee as Lessor's agent for
the sole and limited purpose of accepting delivery of the Equipment from each
vendor thereof. Lessee shall pay any and all delivery and installation charges.
Lessor shall not be liable to Lessee for any delay in, or failure of, delivery
of the Equipment.
8. PURCHASE OBLIGATION. Lessee shall, upon expiration of the
Term, purchase all of the Equipment covered by the applicable Lease on the date
specified therefor in the applicable Schedule ("Purchase Date"). The purchase
price for such Equipment shall be set forth in the applicable Schedule, and
shall be equal to ten percent (10%) of the purchase price of such Equipment, in
addition to applicable sales and other taxes applicable to the transfer of the
Equipment (the "Purchase Price"). On the Purchase Date, for any Equipment,
Lessee shall pay to Lessor the Purchase Price, together with any other amount
payable and arising hereunder, in immediately available funds, whereupon Lessor
shall transfer to Lessee, without recourse or warranty of any kind, express or
implied, all of Lessor's right, title, and interest in and to such Equipment on
an "As Is, Where Is" basis.
9. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS. Lessee
shall affix to the Equipment any labels supplied by Lessor indicating ownership
of such Equipment. The Equipment is and shall be the sole property of Lessor.
Lessee shall have no right, title, or interest therein, except as lessee under a
Lease. The Equipment is and shall at all times be and remain personal property
and shall not become a
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fixture. Lessee shall obtain and record such instruments and take such steps as
may be necessary to prevent any person from acquiring any rights in the
Equipment by reason of the Equipment being claimed or deemed to be real
property. Upon request by Lessor, Lessee shall use its best efforts to obtain
and deliver to Lessor valid and effective waivers, in recordable form, by the
owners, landlords, and mortgagees of the real property upon which the Equipment
is located or certificates of Lessee that it is the owner of such real property
or that such real property is neither leased nor mortgaged. Lessee shall make
the Equipment and its maintenance records available for inspection by Lessor at
reasonable times and upon reasonable notice. Lessee shall execute and deliver to
Lessor for filing any UCC financing statements or similar documents Lessor may
reasonably request.
10. EQUIPMENT USE. Lessee agrees that the Equipment will be
operated by competent, qualified personnel in connection with Lessee's business
for the purpose for which the Equipment was designed and in accordance with
applicable operating instructions, laws, and government regulations, and that
Lessee shall use all reasonable precautions to prevent loss or damage to the
Equipment from fire and other hazards. Lessee shall procure and maintain in
effect all orders, licenses, certificates, permits, approvals, and consents
required by federal, state, or local laws or by any governmental body, agency,
or authority in connection with the delivery, installation, use, and operation
of the Equipment.
11. MAINTENANCE. Lessee, at its sole cost and expense, shall keep
the Equipment in a suitable environment as specified by the manufacturer's
guidelines or the equivalent, shall meet all recertification requirements, and
shall maintain the Equipment in its original condition and working order,
ordinary wear and tear excepted. At the reasonable request of Lessor, Lessee
shall furnish all proof of maintenance.
12. ALTERATION; MODIFICATIONS; PARTS. Lessee may alter or modify
the Equipment only with the prior written consent of Lessor, which consent shall
not be unreasonably withheld. Any alteration shall be removed and the Equipment
restored to its normal, unaltered condition at Lessee's expense (without
damaging the Equipment's originally intended function or its value) prior to its
return to Lessor. Any part installed in connection with warranty or maintenance
service or which cannot be removed in accordance with the preceding sentence
shall be the property of Lessor.
13. RETURN OF EQUIPMENT. Upon demand by Lessor pursuant to
Paragraph 21 below, Lessee shall contact Lessor for shipping instructions and,
at Lessee's own risk, immediately return the Equipment, freight prepaid, to a
location in the continental United States specified by Lessor. At the time of
such return to Lessor, the Equipment shall (i) be in the operating order,
repair, and condition as required by or specified in the original specifications
and warranties of each manufacturer and vendor thereof, ordinary wear and tear
excepted, (ii) meet all recertification requirements, and (iii) be capable of
being promptly assembled and operated by a third party purchaser or third party
lessee without further repair, replacement, alterations, or improvements, and in
accordance and material compliance with any and all statutes, laws, ordinances,
rules, and regulations of any governmental authority or any political
subdivision thereof applicable to the use and operation of the Equipment. The
provisions of this Paragraph 13 are of the essence of the Lease, and upon
application to any court of equity having jurisdiction in the premises, Lessor
shall be entitled to a decree against Lessee requiring specific performance of
the covenants of Lessee set forth in this Paragraph 13. If Lessee fails to
return the Equipment when required, the terms and conditions of the Lease shall
continue to be applicable and Lessee shall continue to pay Rent until the
Equipment is received by Lessor.
14. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain, at
its own expense, liability and property damage insurance relating to the
Equipment,
3.
<PAGE> 4
insuring against such risks as are customarily insured against on the type of
equipment leased hereunder by businesses in which Lessee is engaged in such
amounts, in such form, and with insurers satisfactory to Lessor; provided,
however, that the amount of insurance against damage or loss shall not be less
than the greater of (a) the replacement value of the Equipment and (b) the
stipulated loss value of the Equipment specified in the applicable Schedule
("Stipulated Loss Value"). Each liability insurance policy shall provide
coverage (including, without limitation, personal injury coverage) of not less
than $1,000,000 for each occurrence, and shall name Lessor as an additional
insured; and each property damage policy shall name Lessor and Lessee as loss
payees and all policies shall contain a clause requiring the insurer to give
Lessor at least thirty days' prior written notice of any alteration in the terms
or cancellation of the policy. Lessee shall furnish to Lessor and Lessee a copy
of each insurance policy (with endorsements) or other evidence satisfactory to
Lessor that the required insurance coverage is in effect; provided, however,
Lessor shall have no duty to ascertain the existence of or to examine the
insurance policies to advise Lessee if the insurance coverage does not comply
with the requirements of this Paragraph. If Lessee fails to insure the Equipment
as required, Lessor shall have the right but not the obligation to obtain such
insurance, and the cost of the insurance shall be for the account of Lessee due
as part of the next due Rent. Lessee consents to Lessor's release, upon its
failure to obtain appropriate insurance coverage, of any and all information
necessary to obtain insurance with respect to the Equipment or Lessor's interest
therein.
Until the Equipment is returned to and received by Lessor as
provided in Paragraph 13 above, Lessee shall bear the entire risk of theft or
destruction of, or damage to, the Equipment including, without limitation, any
condemnation, seizure, or requisition of title or use ("Casualty Loss"). No
Casualty Loss shall relieve Lessee from its obligations to pay Rent except as
provided in clause (b) below. When any Casualty Loss occurs, Lessee shall
immediately notify Lessor and, at the option of Lessor, shall promptly (a) place
such Equipment in good repair and working order; or (b) pay Lessor an amount
equal to the Stipulated Loss Value of such Equipment and all other amounts
(excluding Rent) payable by Lessee hereunder, together with a late charge on
such amounts at a rate per annum equal to the rate imputed in the Rent payments
hereunder (as reasonably determined by Lessor) from the date of the Casualty
Loss through the date of payment of such amounts, whereupon Lessor shall
transfer to Lessee, without recourse or warranty (express or implied), all of
Lessor's interest, if any, in and to such Equipment on an "AS IS, WHERE IS"
basis. The proceeds of any insurance payable with respect to the Equipment shall
be applied, at the option of Lessor, either towards (i) repair of the Equipment
or (ii) payment of any of Lessee's obligations hereunder. Lessee hereby appoints
Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and
execute and endorse all documents, checks or drafts issued with respect to any
Casualty Loss under any insurance policy relating to the Equipment.
