<PAGE>
Pursuant to Rule 420(b)(4)
Registration No. 333-72999
4,000,000 Shares
Portal Software, Inc.
[LOGO OF PORTAL SOFTWARE, INC. APPEARS HERE]
Common Stock
----------------
This is an initial public offering of shares of Portal Software, Inc. All of
the 4,000,000 shares of common stock are being sold by Portal.
Prior to this offering, there has been no public market for the common stock.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "PRSF".
Immediately following and conditioned upon the sale of the shares in the
initial public offering, Portal will sell to Cisco Systems, Inc. and Andersen
Consulting LLP in a concurrent private placement, an additional 3,000,000 and
380,184 shares of common stock, respectively, at the initial public offering
price less the underwriting discount.
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price......................... $14.00 $56,000,000
Underwriting discount................................. $ 0.98 $ 3,920,000
Proceeds, before expenses, to Portal.................. $13.02 $52,080,000
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 600,000 shares from Portal at the initial public offering price less
the underwriting discount.
----------------
The underwriters expect to deliver the shares in New York, New York on May
11, 1999.
Goldman, Sachs & Co.
Credit Suisse First Boston
BancBoston Robertson Stephens
Hambrecht & Quist
----------------
Prospectus dated May 5, 1999.
<PAGE>
[DESCRIPTION OF ARTWORK]
Images of the different screens from Infranet.
A diagram with the word "Infranet" in the middle and spokes extending outward
in all directions. Each spoke indicates an element of an Internet-based
service provider's business.
A list of Portal's representative customers above Portal's logo is on the
bottom right-hand side of the page.
INSIDE FRONT COVER
The inside front cover of the prospectus has a caption centered across the
top of the page which reads "Customer Management and Billing Software
Solutions for Providers of Internet-Based Services."
Along the left side of the page reading from bottom to top vertically is the
phrase "Real Time." "Real Time" is embedded in a blue stripe which runs from
the bottom to the top of the page vertically.
To the right of the phrase "Real Time" and below the caption "Customer
Management and Billing Software Solutions for Providers of Internet-Based
Services" is the image of a clock. Imaged over the clock in the center of face
is the Portal logo and below the logo is the phrase the words "Real Time No
Limits" and below this caption is a list entitled "Valued Benefits." Under
"Valued Benefits" there are three bullet points which read: "Rapid Service
Introduction," "Effective Customer Management" and "Flexible Market Response."
At approximately three o'clock on the face of the clock is a picture of a hand
holding up a computer. Below this picture at approximately 4 o'clock is the
caption and sentence which reads, "Support the Services. Portal lets providers
of Internet-based services rapidly offer a variety of Internet-based services
with flexible service bundling and pricing options, keeping pace with market
demands." At approximately 7 o'clock there is a picture of a hand holding a
stack of money. At approximately 8 o'clock, there is a caption and sentence
which corresponds to the hand holding the stack of money that reads, "Collect
the Money. Portal maintains real time subscriber account information and
allows subscribers to access billing and service information directly,
reducing support needs and improving satisfaction." At approximately 10
o'clock there is a picture of hand holding a mouse. At approximately 12
o'clock there is a caption and sentence which corresponds to the hand holding
the mouse which reads, "Manage the Subscribers. Portal offers instant
subscriber registration and service activation coupled with a range of cost-
effective features designed to ensure effective customer management and
marketing."
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering
and our consolidated financial statements and notes to those statements
appearing elsewhere in this prospectus. Except as set forth in the consolidated
financial statements or as otherwise specified in this prospectus, all
information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. reflects a three-for-one split of the outstanding shares of common stock
and preferred stock;
. reflects the conversion of all of our outstanding preferred stock into
common stock upon the effectiveness of the registration statement;
. reflects our reincorporation into Delaware; and
. reflects the issuance of 3,380,184 shares of common stock in the
concurrent placement.
See "Description of Capital Stock" and "Underwriting".
Portal Software, Inc.
Our Business
We develop, market and support real-time, scalable customer management and
billing software, or CM&B software, for providers of Internet-based services.
Our Infranet software is a comprehensive solution that meets the complex,
mission-critical provisioning, accounting, reporting and marketing needs of
providers of Internet-based services. Our "Real Time No Limits" Infranet
solution enables the real-time provisioning and reporting of services,
including such functions as account creation, user authentication and
authorization, activity tracking, pricing and rating, billing and customer
service, including self-service, all on a scale of up to millions of users. We
have built Infranet using an open architecture with fully documented
application programming interfaces, or APIs, which facilitate customization,
integration with existing software applications, and creation of new services
by our customers, partners and third parties.
We were founded in 1985 as an on-line service and one of the first Internet
service providers, or ISPs, and we began focusing in late 1993 on developing
and marketing real-time CM&B software for the Internet. We shipped the first
generally available version of Infranet in May 1996. Our approximately 80
Infranet customers include ISPs, such as Concentric Network Corporation and
UUNET Technologies, Inc.; on-line enterprises, such as Juno Online Services,
Inc. and 3Com Corporation's Palm.net; and on-line divisions of
telecommunications carriers, such as BellSouth Corp. and U S West, Inc.
Our Market Opportunity
Providers of Internet-based services and telecommunications carriers are
demanding enhanced capabilities from their CM&B systems as the relentless pace
of change and innovation mandates a new level of CM&B performance and
functionality. Existing CM&B systems used by many traditional
telecommunications carriers are not designed to accommodate "always on", data-
oriented services and can generally be characterized as:
. inflexible;
. capable only of periodic processing or "batch-oriented";
. proprietary;
. centralized; and
. difficult to scale in an Internet environment.
Existing CM&B solutions have significant difficulties in adapting to the needs
of providers of Internet-based services that continually introduce new services
and programs.
We believe that providers of Internet-based services will increasingly
require a CM&B solution that is real-time, distributed, scalable, flexible and
easily adaptable to a vast number of emerging products and services. Infranet
is designed to meet the critical functional requirements of scalability,
enterprise-wide integration, including interoperability with legacy systems,
comprehensive functionality, ease of use, flexibility and improved time to
market. This enables service providers to capture the business benefits of
increased revenue, reduced costs and improved customer service.
3
<PAGE>
Our Strategy
Our strategy is to establish Portal as the CM&B platform of choice for
providers of Internet-based services. Key elements of this strategy are:
Extend Market Leadership Position. Our objective is to extend our position as
a leader in the Internet-based CM&B market to establish Portal as the broad
platform of choice for providers of Internet-based services. We intend to take
advantage of our technological leadership, strategic partnerships, significant
customer relationships, broad-based sales and marketing efforts and scalable
business model to create a widespread customer base that will be difficult for
potential competitors to penetrate.
Target Leading Providers of Advanced Communications Services Worldwide. The
scalability and flexibility of Infranet enables us to target a broad range of
providers of Internet-based services, including on-line service divisions of
major telecommunications providers worldwide, on-line service providers and
companies that use the Internet to provide entirely new types of communications
services.
Build a Long-Term, High Margin, Software-Driven Business Model. The
scalability, comprehensive functionality and extensibility of Infranet,
combined with our strategic partnerships, are designed to allow us to achieve
and maintain a high margin, software-driven business, rather than the service-
intensive, customer-specific approach of many of our competitors.
Leverage Partnerships and Alliances with Systems Integrators, and with
Platform, Software and Services Providers. We have established a series of
partnerships and alliances with systems integrators, such as Andersen
Consulting LLP, Cap Gemini Group, NTT Software Corporation and
PricewaterhouseCoopers LLP and hardware platform, software and services
providers, such as Cisco Systems, Inc., Compaq Corporation, Hewlett-Packard
Company, Microsoft Corporation, Oracle Corporation and Sun Microsystems, Inc.
We believe that our partnership strategy is unique in breadth and scope within
our market, provides us with a competitive advantage and serves as a "force
multiplier" which leverages our own internal capabilities.
Grow with Customers and the Internet. Our strategy is to maximize
opportunities for long-term revenue growth by targeting service providers with
excellent growth prospects and capitalizing on additional sales opportunities
with our customers through the addition of subscribers, add-on component sales,
additional service revenues and maintenance and support agreements. We intend
to continue to evolve and refine our business to track the growth of Internet-
based services, so that as these services proliferate, our revenue growth
opportunities will also increase.