15. TAXES. Lessee shall pay when due, and indemnify and hold
Lessor harmless from, all sales, use, excise, and other taxes, charges, and fees
(including, without limitation, income, franchise, business and occupation,
gross receipts, licensing, registration, titling, personal property, stamp and
interest equalization taxes, levies, imposts, duties, charges, or withholdings
of any nature), and any fines, penalties, or interest thereon, imposed or levied
by any governmental body, agency, or tax authority upon or in connection with
the Equipment, its purchase, ownership, delivery, leasing, possession, use, or
relocation of the Equipment or otherwise in connection with the transactions
contemplated by each Lease or the Rent thereunder, excluding taxes on or
measured by the net income of Lessor. Upon request, Lessee will provide proof of
payment. Unless Lessor elects otherwise, Lessee will pay all property taxes on
the Equipment. Lessee shall timely prepare and file all reports and returns
which are required to be made with respect to any obligation of Lessee under
this Paragraph 15. Lessee shall, to the extent permitted by law, cause all
billings of such fees, taxes, levies, imposts, duties, withholdings, and
governmental charges to be made to Lessor in care of Lessee. Upon request,
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<PAGE> 5
Lessee will provide Lessor with copies of all such billings.
16. LESSOR'S PAYMENT. If Lessee fails to perform its obligations
under Paragraph 14 or 15 above, or Paragraph 22 below, Lessor shall have the
right to substitute performance, in which case Lessee shall immediately
reimburse Lessor therefor.
17. GENERAL INDEMNITY. Each Lease is a net lease. Therefore,
Lessee shall indemnify Lessor and its successors and assigns against, and hold
Lessor and its successors and assigns harmless from, any and all claims,
actions, damages, obligations, liabilities, and all costs and expenses,
including, without limitation, reasonable legal fees incurred by Lessor or its
successors and assigns arising out of each Lease including, without limitation,
the purchase, ownership, delivery, lease, possession, maintenance, condition,
use, or return of the Equipment, or arising by operation of law, except that
Lessee shall not be liable for any claims, actions, damages, obligations, and
costs and expenses determined by a non-appealable, final order of a court of
competent jurisdiction to have occurred as a result of the gross negligence or
willful misconduct of Lessor or its successors and assigns. Lessee agrees that
upon written notice by Lessor of the assertion of any claim, action, damage,
obligation, liability, or lien, Lessee shall assume full responsibility for the
defense thereof, provided that Lessor's failure to give such notice shall not
limit or otherwise affect its rights hereunder. Any payment pursuant to this
Paragraph (except for any payment of Rent) shall be of such amount as shall be
necessary so that, after payment of any taxes required to be paid thereon by
Lessor, including taxes on or measured by the net income of Lessor, the balance
will equal the amount due hereunder. The provisions of this Paragraph with
regard to matters arising during a Lease shall survive the expiration or
termination of such Lease. Notwithstanding anything to the contrary herein,
Lessee shall not be required to indemnify Lessor for claims arising after return
of the equipment to Lessor pursuant to the provisions of Paragraph 13 hereof.
18. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior
written consent of Lessor, (a) assign, transfer, pledge, or otherwise dispose of
any Lease or Equipment, or any interest therein; (b) sublease or lend any
Equipment or permit it to be used by anyone other than Lessee and its employees;
or (c) move any Equipment from the location specified for it in the applicable
Schedule, except that Lessee may move Equipment to another location within the
United States provided that Lessee has delivered to Lessor (A) prior written
notice thereof and (B) duly executed financing statements and other agreements
and instruments (all in form and substance satisfactory to Lessor) necessary to
protect Lessor's interest in such Equipment. Notwithstanding anything to the
contrary in the immediately preceding sentence, Lessee may keep any Equipment
consisting of motor vehicles or rolling stock at any location in the United
States.
19. ASSIGNMENT BY LESSOR. Lessor may, at no cost to Lessee,
assign its interest or grant a security interest in any Lease and the Equipment
individually or together, in whole or in part. If Lessee is given written notice
of any such assignment, it shall immediately make all payments of Rent and other
amounts hereunder directly to such assignee. Each such assignee shall have all
of the rights of Lessor under each Lease assigned to it. Lessee shall not assert
against any such assignee any set-off, defense, or counterclaim that Lessee may
have against Lessor or any other person.
20. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all of
the obligations of Lessee hereunder (together with Lessee, the "Lease Parties")
shall be in default under each Lease upon the occurrence of any of the following
events (each, an "Event of Default"): (a) Lessee fails to pay within five days
of when due any amount required to be paid by Lessee under or in connection with
any Lease; (b) any of the Lease Parties fails to perform any other provision
under or in connection with a Lease or violates any of the covenants or
5.
<PAGE> 6
agreements of such Lease Party under or in connection with a Lease; (c) any
representation made or financial information delivered or furnished by any of
the Lease Parties under or in connection with a Lease shall prove to have been
inaccurate in any material respect when made; (d) any of the Lease Parties makes
an assignment for the benefit of creditors, whether voluntary or involuntary, or
consents to the appointment of a trustee or receiver, or if either shall be
appointed for any of the Lease Parties or for a substantial part of its property
without its consent and, in the case of any such involuntary proceeding, such
proceeding remains undismissed or unstayed for forty-five days following the
commencement thereof; (e) any petition or proceeding is filed by or against any
of the Lease Parties under any Federal or State bankruptcy or insolvency code or
similar law and, in the case of any such involuntary petition or proceeding,
such petition or proceeding remains undismissed or unstayed for forty-five days
following the filing or commencement thereof, or any of the Lease Parties takes
any action authorizing any such petition or proceeding; (f) any of the Lease
Parties fails to pay when due any indebtedness for borrowed money or under
conditional sales or installment sales contracts or similar agreements, leases,
or obligations evidenced by bonds, debentures, notes, or other similar
agreements or instruments to any creditor (including Lessor under any other
agreement) after any and all applicable cure periods therefor shall have
elapsed; (g) any judgment shall be rendered against any of the Lease Parties
which shall remain unpaid or unstayed for a period of sixty days; (h) any of the
Lease Parties shall dissolve, liquidate, wind up or cease its business, sell or
otherwise dispose of all or substantially all of its assets, or make any
material change in its lines of business; (i) any of the Lease Parties shall
amend or modify its name, unless such Lease Party delivers to Lessor, thirty
days prior to any such proposed amendment or modification, written notice of
such amendment or modification and within ten days before such amendment or
modification delivers executed financing statements (in form and substance
satisfactory to the Lessor); (j) any of the Lease Parties shall merge or
consolidate with any other entity or make any material change in its capital
structure, in each case without Lessor's prior written consent, which shall not
be unreasonably withheld; (k) any of the Lease Parties shall suffer any loss or
suspension of any material license, permit, or other right or asset necessary to
the profitable conduct of its business, fail generally to pay its debts as they
mature, or call a meeting for purposes of compromising its debts; (l) any of the
Lease Parties shall deny or disaffirm its obligations hereunder or under any of
the documents delivered in connection herewith; (m) without Lessor's consent
there is a change in more than 35% of the ownership of any equity interests of
any of the Lease Parties on the date hereof or more than 35% of such interests
become subject to any contractual, judicial or statutory lien, charge, security
interest, or encumbrance; or (n) any of the Lease Parties suffers a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise).
21. REMEDIES. Upon the occurrence and continuation of an Event of
Default, Lessor shall have the right, in its sole discretion, to exercise any
one or more of the following remedies: (a) terminate each Lease; (b) declare any
and all Rent and other amounts then due and any and all Rent and other amounts
to become due under each Lease (collectively, the "Lease Obligations")
immediately due and payable; (c) in accordance with applicable law take
possession of any or all items of Equipment, wherever located, without demand,
notice, court order, or other process of law, and without liability for entry to
Lessee's premises, for damage to Lessee's property, or otherwise except as a
result of the gross negligence or willful misconduct of Lessor or Lessor's
agents; (d) demand that Lessee immediately return any or all Equipment to Lessor
in accordance with Paragraph 13 above, and, for each day that Lessee shall fail
to return any item of Equipment, Lessor may demand an amount equal to the Rent
payable for such Equipment in accordance with Paragraph 13 above; (e) lease,
sell, or otherwise dispose of the Equipment in a commercially reasonable manner,
with or without notice and on public or private bid, provided that Lessor shall
apply the proceeds thereof to the obligations owning from Lessee to Lessor under
the Lease; (f) recover the following amounts from the Lessee (as damages,
including reimbursement of costs and expenses, liquidated for all purposes and
not as a
6.
<PAGE> 7
penalty): (i) all costs and expenses of Lessor reimbursable to it hereunder,
including, without limitation, expenses of disposition of the Equipment,
reasonable legal fees, and all other amounts specified in Paragraph 22 below;
(ii) an amount equal to the sum of (A) any accrued and unpaid Rent through the
later of (1) the date of the applicable default, (2) the date that Lessor has
obtained possession of the Equipment, or (3) such other date as Lessee has made
an effective tender of possession of the Equipment to Lessor (the "Default
Date") and (B) if Lessor resells or re-lets the Equipment, Rent at the periodic
rate provided for in each Lease for the additional period that it takes Lessor
to resell or re-let all of the Equipment; (iii) the present value of all future
Rent reserved in the Leases and contracted to be paid over the unexpired Term of
the Leases discounted at five percent compound interest; (iv) the reversionary
value of the Equipment as of the expiration of the Term of the applicable Lease
as set forth on the applicable Schedule; and (v) any indebtedness for Lessee's
indemnity under Paragraph 17 above, plus a late charge at the rate specified in
Paragraph 3 above, less the amount received by Lessor, if any, upon sale or
re-let of the Equipment; and (g) exercise any other right or remedy to recover
damages or enforce the terms of the Leases. Upon the occurrence and continuance
of an Event of Default, Lessor shall have the right, whether or not Lessor has
made any demand or the obligations of Lessee hereunder have matured, to
appropriate and apply to the payment of the obligations of Lessee hereunder all
security deposits and other deposits (general or special, time or demand,
provisional or final) now or hereafter held by and other indebtedness or
property now or hereafter owing by Lessor to Lessee. Lessor may pursue any other
rights or remedies available at law or in equity, including, without limitation,
rights or remedies seeking damages, specific performance, and injunctive relief.
Any failure of Lessor to require strict performance by Lessee, or any waiver by
Lessor of any provision hereunder or under any Schedule, shall not be construed
as a consent or waiver of any other breach of the same or of any other
provision. Any amendment or waiver of any provision hereof or under any Schedule
or consent to any departure by Lessee herefrom or therefrom shall be in writing
and signed by Lessor.
No right or remedy is exclusive of any other provided herein or
permitted by law or equity. All such rights and remedies shall be cumulative and
may be enforced concurrently or individually from time to time.
22. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs
and expenses (including legal fees and expenses) incurred in connection with the
preparation, execution and delivery of this Agreement and any other agreements
and transactions contemplated hereby, which expenses shall not exceed $7,500
without the written consent of Lessee and all costs and expenses in protecting
and enforcing Lessor's rights and interests in each Lease and the equipment,
including, without limitation, legal, collection, and remarketing fees and
expenses incured by Lessor in enforcing the terms, conditions, or provisions of
each Lease or upon the occurrence and continuation of an Event of Default.
23. LESSEE'S WAIVERS. To the extent permitted by applicable law,
Lessee hereby waives any and all rights and remedies conferred upon a lessee by
Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by applicable
law, Lessee also hereby waives any rights now or hereafter conferred by statute
or otherwise which may require Lessor to sell, lease, or otherwise use any
Equipment in mitigation of Lessor's damages as set forth in Paragraph 21 above
or which may otherwise limit or modify any of Lessor's rights or remedies under
Paragraph 21. Any action by Lessee against Lessor for any default by Lessor
under any Lease shall be commenced within one year after any such cause of
action accrues.
24. NOTICES; ADMINISTRATION. Except as otherwise provided herein,
all notices, approvals, consents, correspondence, or other communications
required or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to Lessor, then to Transamerica
7.
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Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut
06032, Attention: Assistant Vice President, Lease Administration, with a copy to
Lessor at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont,
Illinois 60018, Attention: Legal Department, if to Lessee, then to Continuus
Software Corporation, 108 Pacifica, Irvine, California 92618, Attention: Chief
Financial Officer or such other address as shall be designated by Lessee or
Lessor to the other party. All such notices and correspondence shall be
effective when received.
25. REPRESENTATIONS. Lessee represents and warrants to Lessor
that (a) Lessee is duly organized, validly existing, and in good standing under
the laws of the State of its incorporation; (b) the execution, delivery, and
performance by Lessee of this Agreement are within Lessee's powers, have been
duly authorized by all necessary action, and do not and will not contravene (i)
Lessee's organizational documents or (ii) any law, regulation, rule, or
contractual restriction binding on or affecting Lessee; (c) no authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body is required for the due execution, delivery, and
performance by Lessee of this Agreement; (d) each Lease constitutes the legal,
valid, and binding obligations of Lessee enforceable against Lessee in
accordance with its terms except as limited by any bankruptcy, insolvency,
reorganization, or other similar laws of general application affecting the
enforcement of creditor or lessor rights or subject to the effect of general
principles of equity or law; (e) the cost of each item of Equipment does not
exceed the fair and usual price for such type of equipment purchased in like
quantity and reflects all discounts, rebates, and allowances for the Equipment
(including, without limitation, discounts for advertising, prompt payment,
testing, or other services) given to the Lessee by the manufacturer, supplier,
or any other person; and (f) all information supplied by Lessee to Lessor in
connection herewith is correct and does not omit any material statement
necessary to insure that the information supplied is not misleading.
26. FURTHER ASSURANCES. Lessee, upon the request of Lessor, will
execute, acknowledge, record, or file, as the case may be, such further
documents and do such further acts as may be reasonably necessary, to carry out
more effectively the purposes of this Agreement. Lessee hereby appoints Lessor
as its attorney-in-fact to execute on behalf of Lessee and authorizes Lessor to
file without Lessee's signature any UCC financing statements and amendments
necessary to perfect any security interest granted by Lessee to Lessor in the
Equipment.
27. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as
soon as available, but not later than 120 days after the end of each fiscal year
of Lessee and its consolidated subsidiaries, the consolidated balance sheet,
income statement, and statements of cash flows and shareholders equity for
Lessee and its consolidated subsidiaries (the "Financial Statements") for such
year, audited by independent certified public accountants without an adverse
qualification; and (b) as soon as available, but not later than 60 days after
the end of each of the first three fiscal quarters in any fiscal year of Lessee
and its consolidated subsidiaries, the Financial Statements for such fiscal
quarter, together with a certification duly executed by a responsible officer of
Lessee that such Financial Statements have been prepared in accordance with
generally accepted accounting principles and are fairly stated in all material
respects (subject to normal year-end audit adjustments). Lessee shall also
deliver to Lessor as soon as available copies of all press releases and other
similar communications issued by Lessee.
28. CONSENT TO JURISDICTION. Lessee irrevocably submits to the
jurisdiction of any Illinois state or federal court sitting in Illinois for any
action or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby, and Lessee irrevocably agrees that all claims
in respect of any such action or proceeding may be heard and determined in such
Illinois state or federal court.
8.
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29. WAIVER OF JURY TRIAL. LESSEE AND LESSOR IRREVOCABLY WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
30. FINANCE LEASE. Lessee and Lessor agree that each Lease is a
"Finance Lease" as defined by Section 2A-103(g) of the UCC. Lessee acknowledges
that Lessee has reviewed and approved each written Supply Contract (as defined
by UCC 2A-103(y)) covering Equipment purchased from each "Supplier" (as defined
by UCC 2A-103(x)) thereof.
31. NO AGENCY. Lessee acknowledges and agrees that neither the
manufacturer or supplier, nor any salesman, representative, or other agent of
the manufacturer or supplier, is an agent of Lessor. No salesman,
representative, or agent of the manufacturer or supplier is authorized to waive
or alter any term or condition of this Agreement or any Schedule and no
representation as to the Equipment or any other matter by the manufacturer or
supplier shall in any way affect Lessee's duty to pay Rent and perform its other
obligations as set forth in this Agreement or any Schedule.
32. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that Lessor,
in determining the Rent due hereunder, has assumed that certain tax benefits as
are provided to an owner of property under the Internal Revenue Code of 1986, as
amended (the "Code"), and under applicable state tax law, including, without
limitation, depreciation deductions under Section 168(b) of the Code, and
deductions under Section 163 of the Code in an amount at least equal to the
amount of interest paid or accrued by Lessor with respect to any indebtedness
incurred by Lessor in financing its purchase of the Equipment, are available to
Lessor as a result of the lease of the Equipment. In the event Lessor is unable
to obtain such tax benefits as a result of an act or omission of Lessee, is
required to include in income any amount other than the Rent, or is required to
recognize income in respect of the Rent earlier than anticipated pursuant to
this Agreement, Lessee shall pay Lessor additional rent ("Additional Rent") in a
lump sum in an amount needed to provide Lessor with the same after-tax yield and
after-tax cash flow as would have been realized by Lessor had Lessor (i) been
able to obtain such tax benefits, (ii) not been required to include any amount
in income other than the Rent, and (iii) not been required to recognize income
in respect of the Rent earlier than anticipated pursuant to this Agreement. The
Additional Rent shall be computed by Lessor, which computation shall be binding
on Lessee. The Additional Rent shall be due immediately upon written notice by
Lessor to Lessee of Lessor's inability to obtain tax benefits, the inclusion of
any amount in income other than the Rent or the recognition of income in respect
of the Rent earlier than anticipated pursuant to this Agreement. The provisions
of this Paragraph 32 shall survive the termination of this Agreement.
33. GOVERNING LAW; SEVERABILITY. EACH LEASE SHALL BE GOVERNED BY
THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF. IF ANY PROVISION SHALL BE HELD TO BE INVALID OR
UNENFORCEABLE, THE VALIDITY AND ENFORCEABILITY OF THE REMAINING PROVISIONS SHALL
NOT IN ANY WAY BE AFFECTED OR IMPAIRED.
LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND THE SCHEDULE HERETO,
UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER,
LESSEE AND LESSOR AGREE THAT THIS AGREEMENT, THE SCHEDULES DELIVERED IN
CONNECTION HEREWITH FROM TIME TO TIME, AND THE COMMITMENT LETTER ARE THE
COMPLETE AND
9.
<PAGE> 10
EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL
PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS
BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. SHOULD THERE EXIST
ANY INCONSISTENCY BETWEEN THE TERMS OF THE COMMITMENT LETTER AND THIS AGREEMENT,
THE TERMS OF THIS AGREEMENT SHALL PREVAIL.
IN WITNESS WHEREOF, the parties hereto have executed or caused
this Agreement to be duly executed by their duly authorized officers as of the
date first written above.
CONTINUUS SOFTWARE CORPORATION
By: /s/ John R. Wark
------------------------------------
Name: John R. Wark
Title: President and CEO
Federal Tax ID: 43-1070080
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
------------------------------------
Name:
Title:
10.
<PAGE> 1
Exhibit 10.39
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
NO. 1
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
CONTINUUS SOFTWARE CORPORATION (THE "COMPANY")
DATE OF INITIAL ISSUANCE: APRIL 30, 1999
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST I or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Forty-Four
Thousand (44,000) shares of common stock, without par value, of the Company (the
"Common Stock"), at the Warrant Price, payable as provided herein. The exercise
of this Warrant shall be subject to the provisions, limitations and restrictions
herein contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, without par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
TERM OF THIS WARRANT - shall mean the period beginning on the date of
initial issuance hereof and ending on April 30, 2006.
WARRANT PRICE - $3.40 per share, subject to adjustment in accordance
with Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated March 26, 1999 executed by the Company
and Transamerica Business Credit Corporation (the "Commitment Letter") to the
original holder of this Warrant, or any transferees from such original holder or
this Holder.
1.
<PAGE> 2
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued
to the Holder
WCS equals the number of shares of Common Stock purchasable
under the Warrant or, if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised (at the date of such calculation)
CMP equals the Current Market Price (at the date of such
calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
2.
<PAGE> 3
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS"
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes (other than income
taxes) which may be payable in respect of the issue of this Warrant or any
Common Stock or certificates therefor issuable upon the exercise of this
Warrant. The Company further covenants and agrees that the Company will at all
times have authorized and reserved, free from preemptive rights, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant. If and so long as the Common Stock issuable upon
the exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all shares of such Common
Stock issuable upon exercise of this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
3.
<PAGE> 4
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's
4.
<PAGE> 5
records. Where appropriate, such copy may be given in advance and may be
included as part of the notice required to be mailed under the provisions of
subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. Subject to compliance with applicable
Federal and state securities laws, this Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant,
5.
<PAGE> 6
which shall be payable by the Holder. Holder will not transfer this Warrant and
the rights hereunder except in compliance with federal and state securities
laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
6.
<PAGE> 7
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 108 Pacifica, , Irvine, California, 92618,
Attention: Chief Financial Officer or to such other address as shall have been
furnished in writing to the Holder by the Company. Any notice so addressed and
mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
7.
<PAGE> 8
SECTION 15. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 5th day of May, 1999.
CONTINUUS SOFTWARE CORPORATION
[CORPORATE SEAL]
By: /s/ John R. Wark
-----------------------------------
Title: President/CEO
--------------------------------
8.
<PAGE> 9
FORM OF NOTICE OF EXERCISE
[TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares
of Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $__________ therefor; or
[ ] directs the Company to issue ______
shares, and to withhold ____ shares
in lieu of payment of the Warrant
Price, as described in Section 2.1
of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
___________________________________
[Type Name of Holder]
By:________________________________
Title:_____________________________
Dated:________________________
9.
<PAGE> 10
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By:________________________________
Title:_____________________________
Dated:________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
10.
<PAGE> 11
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By:________________________________
Title:_____________________________
Dated:________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
11.
<PAGE> 1
Exhibit 10.40
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
NO. 1
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
CONTINUUS SOFTWARE CORPORATION (THE "COMPANY")
DATE OF INITIAL ISSUANCE: APRIL 30, 1999
THIS CERTIFIES THAT for value received, PRIORITY CAPITAL RESOURCES or
its registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Eleven Thousand
(11,000) shares of common stock, without par value, of the Company (the "Common
Stock"), at the Warrant Price, payable as provided herein. The exercise of this
Warrant shall be subject to the provisions, limitations and restrictions herein
contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, without par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
TERM OF THIS WARRANT - shall mean the period beginning on the date of
initial issuance hereof and ending on April 30, 2006.
WARRANT PRICE - $3.40 per share, subject to adjustment in accordance
with Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated March 26, 1999 executed by the Company
and Transamerica Business Credit Corporation (the "Commitment Letter") to the
original holder of this Warrant, or any transferees from such original holder or
this Holder.
1.
<PAGE> 2
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued
to the Holder
WCS equals the number of shares of Common Stock purchasable
under the Warrant or, if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised (at the date of such calculation)
CMP equals the Current Market Price (at the date of such
calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
2.
<PAGE> 3
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
" THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES SCT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes (other than income
taxes) which may be payable in respect of the issue of this Warrant or any
Common Stock or certificates therefor issuable upon the exercise of this
Warrant. The Company further covenants and agrees that the Company will at all
times have authorized and reserved, free from preemptive rights, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant. If and so long as the Common Stock issuable upon
the exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all shares of such Common
Stock issuable upon exercise of this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall
3.
<PAGE> 4
be appropriately decreased so that the number of shares of Common Stock issuable
upon the exercise hereof shall be increased in proportion to such increase in
outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
4.
<PAGE> 5
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. Subject to compliance with applicable
Federal and state securities laws, this Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
5.
<PAGE> 6
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
6.
<PAGE> 7
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 108 Pacifica, , Irvine, California, 92618,
Attention: Chief Financial Officer or to such other address as shall have been
furnished in writing to the Holder by the Company. Any notice so addressed and
mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
7.
<PAGE> 8
SECTION 15. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 5th day of May, 1999.
CONTINUUS SOFTWARE CORPORATION
[CORPORATE SEAL]
By: /s/ John R. Wark
------------------------------------
Title: President/CEO
---------------------------------
8.
<PAGE> 9
FORM OF NOTICE OF EXERCISE
[TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares
of Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $__________ therefor; or
[ ] directs the Company to issue ______
shares, and to withhold ____ shares
in lieu of payment of the Warrant
Price, as described in Section 2.1
of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
___________________________________
[Type Name of Holder]
By:________________________________
Title:_____________________________
Dated:________________________
9.