Corporate Information
Portal Software, Inc. was incorporated in California in March 1994 as Portal
Information Network, Inc. In December 1995, Portal Communications Company, a
company founded by John E. Little, Portal's Chief Executive Officer, and
incorporated in California in May 1985, was merged into Portal Information
Network, Inc. In October 1997, Portal Information Network, Inc. changed its
name to Portal Software, Inc. Portal Software, Inc. plans to reincorporate in
Delaware prior to the consummation of the offering. References in this
prospectus to "Portal", "we", "our" and "us" refer to Portal Software, Inc., a
Delaware corporation, its predecessors, and each of its subsidiaries. Portal's
principal executive offices are located at 20883 Stevens Creek Boulevard,
Cupertino, California 95014 and Portal's telephone number is (408) 343-4400.
Information contained on Portal's Web site does not constitute part of this
prospectus.
Portal(R) and Infranet(R) are registered trademarks of Portal and the Portal
logo, Infranet IPT and Real Time No Limits are trademarks of Portal. Each
trademark, tradename or service mark of any other company appearing in this
prospectus belongs to its holder.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered... 4,000,000 shares
Common stock offered in
the concurrent
placement. ........... 3,380,184 shares
Common stock to be
outstanding after
the offering and
the concurrent
placement............. 74,732,428 shares
Use of proceeds........ For general corporate
purposes, repayment of
certain indebtedness
and working capital,
including sales and
marketing activities,
product development and
support and capital
expenditures. See "Use
of Proceeds".
Nasdaq National Market
symbol................ PRSF
</TABLE>
The common stock outstanding after this offering excludes:
. 7,932,177 shares of common stock issuable upon exercise of stock options
and warrants outstanding as of April 30, 1999 at a weighted average
exercise price of $4.25 per share and 1,800,482 shares of common stock
issuable upon exercise of options granted on the effective date of this
offering at the initial public offering price;
. 3,600,000 shares of common stock available for grant under our 1999 Stock
Incentive Plan which incorporates our 1995 Stock Option/Stock Issuance
Plan and to the extent that any outstanding options expire unexercised,
the shares underlying such options will also be available for grant; and
. 1,800,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
See "Capitalization", "Management--Benefit Plans", "Description of Capital
Stock" and Notes 6 and 8 of Notes to Consolidated Financial Statements.
Summary Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------------------------------
1995 1996 1997 1998 1999
----------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues............. $ 1,517 $ 1,862 $ 5,045 $ 9,416 $ 26,669
Total costs and expenses... 1,717 2,347 7,299 16,802 43,797
Loss from operations....... (200) (485) (2,254) (7,386) (17,128)
Net loss................... (197) (535) (2,274) (7,587) (17,408)
Pro forma basic and diluted
net loss per share
(unaudited)............... $ (0.30)
========
Shares used in computing
pro forma basic and
diluted net loss per share
(unaudited)............... 58,084
========
</TABLE>
<TABLE>
<CAPTION>
January 31, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
Consolidated Balance Sheet Data: (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents....................... $11,809 $11,809 $105,549
Working capital (deficit)....................... (9,150) (9,150) 85,690
Total assets.................................... 32,344 32,344 126,084
Long-term obligations, net of current portion... 2,022 2,022 2,022
Stockholders' equity (net capital deficiency)... (6,551) (6,551) 88,289
</TABLE>
The consolidated balance sheet data is set forth on an actual basis; pro
forma to give effect to the conversion of the outstanding preferred stock into
common stock upon completion of the offering; and as adjusted to reflect the
sale of 4,000,000 shares of common stock in this offering at the initial public
offering price of $14.00 per share and 3,380,184 shares issued in the
concurrent placement and after deducting the estimated underwriting discount
and the estimated offering expenses. See "Use of Proceeds" and
"Capitalization". Working capital (deficit) at January 31, 1999 includes the
effect of deferred revenue of $23,344,000.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. The risks and uncertainties described
below are not the only ones facing our company. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also
may become important factors that may adversely affect our company.
Risks related to our business
It is difficult to evaluate our business because we have a limited history
operating as a provider of CM&B software
Portal has a relatively brief operating history as a provider of CM&B
software. As a result, our historical financial information is of limited value
in projecting future operating results. In late 1993, we changed our strategic
focus from operating as an ISP to developing CM&B software for Internet-based
businesses and we had no meaningful license revenue until 1996. This change
required us to adjust our business processes and make a number of significant
personnel changes, including changes and additions to our engineering and
management teams. Therefore, in evaluating our business, you must consider the
risks and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets, including those discussed below and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Our business strategy may not be successful and we may not
successfully address these risks.
We have not achieved profitability and expect to continue to incur net losses
for at least the next several quarters
We may not be able to increase or even maintain our revenues, and we may not
achieve sufficient revenues or profitability in any future period. We incurred
net losses of approximately $17.4 million for fiscal year 1999, $7.6 million
for fiscal year 1998 and $2.3 million for fiscal year 1997. As of January 31,
1999, we had an accumulated deficit of approximately $27.9 million. We have not
achieved profitability and expect to continue to incur net losses for at least
the next several quarters even if sales of our CM&B software continue to grow.
In addition, we expect to significantly increase our sales and marketing,
product development and administrative expenses. As a result, we will need to
generate significant revenues from sales of Infranet to achieve and maintain
profitability. We expect that we will face increased competition which will
make it more difficult to increase our revenues. Even if we are able to
increase revenues, we may experience price competition which would lower our
gross margins and our profitability. Another factor that will lower our gross
margins is the percentage of our revenues that is derived from indirect
channels and from services, both of which generally have lower margins.
If we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Our quarterly operating results may fluctuate in future periods and we may fail
to meet expectations
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of public market analysts and investors, and the
price of our common stock may fall. Factors that could cause quarterly
fluctuations include:
. variations in demand for our products and services;
. the timing and execution of individual contracts, particularly large
contracts that would materially affect our operating results in a given
quarter;
. the timing of sales of our products and services;
6
<PAGE>
. our ability to develop and attain market acceptance of enhancements to
Infranet and new products and services;
. delays in introducing new products and services;
. new product introductions by competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. the mix of products and services sold;
. the mix of sales channels through which our products and services are
sold;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. the timing of releases of new versions of third-party software and
hardware products that work with our products;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
technical support and other management personnel;
. our ability to expand our operations;
. the amount and timing of expenditures related to expansion of our
operations; and
. global economic conditions as well as those specific to ISPs and other
providers of Internet-based services.
We have difficulty predicting the volume and timing of orders. For example,
substantially all of our future revenues will come from licenses of Infranet
and related services, and the market for this product is in its early stages of
development and is therefore unpredictable. In any given quarter, our sales
have involved, and we expect will continue to involve, large financial
commitments from a relatively small number of customers. As a result, the
cancellation or deferral of even a small number of licenses of Infranet would
reduce our revenues, which would adversely affect our quarterly financial
performance. Also, we have often booked a large amount of our sales in the last
month of the quarter and often in the last week of that month. Accordingly,
delays in the closing of sales near the end of a quarter could cause quarterly
revenue to fall substantially short of anticipated levels. Significant sales
may also occur earlier than expected, which could cause operating results for
later quarters to compare unfavorably with operating results from earlier
quarters.
We record as deferred revenue fees from contracts that do not meet our
revenue recognition policy requirements. While a portion of our revenues each
quarter is recognized from deferred revenue, our quarterly performance will
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts that we enter into may not result in revenue in the
quarter in which the contract was signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our customer support capabilities, develop
new distribution channels and fund greater levels of research and development.
We determine our operating expenses largely on the basis of anticipated revenue
trends and a high percentage of our expenses are fixed in the short term. As a
result, a delay in generating or recognizing revenue could cause significant
variations in our operating results from quarter-to-quarter and could result in
substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
It is difficult to predict the timing of individual orders because Infranet has
a long and variable sales cycle
To date, the sales cycle for Infranet has been three to six months or more
and has required pre-purchase evaluation by a significant number of employees
in our
7
<PAGE>
customers' organizations. The long sales and implementation cycles for Infranet
may cause license revenues and operating results to vary significantly from
period to period. Along with systems integrators and our other distribution
partners, we spend significant time educating and providing information to our
prospective customers regarding the use and benefits of Infranet. Even after
purchase, our customers tend to deploy Infranet slowly and deliberately,
depending on the specific technical capabilities of the customer, the size of
the deployment, the complexity of the customer's network environment, and the
quantity of hardware and the degree of hardware configuration necessary to
deploy Infranet. See "--Our quarterly operating results may fluctuate in future
periods and we may fail to meet expectations" and "Business--Sales and
Marketing".