<PAGE> 10
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By:________________________________
Title:_____________________________
Dated:________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
10.
<PAGE> 11
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By:________________________________
Title:_____________________________
Dated:________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
11.
<PAGE> 1
EXHIBIT 10.41
LOAN AGREEMENT
CONTINUUS SOFTWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 ACCOUNTING AND OTHER TERMS...........................................................4
2 LOAN AND TERMS OF PAYMENT............................................................4
2.1 Advances......................................................................4
2.2 Interest Rate, Payments.......................................................4
2.3 Fees..........................................................................5
3 CONDITIONS OF LOANS..................................................................5
3.1 Conditions Precedent to Initial Advance.......................................5
3.2 Conditions Precedent to all Advances..........................................5
4 REPRESENTATIONS AND WARRANTIES.......................................................5
4.1 Due Organization and Authorization............................................5
4.2 Litigation....................................................................5
4.3 No Material Adverse Change in Financial Statements............................6
4.4 Solvency......................................................................6
4.5 Regulatory Compliance.........................................................6
4.6 Subsidiaries..................................................................6
4.7 Full Disclosure...............................................................6
5 AFFIRMATIVE COVENANTS................................................................6
5.1 Government Compliance.........................................................6
5.2 Financial Statements, Reports, Certificates...................................7
5.3 Taxes.........................................................................7
5.4 Insurance.....................................................................7
5.5 Primary Accounts..............................................................7
6 NEGATIVE COVENANTS...................................................................7
6.1 Dispositions..................................................................7
6.2 Changes in Business, Ownership, Management or Business Locations..............7
6.3 Mergers or Acquisitions.......................................................7
6.4 Indebtedness..................................................................8
6.5 Encumbrance...................................................................8
6.6 Distributions; Investments....................................................8
6.7 Transactions with Affiliates..................................................8
6.8 Subordinated Debt.............................................................8
6.9 Compliance....................................................................8
7 EVENTS OF DEFAULT....................................................................8
7.1 Payment Default...............................................................8
7.2 Covenant Default..............................................................9
7.3 Material Adverse Change.......................................................9
7.4 Attachment....................................................................9
7.5 Insolvency....................................................................9
7.6 Other Agreements..............................................................9
7.7 Judgments.....................................................................9
7.8 Misrepresentations............................................................9
7.9 Guaranty.....................................................................10
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
8 BANK'S RIGHTS AND REMEDIES..........................................................10
8.1 Rights and Remedies..........................................................10
8.2 Remedies Cumulative..........................................................10
8.3 Demand Waiver................................................................10
9 NOTICES.............................................................................10
10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER..........................................10
11 GENERAL PROVISIONS..................................................................11
11.1 Successors and Assigns.......................................................11
11.2 Indemnification..............................................................11
11.3 Time of Essence..............................................................11
11.4 Severability of Provision....................................................11
11.5 Amendments in Writing, Integration...........................................11
11.6 Counterparts.................................................................11
11.7 Survival.....................................................................11
11.8 Confidentiality..............................................................12
11.9 Attorneys' Fees, Costs and Expenses..........................................12
12 DEFINITIONS.........................................................................12
12.1 Definitions..................................................................12
</TABLE>
3
<PAGE> 4
THIS LOAN AGREEMENT dated April 22, 1999, between SILICON VALLEY BANK
("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 with
a loan production office located at 38 Technology Drive, Suite 150, Irvine,
California, 92618 and CONTINUUS SOFTWARE CORPORATION ("Borrower"), whose address
is 108 Pacifica, Irvine, California 92618 provides the terms on which Bank will
lend to Borrower and Borrower will repay Bank. The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
2.1 ADVANCES.
Borrower will pay Bank the unpaid principal amount of all Advances and
interest on the unpaid principal amount of the Advances.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding the Committed Revolving Line.
Amounts borrowed under this Section may be repaid and reborrowed during the term
of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit A. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other amounts due under this Agreement are
immediately payable.
2.2 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate equal to the Prime Rate. After an Event of Default,
Obligations accrue interest at 5 percent above the rate effective immediately
before the Event of Default. The interest rate increases or decreases when the
Prime Rate changes. Interest is computed on a 360 day year for the actual number
of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 22nd of each month. Bank may debit any of Borrower's deposit accounts
including Account Number _______________________________ for principal and
interest payments or any amounts Borrower owes Bank. Bank will notify Borrower
when it debits Borrower's accounts. These debits are not a set-off. Payments
received after 12:00 noon Pacific time are considered received at the opening of
business on the next Business Day. When a payment is due on a day that is
4
<PAGE> 5
not a Business Day, the payment is due the next Business Day and additional fees
or interest accrue.
2.3 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $10,000
due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the date of this Agreement, are
payable when due.
3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE.
Bank's obligation to make the initial Advance is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES.
Bank's obligations to make each Advance, including the initial Advance,
is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 0 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Advance and no Event of Default may have occurred and be continuing, or result
from the Advance. Each Advance is Borrower's representation and warranty on that
date that the representations and warranties of Section 0 remain true.
4 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
4.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
4.2 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5
<PAGE> 6
4.3 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
4.4 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
4.5 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue
its business as currently conducted.
4.6 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
4.7 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading.
5 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
5.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify could have a material
adverse effect on Borrower's business or operations. Borrower will comply, and
have each Subsidiary comply, with all laws, ordinances and regulations to which
it is
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<PAGE> 7
subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
5.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 45 days after the last day of each quarter, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 120 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm acceptable to Bank; (iii) a prompt report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of $100,000 or more;
and (iv) budgets, sales projections, operating plans or other financial
information Bank requests.
5.3 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
5.4 INSURANCE.
Borrower will keep its business insured for risks and in amounts, as
Bank requests.
5.5 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts
with Bank.
6 NEGATIVE COVENANTS
Borrower will not do any of the following:
6.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
6.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or have a material
change in its ownership of greater than 25%. Borrower will not, without at least
30 days prior written notice, relocate its chief executive office or add any new
offices or business locations.
6.3 MERGERS OR ACQUISITIONS.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
7
<PAGE> 8
and is continuing or would result from such action during the term of this
Agreement or result in a decrease of more than 25% of Tangible Net Worth; or
(ii) the merger or consolidation is (a) a Subsidiary into another Subsidiary or
(b) a Subsidiary into Borrower.
6.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
6.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
6.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
6.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
6.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
6.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
7 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
7.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations when due and such
failure shall not have been cured within three (3) days of notice thereof;
8
<PAGE> 9
7.2 COVENANT DEFAULT.
If Borrower violates any covenant in Section 6 or does not perform or
observe any other material term, condition or covenant in this Agreement, any
Loan Documents, or in any agreement between Borrower and Bank and as to any
default under a term, condition or covenant that can be cured, has not cured the
default within 10 days after it occurs, or if the default cannot be cured within
10 days or cannot be cured after Borrower's attempts within 10 day period, and
the default may be cured within a reasonable time, then Borrower has an
additional period (of not more than 30 days) to attempt to cure the default.
During the additional time, the failure to cure the default is not an Event of
Default (but no Advances will be made during the cure period);
7.3 MATERIAL ADVERSE CHANGE.
If there (i) occurs a material adverse change in the business,
operations, or condition (financial or otherwise) of the Borrower, or (ii) is a
material impairment of the prospect of repayment of any portion of the
Obligations.
7.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Advances will be made
during the cure period);
7.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Advances will be made before any
Insolvency Proceeding is dismissed);
7.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right, and the third party actually
exercises such right, to accelerate any Indebtedness exceeding $100,000 or that
could cause a Material Adverse Change;
7.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Advances
will be made before the judgment is stayed or satisfied);
7.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document; or
9
<PAGE> 10
7.9 GUARANTY.
Any guaranty of any Obligations ceases for any reason to be in full
force or any Guarantor does not perform any obligation under any guaranty of the
Obligations, or any material misrepresentation or material misstatement exists
now or later in any warranty or representation in any guaranty of the
Obligations or in any certificate delivered to Bank in connection with the
guaranty, or any circumstance described in Sections 7.4, 7.5 or 7.7 occurs to
any Guarantor.