Our business depends on the acceptance of Infranet, and it is uncertain whether
the market will accept this product
Our future growth depends on the commercial success of Infranet.
Substantially all of our licensing revenues are derived from Infranet. Our
business will be harmed if our target customers do not adopt and purchase
Infranet. The market for Internet-based CM&B software is in its early stages of
development. Our future financial performance will also depend on the
successful development, introduction and customer acceptance of new and
enhanced versions of Infranet. We are not certain that our target customers
will widely adopt and deploy Infranet as their CM&B solution. In the future we
may not be successful in marketing Infranet or any new or enhanced products or
services.
Significant technical challenges arise in our business because many of our
customers purchase and implement Infranet in phases, deploy Infranet across a
variety of computer hardware platforms and integrate it with a number of legacy
systems, third-party software applications and programming tools.
Implementation currently requires participation by our professional services
group, which has significantly limited resources. Some customers may also
require us to develop costly customized features or capabilities, which
increase our costs and consume our limited customer service and support
resources. Also, revenues we derive from our services business have a
significantly lower margin than revenues derived from licensing Infranet. If
new or existing customers have difficulty deploying our products or require
significant amounts of our professional services support, our operating margins
could be harmed.
We must hire and retain qualified sales personnel to sell Infranet
Our financial success depends to a large degree on the ability of our direct
sales force to increase sales to a level required to reach and maintain
profitability. Therefore, our ability to increase revenues in the future
depends considerably upon our success in recruiting, training and retaining
additional direct salespeople and the success of the direct sales force. There
is a shortage of direct sales personnel with the skills and expertise necessary
to sell our products. Also, it may take a new salesperson several months before
he or she becomes a productive member of our sales force. Our business will be
harmed if we fail to hire or retain qualified sales personnel, or if newly
hired salespeople fail to develop the necessary sales skills or develop these
skills more slowly than we anticipate.
In addition, we may miss sales opportunities that are available through other
sales distribution methods and other sources of leads, such as domestic and
foreign resellers and value-added resellers. In the future, we intend to
augment our indirect sales distribution methods through additional third-party
distribution arrangements. However, there is no guarantee that we will
successfully augment these arrangements or that the expansion of indirect sales
distribution methods will increase revenues. We may be at a serious competitive
disadvantage if we fail to enhance these indirect sales channels. See
"Business--Sales and Marketing".
8
<PAGE>
We also use systems integrators and other strategic relationships to implement
and sell Infranet
We have entered into relationships with third-party systems integrators, as
well as with hardware platform and software applications developers and service
providers. We have derived, and anticipate that we will continue to derive, a
significant portion of our revenues from customers that have significant
relationships with our market and platform partners. We could lose sales
opportunities if we fail to work effectively with these parties or fail to grow
our base of market and platform partners.
Many of these partners also work with competing software companies, and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to marketing our products versus the products of others.
We may not be able to enter into additional, or maintain our existing,
strategic relationships on commercially reasonable terms, or at all. Our
agreements with these parties typically are in the form of nonexclusive
referral fee or reseller agreements that may be terminated by either party
without cause or penalty and with limited notice. Therefore, there is no
guarantee that any single party will continue to market our products. If these
relationships fail, we will have to devote substantially more resources to the
distribution, sales and marketing, implementation and support of Infranet than
we would otherwise, and our efforts may not be as effective as those of our
partners, either of which would harm our business.
Our customer base is concentrated and the loss of one or more of our customers
could cause our business to suffer
A substantial portion of our license and services revenues in any given
quarter has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitments. As a result, if a large
contract is cancelled or deferred or an anticipated contract does not
materialize, our business would be harmed. We have initially targeted large
ISPs, including on-line divisions of telecommunications carriers and other
providers of Internet-based services. Some of the industries we have targeted
are consolidating, which could reduce the number of potential customers
available to us. See "Business--Customers".
Our business will suffer dramatically if we fail to successfully manage our
growth
Our ability to successfully offer Infranet and new products and services in a
rapidly evolving market requires an effective planning and management process.
We continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. Our business will
suffer dramatically if we fail to effectively manage this growth. On January
31, 1999, we had a total of 242 employees, compared to a total of 119 employees
on January 31, 1998. From February 1999 through March 1999, we hired 61
additional employees, and we expect to continue to hire new employees at a
rapid pace. This growth has placed, and our anticipated future operations will
continue to place, a significant strain on our management systems and resources
and on our internal training capabilities. We expect that we will need to
continue to improve our financial and managerial controls and reporting systems
and procedures, and will need to continue to expand, train and manage our work
force worldwide. We expect that we will also have to expand our facilities, and
we may face difficulties and significant expenses identifying and moving into
suitable office space.
Our significant international operations and our planned expansion of our
international operations make us much more susceptible to risks from
international operations
For the year ended January 31, 1999, we derived approximately 27% of our
revenue from sales outside North America, and we have offices located in
England, Hong Kong and Australia. As a result, we face risks from doing
business on an international basis, including, among others:
. reduced protection for intellectual property rights in some countries;
. licenses, tariffs and other trade barriers;
9
<PAGE>
. difficulties in staffing and managing foreign operations;
. longer sales and payment cycles;
. greater difficulties in collecting accounts receivable;
. political and economic instability;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. compliance with a wide variety of complex foreign laws and treaties; and
. variance and unexpected changes in local laws and regulations.
We plan to establish additional facilities in other parts of the world. The
expansion of our existing international operations and entry into additional
international markets will require significant management attention and
financial resources. We cannot be certain that our
investments in establishing facilities in other countries will produce desired
levels of revenue. In addition, we have sold Infranet internationally for only
a few years and we have limited experience in developing localized versions of
Infranet and marketing and distributing them internationally.
Further, our international revenues are denominated in U.S. dollars.
Therefore, a strengthening of the dollar versus other currencies could make our
products less competitive in foreign markets. We do not currently engage in
currency hedging activities.
To the extent that we are unable to successfully manage expansion of our
business into international markets due to any of the foregoing factors, our
business could be adversely affected.
Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations
Although we have not done so in the past, we may make acquisitions or
investments in other companies, products or technologies. If we make any
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners.
We may have to incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities for any acquisition could be
substantially dilutive to our stockholders. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.
Our proprietary rights may be inadequately protected, and there is a risk of
infringement
Our success and ability to compete depend substantially upon our internally
developed technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology or to develop products with the same
functionality as our products. Others may develop technologies that are similar
or superior to our technology. Policing unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that our software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grow and the functionality of products in different industry
segments overlaps. Some of our competitors in the market for CM&B software may
have filed or may intend to file patent applications covering
10
<PAGE>
aspects of their technology upon which they may claim our technology infringes.
We cannot be certain that any of these competitors will not
make a claim of infringement against us with respect to our products and
technology.
As is common in the software industry, we may receive, from time to time,
notice of claims of infringement of other parties' proprietary rights. Any
litigation, brought by us or by others, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
product shipment delays or require us to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on acceptable terms, or at all,
and could have a material and adverse impact on our gross margins and
profitability. If a successful claim of product infringement were made against
us and we could not develop non-infringing technology or license the infringed
or similar technology on a timely and cost-effective basis, our business could
be significantly harmed. See "Business--Intellectual Property".
Our business will suffer if our software contains errors or our product
development is delayed
We face possible claims and higher costs as a result of the complexity of our
products and the potential for undetected errors. Due to the "mission critical"
nature of Infranet, undetected errors are of particular concern. The
implementation of Infranet, which we accomplish through our services division
and with our partners, typically involves working with sophisticated software,
computing and communications systems. If we experience difficulties with an
implementation or do not meet project milestones in a timely manner, we could
be obligated to devote more customer support, engineering and other resources
to a particular project and to provide these services at reduced or no cost. If
our software contains undetected errors or we fail to meet our customers'
expectations or project milestones in a timely manner we could experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to achieve market acceptance;
. diversion of development resources;
. injury to our reputation;
. increased service and warranty costs;
. legal actions by customers against us; and
. increased insurance costs.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, these contractual
limitations on liability may not be enforceable and we may be subject to claims
based on errors in our software or mistakes in performing our services
including claims relating to damages to our customers' internal systems. A
product liability claim, whether or not successful, could harm our business by
increasing our costs and distracting our management.