8 BANK'S RIGHTS AND REMEDIES
8.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 7.5 occurs all Obligations are immediately due
and payable without any action by Bank); and
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
8.2 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
by law, or in equity. Bank's exercise of one right or remedy is not an election,
and Bank's waiver of any Event of Default is not a continuing waiver. Bank's
delay is not a waiver, election, or acquiescence. No waiver is effective unless
signed by Bank and then is only effective for the specific instance and purpose
for which it was given.
8.3 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
9 NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A party may change its notice address by giving the other party
written notice.
10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Orange County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY
10
<PAGE> 11
CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER
CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
11 GENERAL PROVISIONS
11.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
11.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
11.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
11.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
11.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.
11.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
11.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 11.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
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<PAGE> 12
11.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
11.9 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
12 DEFINITIONS
12.1 DEFINITIONS.
In this Agreement:
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs and
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"COMMITTED REVOLVING LINE" is an Advance of up to $2,000,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation
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<PAGE> 13
is made or, if not determinable, the maximum reasonably anticipated liability
for it determined by the Person in good faith; but the amount may not exceed the
maximum of the obligations under the guarantee or other support arrangement.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"GAAP" is generally accepted accounting principles.
"GUARANTOR" is any present or future guarantor of the Obligations,
including Brentwood Associates VI, L.P. and Norwest Equity Partners V.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 7.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
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<PAGE> 14
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b)(i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is April 22, 2001.
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"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
Continuus Software Corporation
By: /s/ John R. Wark
---------------------------
Title: President/CEO
------------------------
BANK:
SILICON VALLEY BANK
By: /s/ Marla Johnson
---------------------------
Title: Vice President
-------------------------
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SCHEDULE
CONTINUUS SOFTWARE & SUBSIDIARIES
BALANCE SHEET LIABILITIES
MARCH 31, 1999
<TABLE>
<S> <C>
LIABILITIES
CURRENT LIABILITIES
SHORT-TERM BORROWINGS 4,811
NOTE PAYABLE -
ACCOUNTS PAYABLE 1,111,283
INTERCOMPANY ACCOUNTS PAYABLE -
ACCRD P/R & RELATED EXPENSES 2,498,290
ACCRUED DATABASE/LICENSE FEES -
OTHER ACCRUED LIABILITIES 1,140,500
CUSTOMER DEPOSITS/DEFERRED REVENUE 326,837
DEFERRED FACILITY OBLIGATION -
DEFERRED MAINEANCE REVENUE 4,349,851
CURRENT PORTION CAP LEASE OBLIG 691,779
----------
TOTAL CURRENT LIABILITIES 10,123,351
LONG TERM NOTE PAYABLE 6,000,000
DEFERRED FACILITY OBLIGATION -
DEFERRED MAINTENANCE REVENUE 108,603
CAPITAL LEASE OBLIGATIONS 376,017
DEFERRED INCOME TAXES -
----------
TOTAL LIABILITIES 16,607,971
==========
</TABLE>
<PAGE> 1
Exhibit 10.42
CONTRIBUTION AGREEMENT
This Contribution Agreement (the "Agreement") is made as of this 22nd
day of April, 1999, by and between Continuus Software Corporation, a California
corporation (the "Company"), and each of Norwest Equity Partners IV ("Norwest
IV"), Norwest Equity Partners V ("Norwest V"), Brentwood Associates VI, LP
("Brentwood"), Advanced Technology Ventures III ("ATV"), Accel Investors '95
L.P. ("Accel 95"), Accel IV L.P. ("Accel IV"), Accel Keiretsu L.P. ("Accel
Keiretsu") and Ellmore C. Patterson Partners ("Patterson Partners")
(collectively, the "Guarantors" and individually, each a "Guarantor").
RECITALS:
A. WHEREAS, the Guarantors each own an equity interest in the Company;
B. WHEREAS, concurrently herewith, the Company and Silicon Valley Bank
(the "Bank") will enter into that certain Loan Agreement dated of even date
herewith (the "Loan Agreement"), pursuant to which the Bank agrees to advance
$2,000,000 to the Company (the "Loan");
C. WHEREAS, as a condition to entering the Loan Agreement and making the
Loan, the Bank is requiring that Norwest V and Brentwood (together, the "Named
Guarantors") guarantee in aggregate all $2,000,000 of the Company's obligations
under the Loan Agreement pursuant to that certain Unconditional Guaranty dated
April 22, 1999 between Norwest V and the Bank in the amount of $1,160,000 and
that certain Unconditional Guaranty dated April 22, 1999 between Brentwood and
the Bank in the amount of $840,000 (each a "Guaranty," collectively the
"Guaranties") substantially in the forms attached hereto as Exhibit A;
D. WHEREAS, each of Norwest IV, ATV, Accel 95, Accel IV, Accel Keiretsu
and Patterson Partners have agreed to participate in the guarantee of the
Company's obligations under the Loan but will not be a party to the Guaranties;
E. WHEREAS, the Named Guarantors are unwilling to sign the Guaranties
absent an agreement among the Guarantors that all risks and liabilities
associated with the Guaranties are to be borne by all of the Guarantors pursuant
to their pro rata equity ownership in the Company relative to the other
Guarantors; and
F. WHEREAS, as consideration for the execution of the Guaranties by the
Named Guarantors and this Agreement by the Guarantors and the obligations of the
Named Guarantors thereby and the Guarantors hereby, the Company has agreed to
issue to each Guarantor warrants to purchase Common Stock of the Company as set
forth below.
NOW THEREFORE, for good and valuable consideration, the parties hereto
agree as follows:
1.
<PAGE> 2
1. Right to Contribution. If any Named Guarantor or Named Guarantors (a
"Paying Guarantor" or the "Paying Guarantors") from time to time makes any good
faith payment in connection with the Guaranties (the "Payment"), each other
Guarantor (each a "Contributing Guarantor") shall have an unconditional
obligation to pay to the Paying Guarantor(s) an amount (the "Required
Contribution Amount") so that after payment of the Required Contribution Amount
all risks and liabilities shall have been borne by all of the Guarantors
pursuant to their pro rata equity ownership in the Company relative to the other
Guarantors as of the date of this Agreement and as set forth in Exhibit B
hereto. The Contributing Guarantors shall pay their applicable Required
Contribution Amount to the Paying Guarantor(s) within five days of receipt of a
written demand for contribution of the Required Contribution Amount (the
"Contribution Demand Notice"). The Contribution Demand Notice shall set forth
the aggregate amount of the Payment and the Required Contribution Amount.
2. Default. If any Guarantor fails to pay a Required Contribution Amount
owed by such Guarantor within five days from the date of receipt of a
Contribution Demand Notice, such Guarantor shall be deemed to be a "Defaulting
Guarantor." The Defaulting Guarantor shall pay interest on the Required
Contribution Amount to the Paying Guarantor at a rate equal to the lesser of (i)
the Prime Rate [(as defined in the Loan Agreement)] plus two percent (2%), and
(ii) the highest rate permitted by law. The interest shall begin to accrue as of
the date of the Contribution Demand Notice.
3. Absolute Obligation. Each Guarantor specifically acknowledges that
such Guarantor is obligated to contribute such Guarantor's respective share to
the other Guarantors under this Agreement regardless of whether:
a. The amount of Payment is determined (i) in court or by
arbitration or by settlement of a disputed claim by any party, or (ii) by a good
faith agreement settling or establishing the amount of the Payment; or
b. The Contributing Guarantor has had the opportunity to defend
or in any way diminish or discharge the amounts paid by a Paying Guarantor
pursuant to the Guaranties; provided, however, that each of the Named Guarantors
will from time to time in good faith attempt to inform the other Guarantors of
the status of the Guaranties and any Payment or potential Payment therefrom.
4. Issuance of Initial Warrants. Upon execution of this Agreement, the
Company has agreed to issue to each Guarantor warrants to purchase the
Guarantor's pro rata share (as set forth on Exhibit C hereto) of 142,861 shares
of Common Stock of the Company (the "Initial Warrants") in substantially the
form attached hereto as Exhibit D.
2.
<PAGE> 3
5. Payment Consequences. The Company agrees that on the first occasion,
if any, that the Named Guarantor(s) are required to make a Payment, the Company
will issue to each Paying Guarantor and Contributing Guarantor (but not
including any Defaulting Guarantor) (i) warrants to purchase such Guarantor's
pro rata share (based on the portion of the Payment paid or reimbursed by such
Guarantor) of an additional 95,242 shares of Common Stock of the Company (the
"Secondary Warrants") in substantially the form attached hereto as Exhibit D.
6. Amendment. This Agreement may be amended and any provision of this
Agreement waived only with the written agreement of the Company and Guarantors
who are the guarantees of a majority of the Loan under this Agreement; provided,
however, no such amendment or waiver is permitted which would increase the
amount for which any Guarantor could be held liable hereunder, without the prior
written consent of all the Guarantors.
7. Termination. This Agreement, as it may be modified or amended from
time to time, shall remain in effect, and shall not be terminated, until the
Guaranties and all Required Contribution Amounts have been discharged or
otherwise satisfied in accordance with their terms.
8. Attorneys' Fees. In the event one party brings an action to enforce
the provisions of this Agreement, the prevailing party in such action shall be
entitled to recover from the non-prevailing party the costs, expenses and
reasonable attorneys' fees associated with such action, which costs, expenses
and attorneys fees (including fees on appeal) may be made a part of any award of
judgment entered.
9. Governing Law; Miscellaneous. This Agreement shall be governed by and
construed in accordance with the internal laws of the state of California.
10. Assignment. This Agreement shall inure to the benefit of the parties
hereto, their successors and assigns, and shall be binding upon the Guarantors
and the Company and their respective successors and assigns. The obligations of
each Guarantor under this Agreement may only be assigned, including by operation
of law, to another Guarantor, unless otherwise agreed to by written consent of
the Company and all of the Guarantors.
11. No Third Party Beneficiaries. This Agreement is solely for the
benefit of the parties hereto and their respective successors and assigns.
Neither the Bank nor any other person shall be a beneficiary of or to any of the
provisions of this Agreement, and the parties hereto specifically deny any
intention to do so.
12. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute one and the same Agreement. Delivery of any
executed counterpart of a signature page to this Agreement by facsimile shall be
effective as delivery of an original executed counterpart of this Agreement.
3.
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CONTINUUS SOFTWARE CORPORATION NORWEST EQUITY PARTNERS IV
By: /s/ Steven L. Johnson By: /s/ Kevin Hall
------------------------------- ---------------------------------
Its: Its:
---------------------------- ------------------------------
NORWEST EQUITY PARTNERS V
By: /s/ Kevin Hall
---------------------------------
Its:
------------------------------
BRENTWOOD ASSOCIATES VI, LP
By: Brentwood VI Ventures, L.P.
---------------------------------
Its: General Partner
------------------------------
By: /s/ G. Bradford Jones
---------------------------------
Its: General Partner
------------------------------
ADVANCED TECHNOLOGY VENTURES III
By: /s/
---------------------------------
Its: General Partner
------------------------------
ACCEL INVESTORS '95 L.P.
By: /s/ Ellmore C. Patterson
---------------------------------
Its:
------------------------------
ACCEL IV L.P.
By: /s/ Ellmore C. Patterson
---------------------------------
Its:
------------------------------
4.
<PAGE> 5
ACCEL KEIRETSU L.P.
By: /s/ Ellmore C. Patterson
---------------------------------
Its:
------------------------------
ELLMORE C. PATTERSON PARTNERS
By: /s/ Ellmore C. Patterson
---------------------------------
Its:
------------------------------
5.
<PAGE> 6
EXHIBIT A
UNCONDITIONAL GUARANTIES
<PAGE> 7
EXHIBIT B
<TABLE>
<S> <C>
Norwest Equity Partners IV 21.9 %
Norwest Equity Partners V 18.0 %
Brentwood Associates VI, LP 28.7 %
Advanced Technology Ventures III 18.6 %
Accel Investors '95 L.P. 0.5 %
Accel IV L.P. 11.6 %
Accel Keiretsu L.P. 0.2 %
Ellmore C. Patterson Partners 0.3 %
</TABLE>
<PAGE> 8
EXHIBIT C
NUMBER OF WARRANTS UNDER SECTION 4
Pro rata share of warrants to purchase 142,861 shares:
<TABLE>
<S> <C>
Norwest Equity Partners IV 31,311
Norwest Equity Partners V 25,766
Brentwood Associates VI, LP 41,055
Advanced Technology Ventures III 26,583
Accel Investors '95 L.P. 781
Accel IV L.P. 16,620
Accel Keiretsu L.P. 345
Ellmore C. Patterson Partners 400
</TABLE>
NUMBER OF WARRANTS UNDER SECTION 5
Pro rata share of warrants to purchase 95,242 shares:
<TABLE>
<S> <C>
Norwest Equity Partners IV 20,874
Norwest Equity Partners V 17,178
Brentwood Associates VI, LP 27,370
Advanced Technology Ventures III 17,722
Accel Investors '95 L.P. 521
Accel IV L.P. 11,080
Accel Keiretsu L.P. 230
Ellmore C. Patterson Partners 267
</TABLE>
<PAGE> 1
Exhibit 10.43
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
STOCK PURCHASE WARRANT
To Purchase Shares of Common Stock of
CONTINUUS SOFTWARE CORPORATION
THIS CERTIFIES that, for value received, _____________________________ (the
"Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after the date hereof and on or prior
to three years from the date hereof, but not thereafter, to subscribe for and
purchase, from CONTINUUS SOFTWARE CORPORATION, a California corporation (the
"Company"), ________ shares of Common Stock at a purchase price per share equal
to the "Exercise Price" (as defined below). The purchase price and the number of
shares for which this Warrant is exercisable shall be subject to adjustment as
provided herein.
1. TITLE OF WARRANt. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company,
referred to in Section 3 hereof, by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant together with the Assignment
Form annexed hereto properly endorsed.
2. EXERCISE PRICE. The initial Exercise Price shall be equal to $3.40 per
share.
3. EXERCISE OF WARRANT. The purchase rights represented by this Warrant are
exercisable by the registered holder hereof, in whole or in part, at any time
before the close of business on the date three years following the date hereof
by the surrender of this Warrant and the Notice of Exercise annexed hereto duly
executed at the office of the Company, located at 108 Pacifica, Irvine,
California 92718 (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company), and upon payment of the
purchase price of the shares thereby purchased (by cash or by check or bank
draft payable to the order of the Company or by cancellation of indebtedness of
the Company to the holder hereof, if any, at the time of exercise in an amount
equal to the purchase price of the shares thereby purchased); whereupon the
holder of this Warrant
1.
<PAGE> 2
shall be entitled to receive a certificate for the number of shares of Common
Stock so purchased. The Company agrees that if at the time of the surrender of
this Warrant and purchase the holder hereof shall be entitled to exercise this
Warrant, the shares so purchased shall be and be deemed to be issued to such
holder as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been exercised as aforesaid.
Certificates for shares purchased hereunder shall be delivered to the
holder hereof within a reasonable time after the date on which this Warrant
shall have been exercised as aforesaid.
The Company covenants that all shares of Common Stock which may be issued
upon the exercise of rights represented by this Warrant will, upon exercise of
the rights represented by this Warrant, be fully paid and nonassessable and free
from all taxes, liens and charges in respect of the issue thereof (other than
taxes in respect of any transfer occurring contemporaneously with such issue).
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon the exercise of
this Warrant, an amount equal to such fraction multiplied by the then current
price at which each share may be purchased hereunder shall be paid in cash to
the holder of this Warrant.
5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. NO RIGHTS AS SHAREHOLDERS. This Warrant does not entitle the holder
hereof to any voting rights or other rights as a shareholder of the Company
prior to the exercise thereof.
2.
<PAGE> 3
7. EXCHANGE AND REGISTRY OF WARRANT. This Warrant is exchangeable, upon the
surrender hereof by the registered holder at the above-mentioned office or
agency of the Company, for a new Warrant of like tenor and dated as of such
exchange.