In the past we have failed to release certain new products and upgrades on
time. These delays may result in:
. customer dissatisfaction;
. cancellation of orders and license agreements;
. negative publicity;
. loss of revenues;
. slower market acceptance; or
. legal action by customers against us.
Our business may be harmed if we are unable to develop, license or acquire new
products or enhancements to Infranet on a timely and cost-effective basis, or
if these products or enhancements are not accepted by the market. See
"Business--Products and Services".
11
<PAGE>
We incorporate software licensed from third parties into Infranet and any
significant interruption in the availability of these third-party software
products or defects in these products could harm our business in the short-term
Portions of Infranet incorporate software developed and maintained by third-
party software vendors, such as operating systems, tools and database vendors.
We expect that we may have to incorporate software from third party vendors and
developers to a larger degree in our future products. Any significant
interruption in the availability of these third-party software products or
defects in these products or future products could harm our sales unless and
until we can secure another source. We may not be able to replace the
functionality provided by the third-party software currently offered with our
products if that software becomes obsolete, defective or incompatible with
future versions of our products or is not adequately maintained or updated. The
absence of, or any significant delay in, the replacement of that functionality
could result in delayed or lost sales and increased costs and could harm our
business in the short-term.
Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of Infranet
Software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. Errors or defects that
affect the operation of our software could result in:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.
We are still in the process of completing testing of our Year 2000 readiness
and face uncertainty as a result. Infranet operates in complex network
environments and directly and indirectly interacts with a number of other
hardware and software systems. Our software also interfaces with third-party
systems, such as credit card processing services and customer-specific
modifications that our service providers, third-party integrators and customers
have created to be used with Infranet. Despite preliminary investigation and
testing by us and our partners, Infranet and the underlying systems and
protocols running it may contain errors or defects associated with Year 2000
date functions. We may not identify all Year 2000 failures in our partners'
products because not all failures are within the scope of these tests. In
addition, some of our customers elect to integrate Infranet with interfaces not
ordinarily supported by Portal. This integration, whether performed by Portal,
the customer or a third party systems integrator, is also not within the scope
of Portal's in-house testing efforts. Portal has advised all customers that
they must independently test these integrations for year 2000 compliance.
We also have not performed any operational tests on our internal systems.
Accordingly, we are unable to predict to what extent our business may be
affected if our software, the systems that operate in conjunction with our
software or our internal systems experience a material Year 2000 failure.
The purchasing patterns of our customers and potential customers based on
Year 2000 issues may make it difficult to predict future sales of Infranet.
Many companies are deferring software purchases until after January 1, 2000.
Other companies are accelerating purchases of software products prior to 2000,
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
12
<PAGE>
Our officers and directors will be able to exert significant control on Portal
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately 66.3% of our outstanding common stock
following the completion of this offering and the concurrent placement. In
addition, Cisco, which will purchase 3,000,000 shares of common stock in the
concurrent placement, has agreed in certain circumstances to vote all shares of
common stock it owns, in the event that the board of directors of Portal
approves a sale of substantially all of the assets of Portal, or a merger in
which Portal is not the surviving corporation, in proportion to the vote of all
of the stockholders of Portal. This may further enhance our officers' and
directors' ability to exert control over Portal. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
Stockholders" and "Description of Capital Stock--Concurrent Private Placement".
We are subject to anti-takeover provisions that could delay or prevent an
acquisition of our company
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Further, without any further vote or
action on the part of the stockholders, the board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever
issued, may have preference over and harm the rights of the holders of common
stock. Although the issuance of this preferred stock will provide us with
flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
a majority of our outstanding voting stock. We currently have no plans to issue
preferred stock.
Certain provisions of our amended and restated certificate of incorporation
and bylaws and the Delaware General Corporation Law may delay or impede a
merger, tender offer or proxy contest involving Portal. Furthermore, the board
of directors is divided into three classes, only one of which is elected each
year. Directors may only be removed by the affirmative vote of 66 2/3% or
greater of all classes of voting stock, and the removal must be for cause.
These factors may further delay or prevent a change of control of Portal.
In addition, Portal has entered into an agreement with Cisco that could delay
or prevent us from being acquired. Subject to certain limitations, if Portal
enters into negotiation with certain third parties regarding a potential
merger, acquisition or other business combination, Portal must notify Cisco of
that potential transaction no later than seven days prior to executing a
definitive agreement. Cisco has seven days from the date of Portal's
notification to prepare its own offer for consideration by Portal and its board
of directors. See "Description of Capital Stock--Concurrent Private Placement".
We do not intend to pay dividends on our common stock
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy".
Risks related to the CM&B industry
Our future success will depend on our ability to manage technological change
The market for CM&B software and services and Internet applications is
characterized by:
. rapid technological change;
. frequent new product introductions;
. changes in customer requirements; and
. evolving industry standards.
Future versions of hardware and software platforms embodying new technologies
and the emergence of new industry standards could render our products obsolete.
Our future success
13
<PAGE>
will depend upon our ability to develop and introduce a variety of new products
and product enhancements to address the increasingly sophisticated needs of our
customers.
Infranet is designed to work on a variety of hardware and software platforms
used by our customers. However, Infranet may not operate correctly on evolving
versions of hardware and software platforms, programming languages, database
environments, accounting and other systems that our customers use. We must
constantly modify and improve our products to keep pace with changes made to
these platforms and to back-office applications and other Internet-related
applications. This may result in uncertainty relating to the timing and nature
of new product announcements, introductions or modifications, which may harm
our business. If we fail to modify or improve our products in response to
evolving industry standards, our products could rapidly become obsolete, which
would harm our business.
The markets in which we sell our product are highly competitive and we may not
be able to compete effectively
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition from providers of traditional CM&B
software such as Amdocs Limited, Kenan Systems Corporation, which was recently
acquired by Lucent Technologies, Inc., LHS Group Inc. and Saville Systems PLC;
emerging providers of Internet-specific billing software, such as Belle Systems
S/A, Solect Technology Group and TAI Corporation; and proprietary systems
developed by providers of Internet-based services. We also compete with systems
integrators and with internal MIS departments of larger telecommunications
carriers. We are aware of numerous other major ISPs, software developers and
smaller entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete with Infranet.
We anticipate continued growth and competition in the on-line services and
telecommunications industries and the entrance of new competitors into the CM&B
software market, and that the market for our products and services will remain
intensely competitive. We expect that competition will increase in the near
term and that our primary long-term competitors may have not yet entered the
market. Many of our current and future competitors have significantly more
personnel and greater financial, technical, marketing and other resources than
we do.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, current
and potential competitors have greater name recognition and more extensive
customer bases that they can leverage. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could harm our business. See "Business--
Competition".
Our business substantially depends upon the continued growth of the Internet
and Internet-based services
We sell Infranet to organizations providing Internet-based services.
Consequently, our future revenues and profits, if any, substantially depend
upon the continued acceptance and use of the Internet as an effective medium of
commerce and communication. Rapid growth in the use of the Internet and on-line
services is a recent phenomenon and it may not continue. As a result, a broad
base of regular Internet users may not develop, and the market may not accept
recently introduced services and products that rely upon the Internet, such as
Infranet.
In addition, for a variety of reasons the Internet may not be accepted as a
viable long-term medium of commerce and communication. For example, the network
infrastructure that supports the Internet may not develop adequately. To the
extent that the Internet continues to experience significant expansion in the
number of users, frequency of use or bandwidth requirements, the infrastructure
for the Internet may be unable to support the demands placed upon it. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the
14
<PAGE>
Internet also could result in slower response times and adversely affect usage
of the Internet generally and our customers in particular. Any of these events
could significantly reduce demand for our products and harm our business.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our products and services and increased costs of doing business
Due to the increasing popularity and use of the Internet, it is possible that
state and federal regulators could adopt laws and regulations that may impose
additional burdens on those companies conducting business on-line.
The growth and development of the market for Internet-based services may
prompt calls for more stringent consumer protection laws. The adoption of any
additional laws or regulations may decrease the expansion of the Internet. A
decline in the growth of the Internet could decrease demand for our products
and services and increase our cost of doing business, or otherwise harm our
business. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our
costs could increase and our growth could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing
laws and regulations to the Internet and other on-line services.
Our future success depends on our ability to attract and retain additional
personnel
We intend to hire a significant number of additional sales, support,
marketing, administrative and research and development personnel in 1999 and
beyond. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. We
currently have a small customer service and support organization and will need
to increase our staff to support new customers and the expanding needs of our
existing customers. Hiring qualified customer service and support personnel, as
well as sales, marketing, administrative and research and development
personnel, is very competitive in our industry, particularly in the San
Francisco Bay Area, where Portal is headquartered, due to the limited number of
people available with the necessary technical skills and understanding of the
Internet. We expect to face greater difficulty attracting these personnel with
equity incentives as a public company than we did as a privately held company.
Our future success also depends upon the continued service of our executive
officers and other key sales, marketing and support personnel in general, and
on the services of John E. Little, our President and Chief Executive Officer,
and David S. Labuda, our Chief Technology Officer, in particular. None of our
officers or key employees is bound by an employment agreement for any specific
term. Our relationships with these officers and key employees are at will.
Risks related to this offering
We have substantial discretion as to how to use the proceeds from this offering
and the concurrent placement
Our management has broad discretion as to how to spend the proceeds from this
offering and the concurrent placement and may spend these proceeds in ways with
which our stockholders may not agree. We cannot predict that investment of the
proceeds will yield a favorable or any return. See "Use of Proceeds".
There has been no prior public market for our common stock, and the price of
our common stock may be volatile
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. We negotiated 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, and the market price of the common stock could fall below the initial
public offering price. See "Underwriting".
15
<PAGE>
The trading price of the common stock may fluctuate widely as a result of a
number of factors, many of which are outside our control. Some of these factors
include:
. quarter-to-quarter variations in our operating results;
. failure to meet the expectations of industry analysts;
. changes in earnings estimates by analysts;
. announcements and technological innovations or new products by us or our
competitors;
. increased price competition;
. developments or disputes concerning intellectual property rights; and
. general conditions in the Internet industry.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
Internet and computer software companies and which have often been unrelated to
the operating performance of these companies.
Future sales of shares could affect our stock price
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants and shares
issued in the concurrent placement, in the public market following this
offering, the market price of our common stock could fall. Such sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate. Upon completion of
this offering and the concurrent placement, we will have outstanding 74,732,428
shares of common stock, based upon 67,352,244 shares outstanding as of April
30, 1999, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options or warrants after April 30, 1999. Of these
shares, the 4,000,000 shares sold in this offering will be freely tradable.
This leaves 67,352,244 shares eligible for sale in the public market beginning
180 days after the date of this prospectus and 3,380,184 shares eligible for
sale in the public market beginning one year after the date of this prospectus.
Investors in this offering will suffer immediate and substantial dilution
If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value. If other
securityholders exercise options or warrants to purchase our capital stock, you
will suffer further dilution. See "Dilution".
This prospectus contains forward-looking statements; these statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control
This prospectus contains forward-looking statements that are not historical
facts but rather are based on current expectations, estimates and projections
about our industry, our beliefs and assumptions. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates" and variations
of these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors, some of which are
beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" and elsewhere in this prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus. We undertake no
obligation to update these statements or publicly release the results of any
revisions to the forward-looking statements that we may make to reflect events
or circumstances after the date of this prospectus or to reflect the occurrence
of unanticipated events.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to Portal from the sale and issuance of the 4,000,000 shares
of common stock offered and from the concurrent placement of 3,380,184 shares
of common stock will be $94.8 million (approximately $102.7 million if the
underwriters' over-allotment option is exercised in full), at the initial
public offering price of $14.00 per share after deducting the underwriting
discount and estimated offering expenses. Portal is conducting this offering
primarily to increase its equity capital, create a public market for its common
stock and to facilitate future access by Portal to public equity markets.
Portal intends to use the net proceeds for general corporate purposes and
working capital, including sales and marketing activities, product development
and support and capital expenditures. In addition, Portal will use the net
proceeds to repay the customer deposit for prepaid services which bears
interest at a rate of 10% per annum, matures on November 30, 1999, and under
which Portal owed $1.1 million as of April 1, 1999. Portal also may use the net
proceeds to repay amounts borrowed under a $5.0 million line of credit under a
loan and security agreement entered into with Imperial Bank in April 1999.
Amounts borrowed under this line of credit bear interest at a rate equal to
Imperial Bank's prime rate plus 0.5% per year and mature on April 13, 2000. As
of April 22, 1999 Portal owed $1,000,000 under the credit line. Portal may also
use a portion of the net proceeds to acquire or invest in complementary
businesses or products or to obtain the right to use complementary
technologies. Portal has no agreements or commitments with respect to any
acquisition or investment, and it is not involved in any negotiations with
respect to any transaction. Pending these uses, the net proceeds of this
offering and the concurrent placement will be invested in short-term, interest-
bearing, investment grade securities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
DIVIDEND POLICY
Portal has never declared or paid dividends on its capital stock and does not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of
Portal's board of directors after taking into account various factors,
including its financial condition, operating results, current and anticipated
cash needs and plans for expansion. Portal's line of credit arrangement with
Imperial Bank prohibits the payment of dividends by Portal without Imperial
Bank's consent.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Portal as of January 31,
1999, on an actual basis; on a pro forma basis giving effect to the conversion
of 9,550,729 outstanding shares of convertible preferred stock into 28,652,187
shares of common stock upon the completion of this offering; and as adjusted to
reflect the net proceeds from the sale of 4,000,000 shares of common stock
offered by Portal in this offering at the initial public offering price of
$14.00 per share and 3,380,184 shares of common stock in the concurrent
placement and after deducting the underwriting discount and the estimated
offering expenses. This table should be read in conjunction with the
consolidated financial statements and notes to consolidated financial
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
January 31, 1999
--------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share amounts)
<S> <C> <C> <C>
Current portion of long-term obligations....... $ 4,601 $ 4,601 $ 3,474
======== ======== ========
Long-term obligations, excluding current
portion....................................... $ 2,022 $ 2,022 $ 2,022
Stockholders' equity (net capital deficiency):
Convertible preferred stock: 20,000,000 shares,
no par value per share, authorized, actual;
5,000,000 shares, $0.001 par value per share,
authorized, pro forma and as adjusted;
9,550,729 shares, no par value per share,
issued and outstanding, actual; no shares,
$0.001 par value per share, issued and
outstanding, pro forma and as adjusted........ 18,482 -- --
Common stock: 35,000,000 shares, no par value
per share, authorized, actual; 250,000,000
shares, $0.001 par value per share,
authorized, pro forma and as adjusted;
13,061,181 shares, no par value per share,
issued and outstanding, actual; 67,835,730
shares, $0.001 par value per share, issued and
outstanding, pro forma; 75,215,914 shares,
$0.001 par value per share, issued and
outstanding, as adjusted...................... 927 68 75
Additional paid-in capital..................... 16,753 36,094 130,927
Notes receivable from stockholders............. (318) (318) (318)
Deferred stock compensation.................... (14,456) (14,456) (14,456)
Accumulated deficit............................ (27,939) (27,939) (27,939)
-------- -------- --------
Stockholders' equity (net capital deficiency).. (6,551) (6,551) 88,289
-------- -------- --------
Total capitalization........................... $ (4,529) $ (4,529) $ 90,311
======== ======== ========
</TABLE>
The number of shares of common stock outstanding as of January 31, 1999
excludes:
. 6,179,898 shares of common stock issuable upon exercise of stock options
and warrants outstanding at a weighted average exercise price of $1.45
per share;
. 10,525,842 shares of common stock available for grant under the 1999
Stock Incentive Plan which incorporates our 1995 Stock Option/Stock
Issuance Plan; and
. 1,800,000 shares of common stock reserved for issuance under Portal's
1999 Employee Stock Purchase Plan.
Also excludes 2,705,730 shares of common stock issuable upon exercise of
stock options granted between February 1, 1999 and April 30, 1999 at a weighted
average exercise price of $9.40 per share, and 1,800,482 shares of common stock
issuable upon exercise of stock options granted on the effective date of this
offering at the initial public offering price.
See "Management--Benefit Plans", "Description of Capital Stock" and Notes 6 and
8 of Notes to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of Portal at January 31,
1999, was approximately $(6,551,000), or $(0.10) per share. Pro forma net
tangible book value (deficit) per share represents total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding
after giving effect to the conversion of all outstanding convertible preferred
stock. After giving effect to the 4,000,000 shares of common stock offered in
this offering at the initial public offering price of $14.00 per share, and
3,380,184 shares offered in the concurrent placement and after deducting the
underwriting discount and estimated offering expenses, Portal's pro forma net
tangible book value at January 31, 1999 would have been $88,289,000, or $1.17
per share. This represents an immediate increase in net tangible book value of
$1.27 per share to existing stockholders and an immediate dilution of $12.83
per share to new investors purchasing shares of common stock in this offering.
Dilution is defined as the reduction in the proportion of income, or earnings
per share, to which each share is entitled due to the issuance of additional
shares. With the sale and issuance of 4,000,000 shares in this offering and
3,380,184 shares in the concurrent placement, existing stockholders will suffer
an immediate reduction in the net tangible book value of their shares because
such additional shares decrease the percentage ownership of the existing
stockholder. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $14.00
Pro forma net tangible book value (deficit) per share prior to
the offering................................................. $ (0.10)
Increase per share attributable to new investors.............. 1.27
--------
Pro forma net tangible book value per share after the offering.. 1.17
------
Dilution per share to new investors............................. $12.83
======
</TABLE>
The following table summarizes, as of January 31, 1999, on the pro forma
basis described above, the total number of shares and consideration paid to
Portal and the average price per share paid by existing stockholders and by new
investors purchasing shares of common stock in this offering at the initial
public offering price of $14.00 per share (before deducting the estimated
underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 67,835,730 90.2% $ 19,448,000 16.3% $ 0.29
New public investors.... 4,000,000 5.3 56,000,000 46.9 14.00
Concurrent placement
investors.............. 3,380,184 4.5 44,009,996 36.8 13.02
---------- ----- ------------ -----
Totals.................. 75,215,914 100.0% $119,457,996 100.0%
========== ===== ============ =====
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of January 31, 1999 and exclude:
. 6,179,898 shares of common stock issuable upon exercise of stock options
and warrants outstanding at a weighted average exercise price of $1.45
per share;
. 10,525,842 shares of common stock available for grant under the 1999
Stock Incentive Plan which incorporates our 1995 Stock Option/Stock
Issuance Plan; and
. 1,800,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan.
Also excludes 2,705,730 shares of common stock issuable upon exercise of
stock options granted between February 1, 1999 and April 30, 1999 at a weighted
average exercise price of $9.40 per share, and 1,800,482 shares of common stock
issuable upon exercise of stock options granted on the effective date of this
offering at the public offering price.
To the extent that any of these options or warrants are exercised, there will
be further dilution to new investors. See "Capitalization", "Management--
Benefit Plans", "Description of Capital Stock" and Notes 6 and 8 of Notes to
Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of Portal Software, Inc. and the Notes to Consolidated Financial Statements
included elsewhere in this prospectus. The consolidated statement of operations
data set forth below for the fiscal years ending January 31, 1997, 1998 and
1999 and the consolidated balance sheet data at January 31, 1998 and 1999 have
been derived from audited consolidated financial statements of Portal Software,
Inc. included elsewhere in this prospectus, which have been audited by Ernst &
Young LLP, Independent Auditors. The consolidated statement of operations data
for the year ended January 31, 1996 and the consolidated balance sheet data at
January 31, 1996 and 1997, are derived from audited consolidated financial
statements that are not included in this prospectus. The consolidated statement
of operations data for the year ended January 31, 1995 and the consolidated
balance sheet data at January 31, 1995 are unaudited. The basic and diluted net
loss per share and the pro forma basic and diluted net loss per share
computation excludes potential shares of common stock (options and common
stock) subject to repurchase rights held by Portal, preferred stock and
warrants, since their effect would be antidilutive. See Note 1 of Notes to
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used to compute basic and diluted net loss per
share and pro forma basic and diluted net loss per share. The historical
results are not necessarily indicative of results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License fees................ $ -- $ -- $ 3,944 $ 6,892 $ 13,536
Services.................... 1,517 1,862 1,101 2,524 13,133
------- ------- -------- -------- ---------
Total revenues............. 1,517 1,862 5,045 9,416 26,669
------- ------- -------- -------- ---------
Costs and expenses:
Cost of license fees........ -- 13 62 970 458
Cost of services............ 791 267 518 2,152 9,425
Research and development.... 432 517 2,527 5,628 11,252
Sales and marketing......... -- 44 2,371 5,436 14,112
General and administrative.. 494 1,506 1,821 2,616 6,253
Amortization of deferred
stock compensation......... -- -- -- -- 2,297
------- ------- -------- -------- ---------
Total costs and expenses... 1,717 2,347 7,299 16,802 43,797
------- ------- -------- -------- ---------
Loss from operations.......... (200) (485) (2,254) (7,386) (17,128)
Interest income (expense) and
other income, net............ 3 (50) (20) (201) 435
------- ------- -------- -------- ---------
Loss before income taxes...... (197) (535) (2,274) (7,587) (16,693)
Provision for income taxes.... -- -- -- -- (715)
------- ------- -------- -------- ---------
Net loss...................... $ (197) $ (535) $ (2,274) $ (7,587) $ (17,408)
======= ======= ======== ======== =========
Basic and diluted net loss per
share ....................... $(0.10) $(0.16) $ (0.18) $ (0.37) $ (0.59)
======= ======= ======== ======== =========
Shares used in computing basic
and diluted net loss per
share ....................... 2,017 3,394 12,432 20,786 29,531
======= ======= ======== ======== =========
Pro forma basic and diluted
net loss per share
(unaudited) ................. $ (0.30)
=========
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)... 58,084
=========
<CAPTION>
January 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents .... $ 16 $ 328 $ 1,540 $ 14,646 $ 11,809
Working capital (deficit)..... (373) (1,045) (651) 6,581 (9,150)
Total assets.................. 549 881 3,527 23,125 32,344
Long-term obligations, net of
current portion.............. 170 98 447 1,500 2,022
Stockholders' equity (net
capital deficiency).......... (26) (652) 111 7,763 (6,551)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties. These forward-
looking statements include, among others, those statements including the words
"expects", "anticipates", "intends", "believes" and similar language. Portal's
actual results could differ materially from those discussed in this prospectus.
Factors that could cause or contribute to these differences include, but are
not limited to, the risks discussed in the section entitled "Risk Factors" in
this prospectus.
Overview
Portal Software, Inc. develops, markets and supports real-time customer
management and billing software, known as CM&B software, for providers of
Internet-based services. Portal was incorporated in California in March 1994 as
Portal Information Network, Inc. In December 1995, Portal Communications
Company, a predecessor company that was founded in 1985, was merged with and
into Portal Information Network, Inc. Portal Communications Company operated a
proprietary, network-based on-line system, provided Internet access and hosted
private label on-line services from its inception until 1996 when these
services were discontinued and the individual customers were sold to Sprint
Corporation. In October 1997, Portal Information Network, Inc. changed its name
to Portal Software, Inc.
In late 1993, Portal began focusing on developing and marketing real-time
CM&B software for the Internet. The first generally available version of the
product, named Infranet, was shipped in May 1996.
Beginning with fiscal year 1997, substantially all of Portal's revenues have
come from the license of one product, Infranet, and from related services.
Revenues consist of Infranet license, consulting, training, support and
maintenance fees. License revenues are comprised of perpetual or multiyear
license fees which are primarily derived from contracts with corporate
customers and resellers. Portal believes that future license revenues will be
generated from three sources:
. license fees from new customers;
. license fees for new products to existing customers; and
. growth in the subscriber base of its existing customers, which will lead
to increased revenue from subscriber-based licenses.
Revenue from license fees is recognized when a formal agreement exists or
purchase order is received, delivery of the product has occurred, no
significant Portal obligations with regard to implementation remain, the fee is
fixed or determinable and collectibility is probable. For electronic delivery,
the software is considered to have been delivered when Portal has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee
is collected. Revenue from arrangements with customers that are not the
ultimate users, such as resellers, is not recognized until the product is
delivered to the end-user.
Services revenues are primarily comprised of revenues from systems
integration or other consulting activities, maintenance agreements and training
of customers and partners. If the software is paid for by the customer prior to
the commencement of services and Portal is required to perform only training or
limited installation services, Portal recognizes services revenues as these
services are performed. Otherwise, Portal recognizes services revenues using
contract accounting. Maintenance agreements provide for technical support and
include the right to unspecified upgrades. Maintenance revenues are deferred
and recognized on a straight-line basis over the life of the related agreement,
which is typically one year. Customer advances and billed amounts due from
customers in excess of revenues recognized are recorded as deferred revenue.
21
<PAGE>
Portal's cost of license fees includes a royalty payment for third-party
technology included in Infranet. Resellers' commissions are also included in
cost of license fees when Portal is paid directly by a customer for a contract
originated by a systems integrator. Agreements with some of these partners
require Portal to make a payment equal to a percentage of the license and
maintenance revenues recognized. Cost of license fees do not include costs of
packaging, documentation or delivery as our product is delivered electronically
via the Internet. Cost of services consists primarily of headcount-related
expenses, costs related to outside consultants, travel and overhead associated
with delivering consulting, training and support to Portal's customers.
Portal has a limited operating history as a software company. Portal incurred
a net loss of $2.3 million for fiscal year 1997, $7.6 million for fiscal year
1998, and $17.4 million for fiscal year 1999. As of January 31, 1999, Portal
had an accumulated deficit of $27.9 million. Since 1994, Portal has not
achieved profitability on a quarterly or annual basis, and Portal anticipates
that it will incur net losses for at least the next several quarters. Portal
expects to increase its sales and marketing, product development and
administrative expenses for the foreseeable future. As a result, Portal will
need to generate significant revenues from licenses of Infranet to achieve and
maintain profitability.
Portal has generated a substantial portion of its historical Infranet
revenues from approximately 80 customers. Portal has established a series of
partnerships with systems integrators and hardware platform, software and
service providers. Portal has derived, and anticipates that it will continue to
derive, a substantial portion of its revenues from customers that have
significant relationships with its market and platform partners.
Results of Operations
The following table sets forth the results of operations for Portal expressed
as a percentage of total revenues. The historical results are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Year Ended
January 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
License fees............................................. 78 % 73 % 51 %
Services................................................. 22 27 49
--- --- ---
Total revenues......................................... 100 100 100
--- --- ---
Costs and expenses:
Cost of license fees..................................... 1 10 2
Cost of services......................................... 10 23 35
Research and development................................. 50 60 42
Sales and marketing...................................... 47 58 53
General and administrative............................... 36 28 23
Amortization of deferred stock compensation.............. -- -- 8
--- --- ---
Total costs and expenses............................... 144 179 163
Loss from operations....................................... (44) (79) (63)
Interest income (expense) and other income, net............ 0 (2) 1
--- --- ---
Loss before income taxes................................... (44) (81) (62)
Provision for income taxes................................. -- -- (3)
--- --- ---
Net loss................................................... (44)% (81)% (65)%
=== === ===
</TABLE>
22
<PAGE>
Years Ended January 31, 1998 and 1999
Revenues
Total revenues were $26.7 million in fiscal year 1999, an increase of $17.3
million or 183% over fiscal year 1998. In fiscal year 1999, no customer
accounted for 10% or more of total revenues, while one customer, CompuServe, in
fiscal year 1998 accounted for 47% of total revenues. In fiscal year 1999,
Portal's top ten customers accounted for approximately 37% of total revenues,
while in fiscal year 1998, the top ten customers accounted for 83% of total
revenues.
License fees declined as a percentage of total revenues in fiscal year 1999
compared to fiscal year 1998 primarily due to Portal signing several contracts
in fiscal year 1999 that could not be recognized under Portal's revenue
recognition policy. The license fees on these contracts were deferred because
features promised to the customer were not yet available as the functionality
required by such customers was in the process of being developed, or the
license fees were bundled with services considered essential to the
functionality of the software being delivered. The percentage decline was also
due to increased demand for Portal's services.
Portal's business strategy is to provide CM&B software that will meet the
needs of different Internet service business models. Consequently, because of
the number of different Internet service business models, Portal has received,
and will continue to receive, requests from customers to provide special
features that do not currently exist in its product but that Portal may agree
to provide to the customer in the future. It is Portal's expectation that
certain customers will continue to negotiate and require features that are not
immediately available. However, as Infranet matures, Portal expects that fewer
orders will require features not yet available.
License fees totaled $13.5 million in fiscal year 1999, an increase of $6.6
million or 96% over fiscal year 1998. The increase in license fees was
primarily due to expanded marketing activities, growth in Portal's sales force
and greater demand for and the acceptance of Infranet.
Services revenues were $13.1 million in fiscal year 1999, an increase of
$10.6 million or 420% over fiscal year 1998. The increase in services revenues
resulted, in part, from the increase in support and maintenance service fees
related to Portal's growing installed base, both in terms of directly supported
sites as well as additional users, and the renewal of maintenance contracts.
The increase also resulted from the timing of services revenue recognition,
which typically begins prior to the recognition of license fees, particularly
in the case of large customers that require integration with legacy systems. In
addition, the increase in services revenues resulted from increased demand for
Portal's consulting, maintenance
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------- Percent
1998 1999 Change
---------------------- -------
Geographical Revenues: (in thousands)
<S> <C> <C> <C>
North America.................................... $ 7,955 $ 19,531 146%
Percentage of total revenues................... 85% 73%
International
Europe.......................................... 1,072 4,406 311%
Percentage of total revenues................... 11% 17%
Intercontinental................................ 389 2,732 602%
Percentage of total revenues................... 4% 10%
---------- ----------- ----
Total international.............................. 1,461 7,138 389%
Percentage of total revenues................... 15% 27%
---------- ----------- ----
Total revenues................................... $ 9,416 $ 26,669 183%
========== =========== ====
</TABLE>
23
<PAGE>
and training services to meet the increasingly complex demands of Portal's
customers.
North American revenues, which are defined by Portal as revenues from the
United States and Canada, were $19.5 million in fiscal year 1999, an increase
of $11.6 million or 146%, over fiscal year 1998. The increase in North American
revenues was primarily due to expanded marketing activities, greater acceptance
of Infranet and growth in Portal's sales force in the North American market.
International revenues for Europe and Intercontinental, which are defined by
Portal as Asia-Pacific, Japan and Latin America, totaled $7.1 million in fiscal
year 1999, an increase of $5.7 million or 389% over fiscal year 1998. European
revenues were $4.4 million in fiscal year 1999, an increase of $3.3 million or
311% over fiscal year 1998. Intercontinental revenues were $2.7 million in
fiscal year 1999, an increase of $2.3 million or 602% over fiscal year 1998.
The increase in international revenues was primarily due to growth in Portal's
direct sales force and increased marketing efforts worldwide and the opening of
an international sales office in Hong Kong.
International revenues represented 27% of total revenues in fiscal year 1999,
compared with 15% in fiscal year 1998. In fiscal year 1999, revenues from
Europe were 17% of total revenues and revenues from Intercontinental were 10%
of total revenues.
Expenses
Cost of License Fees
Cost of license fees consists of resellers' commission payments to systems
integrators and third-party royalty obligations. Cost of license fees was $0.5
million in fiscal year 1999, a decrease of $0.5 million or 53% from fiscal year
1998. Gross margin for license fees was approximately 97% in fiscal year 1999
compared to approximately 86% in fiscal year 1998. The increase in gross margin
and the decrease in cost of license fees were primarily due to a substantial
reseller commission paid to a systems integrator in fiscal year 1998. Portal
did not incur any shipping, packaging or documentation costs, as its product
was delivered electronically over the Internet. Portal believes that in future
periods resellers' commissions may increase in aggregate dollars and as a
percentage of total revenues as Portal expands its base of systems integrator
partners.
Cost of Services
Cost of services primarily consists of maintenance, consulting, and training
expenses. Cost of services was $9.4 million in fiscal year 1999, an increase of
$7.3 million or 338% over fiscal year 1998. The increase was primarily due to
an increase in the number of consulting and support personnel necessary to
support both the expansion of Portal's installed base of customers and new
installations. Gross margin for services was approximately 28% in fiscal year
1999 compared to approximately 15% in fiscal year 1998. The increase in gross
margin for services was due primarily to increased availability and utilization
of service personnel. Portal expects cost of services to increase substantially
in the next few quarters as a result of increased demand for services.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs for Portal's development and technical support efforts. Research and
development expenses were $11.3 million in fiscal year 1999, an increase of
$5.6 million or 100% over fiscal year 1998. The increase was primarily due to
an increase in the number of research and development personnel necessary to
support both expanded functionality of Infranet and increases in Portal's
quality assurance, technical support and technical publications operations.
Portal believes its investment in research and development will increase
substantially in future periods. Portal has not capitalized any software
development costs to date.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel and related costs for
Portal's direct sales force, marketing staff and marketing programs, including
trade shows, advertising
24
<PAGE>
and costs associated with Portal's recruitment of new and maintenance of
existing strategic partnerships. Sales and marketing expenses were $14.1
million in fiscal year 1999, an increase of $8.7 million or 160% over fiscal
year 1998. The increase was primarily due to an increase in the number of sales
and marketing personnel, the opening of new sales offices in the United States
and Hong Kong, the costs of establishing sales capabilities in China and
expenses incurred in connection with trade shows and additional marketing
programs. Portal expects that sales and marketing expenses will increase
substantially over the next year as Portal hires additional sales and marketing
personnel, increases spending on advertising and marketing programs and
establishes sales offices in additional domestic and international locations.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources and facilities and information system expenses not
allocated to other departments. General and administrative expenses were
$6.3 million in fiscal year 1999, an increase of $3.6 million or 139% over
fiscal year 1998. The increase was primarily due to an increase in the number
of general and administrative personnel and to increased legal and accounting
costs incurred in connection with business activities. Portal expects that
general and administrative expenses will increase substantially over the next
year as Portal hires additional general and administrative personnel.
Amortization of Deferred Stock Compensation
Portal recorded deferred stock compensation of approximately $16.8 million in
fiscal year 1999, representing the difference between the exercise prices of
options granted to acquire certain shares of common stock during fiscal year
1999 and the deemed fair value for financial reporting purposes of Portal's
common stock on their respective grant dates. Portal amortized deferred
compensation expense of $2.3 million during fiscal year 1999. This compensation
expense relates to options awarded to individuals in all operating expense
categories. Total deferred compensation at January 31, 1999 of approximately
$14.5 million is being amortized over the vesting periods of the options on a
graded vesting method. The amortization of deferred compensation currently
recorded is estimated to be $8.2 million in fiscal year 2000, $3.7 million in
fiscal year 2001 and $1.9 million in fiscal year 2002.
Provision for Income Taxes
The $0.7 million income tax provision shown for this period is the result of
alternative minimum taxes, foreign withholding taxes on revenue, and tax on
earnings generated from operations in certain foreign jurisdictions.
25
<PAGE>
Years Ended January 31, 1997 and 1998
Revenues
Total revenues were $9.4 million in fiscal year 1998, an increase of $4.4
million or 87% over fiscal year 1997. In fiscal year 1998, one customer,
CompuServe, accounted for approximately 47% of total revenues, while another
customer, Sprint, accounted for 36% of total revenues in fiscal year 1997. In
fiscal year 1998, Portal's top ten customers accounted for approximately 83% of
total revenues, while in fiscal year 1997, the top ten customers accounted for
78% of total revenues.
License fees were $6.9 million in fiscal year 1998, an increase of $2.9
million or 75% over fiscal year 1997. The increase in license fees was
primarily due to expanded sales and marketing activities and greater acceptance
of Infranet.
Services revenues were $2.5 million in fiscal year 1998, an increase of $1.4
million or 129% over fiscal year 1997. The increase in services revenues
resulted, in part, from the increase in support and maintenance service fees
related to Portal's growing installed base, both in terms of directly supported
sites as well as additional users, and the renewal of maintenance contracts.
The increase also resulted from the timing of services revenue recognition,
which typically begins prior to the recognition of license fees, particularly
in the case of large customers that require integration with legacy systems. In
addition, the increase in services revenues resulted from increased demand for
Portal's consulting, maintenance and training services to meet the increasingly
complex demands of Portal's customers.
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------- Percent
1997 1998 Change
----------- ----------- -------
(in thousands)
<S> <C> <C> <C>
Geographical Revenues:
North America................................... $ 4,370 $ 7,955 82%
Percentage of total revenues.................. 87% 85%
International
Europe......................................... 400 1,072 168%
Percentage of total revenues.................. 8% 11%
Intercontinental............................... 275 389 41%
Percentage of total revenues.................. 5% 4%
----------- ----------- ----
Total international............................. 675 1,461 116%
Percentage of total revenues.................. 13% 15%
----------- ----------- ----
Total revenues.................................. $ 5,045 $ 9,416 87%
=========== =========== ====
</TABLE>
North American revenues were $8.0 million in fiscal year 1998, an increase of
$3.6 million or 82% over fiscal year 1997. The increase in North American
revenues was primarily due to expanded marketing activities, greater acceptance
of Infranet and growth in Portal's sales force.
International revenues for Europe and Intercontinental totaled $1.5 million
in fiscal year 1998, an increase of $0.8 million or 116% over fiscal year 1997.
European revenues were $1.1 million in fiscal year 1998, an increase of $0.7
million or 168% over fiscal year 1997, due to the recognition of revenues from
seven additional European customers in fiscal year 1998. Intercontinental
revenue increased 41% over fiscal year 1997. The increase in international
revenues was primarily due to the growth in Portal's direct sales force and
increased marketing efforts worldwide, particularly in Europe.
International revenues represented 15% of total revenue in fiscal year 1998,
compared with 13% in fiscal year 1997.
Expenses
Cost of License Fees
Cost of license fees consists of resellers' commission payments to systems
integrators
26
<PAGE>
and third-party royalty obligations. Cost of license fees was $1.0 million in
fiscal year 1998, an increase of $0.9 million over fiscal year 1997. Gross
margin for license fees was approximately 86% in fiscal year 1998 compared to
approximately 98% in fiscal year 1997. The decrease in gross margin for license
fees and the increase in cost of license fees was primarily due to a reseller
commission paid to a systems integrator in fiscal year 1998. Portal did not
incur any shipping, packaging or documentation costs, as its product was
delivered electronically over the Internet.
Cost of Services
Cost of services primarily consists of maintenance, consulting and training
expenses. Cost of services was $2.2 million in fiscal year 1998, an increase of
$1.6 million or 315% over fiscal year 1997. The increase was primarily due to
an increase in the number of consulting and support personnel necessary to
support expansion of Portal's installed base of customers and new
installations. Gross margin for services was approximately 15% in fiscal year
1998, compared to approximately 53% in fiscal year 1997. The decrease in gross
margin for services was due primarily to the shift of service personnel from
higher margin ISP- related services to lower margin product consulting
services.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs for Portal's development and technical support efforts. Research and
development expenses were $5.6 million in fiscal year 1998, an increase of $3.1
million or 123% over fiscal year 1997. The increase was primarily due to an
increase in the number of research and development personnel necessary to
support expanded functionality of Infranet and increases in Portal's quality
assurance, technical support and technical publications operations.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel and related costs for
Portal's direct sales force, marketing staff and marketing programs, including
trade shows, advertising and costs associated with Portal's recruitment of new
and maintenance of existing strategic partnerships. Sales and marketing
expenses were $5.4 million in fiscal year 1998, an increase of $3.1 million or
129% over fiscal year 1997. The increase was primarily due to an increase in
the number of sales and marketing personnel, the opening of new sales offices
in the United States, Australia and the United Kingdom and expenses incurred in
connection with trade shows and additional marketing programs.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources and facilities and information system expenses not
allocated to other departments. General and administrative expenses were
$2.6 million in fiscal year 1998, representing an increase of $0.8 million or
44% over fiscal year 1997. The increase was primarily due to an increase in the
number of general and administrative personnel and to increased legal and
accounting costs incurred in connection with business activities.
27
<PAGE>
Quarterly Results of Operations
The following table presents Portal's operating results for each of the eight
quarters in the period ended January 31, 1999. The information for each of
these quarters is unaudited and has been prepared on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of Portal and the financial statement
footnotes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31,
1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License fees........... $ 1,480 $ 1,528 $ 1,831 $ 2,053 $