The Company shall maintain at the above-mentioned office or agency a
registry showing the name and address of the registered holder of this Warrant.
This Warrant may be surrendered for exchange, transfer or exercise, in
accordance with its terms, at such office or agency of the Company, and the
Company shall be entitled to rely in all respects, prior to written notice to
the contrary, upon such registry.
8. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new Warrant of like tenor and dated as of such cancellation,
in lieu of this Warrant.
9. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or a Sunday or shall be a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding day not a
legal holiday.
10. EARLY TERMINATION AND DILUTION.
(a) MERGER, SALE OF ASSETS, ETC. If at any time the Company proposes to (i)
effect a merger, reorganization or sale of substantially all of the assets of
the Company in which the shareholders of the Company immediately prior to the
transaction will hold less than 50% of the surviving entity (or its parent)
immediately after the transaction, (ii) effect its initial public offering,
provided such offering closes on or after January 1, 2000, or (iii) effect a
registered public offering of the Company's shares other than the Company's
initial public offering, then the Company shall give the holder of this Warrant
thirty days notice of the proposed closing date of such transaction and if the
Warrant has not been exercised by the closing date of such transaction it shall
terminate.
(b) ISSUE EXERCISE. In lieu of the cash payment set forth in paragraph 3
above, the Investor may elect to pay the Exercise Price by the surrender of
Warrants ("Net Issuance") as determined below (without payment of any kind). If
the Investor elects the Net Issuance method, the Company will issue Common Stock
in accordance with the following formula:
3.
<PAGE> 4
X = Y(A-B)
------
A
Where: X = the number of shares of Common Stock to be issued to the holder.
Y = the number of shares of Common Stock requested to
be exercised under this Warrant.
A = the fair market value of one share
of the Company's Common Stock at the
date of calculation.
B = the Exercise Price (as adjusted to the date of
such calculation).
For purposes of the above calculation, current fair market value of
the Common Stock shall mean with respect to each share of Common
Stock:
(I) if the exercise is in connection with an initial public
offering and if the Company's Registration Statement relating to
such public offering has been declared effective by the
Securities and Exchange Commission, then the fair market value
per share shall be the "Initial Price to Public" specified in the
final prospectus with respect to the offering;
(II) if this Warrant is exercised prior to and not in connection
with the Company's initial public offering, then the current fair
market value of the Common Stock shall be as determined in good
faith by its Board of Directors, unless the Company shall become
subject to a merger, acquisition or other consolidation pursuant
to which the Company is not the surviving party, in which case
the fair market value of the Common Stock shall be deemed to be
the value received by the holders of the Company's Common Stock
pursuant to such merger or acquisition;
(III) if this Warrant is exercised after, and not in connection
with the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market
value shall be the average of the closing prices over a
twenty-one (21) day period ending three days before the day
4.
<PAGE> 5
the current fair market value of the securities is being
determined; or
(b) if actively traded over-the-counter, the fair market
value shall be deemed to be the average of the closing bid and
asked prices quoted on the Nasdaq system (or similar system) over
the twenty-one (21) day period ending three days before the day
the current fair market value of the securities is being
determined;
(IV) if at any time after the Company's initial public offering
the Common Stock is not listed on any securities exchange or
quoted in the Nasdaq system or the over-the-counter market, the
current fair market value of Common Stock shall be the highest
price per share which the Company could obtain from a willing
buyer for shares of Common Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by
its Board of Directors, unless the Company shall become subject
to a merger, acquisition or other consolidation pursuant to which
the Company is not the surviving party, in which case the fair
market value of the Common Stock shall be deemed to be the value
received by the holders of the Company's Common Stock pursuant to
such merger or acquisition.
(c) RECLASSIFICATION, ETC. If the Company at any time shall, by
subdivision, combination or reclassification of securities or otherwise, change
any of the securities to which purchase rights under this Warrant exist into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter be to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities which
were subject to the purchase rights under this Warrant immediately prior to such
subdivision, combination, reclassification or other change. If shares of the
Company's Common Stock are subdivided or combined into a greater or smaller
number of shares of Common Stock, the purchase price under this Warrant shall be
proportionately reduced in case of subdivision of shares or proportionately
increased in the case of combination of shares, in both cases by the ratio which
the total number of shares of Common Stock to be outstanding immediately after
such event bears to the total number of shares of Common Stock outstanding
immediately prior to such event.
5.
<PAGE> 6
(d) CASH DISTRIBUTIONS. No adjustment on account of cash dividends or
interest on the Company's Common Stock or other securities purchasable hereunder
will be made to the purchase price under this Warrant.
(e) AUTHORIZED SHARES. The Company covenants that it will authorize a
sufficient number of shares of Common Stock to provide for the issuance of
Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that during the period this Warrant is outstanding, it
will reserve from such authorized and unissued Common Stock, a sufficient number
of shares of Common Stock to provide for the issuance of such stock upon the
exercise of any purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of the Company's Common
Stock upon the exercise of the purchase rights under this Warrant.
11. MISCELLANEOUS.
(a) ISSUE DATE. The provisions of this Warrant shall be construed and shall
be given effect in all respect as if it had been issued and delivered by the
Company on the date hereof. This Warrant shall be binding upon any successors or
assigns of the Company. This Warrant shall constitute a contract under the laws
of the State of California and for all purposes shall be construed in accordance
with and governed by the laws of said state.
(b) RESTRICTIONS. The holder hereof acknowledges that the Common Stock
acquired upon the exercise of this Warrant may have restrictions upon its resale
imposed by state and federal securities laws.
IN WITNESS WHEREOF, CONTINUUS SOFTWARE CORPORATION has caused this Warrant
to be executed by its officers thereunto duly authorized.
Dated: April 22, 1999
CONTINUUS SOFTWARE
CORPORATION
By:
---------------------------------------
Name:
--------------------------------------
Title:
------------------------------------
6.
<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing warrant, execute this form
and supply required information. Do not use this form
to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
- -------------------------------------------------------------------------------
(Please Print)
- -------------------------------------------------------------------------------
(address)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Holder's Signature:
------------------------------------------------------------
Holder's Address:
------------------------------------------------------------
------------------------------------------------------------
Dated ______________, _______
Signature Guaranteed:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
<PAGE> 8
NOTICE OF EXERCISE
To: CONTINUUS SOFTWARE CORPORATION
(1) The undersigned hereby elects to purchase shares of Common Stock of
CONTINUUS SOFTWARE CORPORATION pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price in full, together with all
applicable taxes, if any.
(2) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares.
- ---------------------- ------------------------
(Date) (Signature)
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Continuus Software Corporation and subsidiaries
We consent to the use in Amendment No. 2 to Registration Statement No. 333-76893
of Continuus Software Corporation and subsidiaries on Form S-1 of our report
dated , appearing in the Prospectus, which is a part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Continuus Software Corporation
and subsidiaries, listed in Item 16. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
Costa Mesa, California
July __, 1999
The above consent is in the form which will be signed by Deloitte & Touche LLP
upon consummation of the reverse stock split and reincorporation in the State of
Delaware which is described in Note 1 of the notes to the consolidated financial
statements and assuming that from January 26, 1999 to the date of such reverse
stock split and reincorporation, no other events have occurred that would affect
the accompanying financial statements and notes thereto.
Deloitte & Touche LLP
Costa Mesa, California
July 9, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF THE STANDISH GROUP INTERNATIONAL, INC.
The undersigned, The Standish Group International, Inc., publisher of
CHAOS '98: A Summary Review, hereby consents to the references to The Standish
Group in the prospectus contained within the Registration Statement No.
333-76893 filed with the Securities and Exchange Commission by Continuus
Software Corporation based on the understanding and agreement that said
references shall read as follows:
In "Business":
The Standish Group estimated that in 1998 as few as 26% of all
corporate IT software projects were completed on time and on
budget.
Dated: May 26, 1999
THE STANDISH GROUP INTERNATIONAL, INC.
By: /s/ James H. Johnson
-------------------------------------
Name: James H. Johnson
-----------------------------------
Title: Chairman
----------------------------------
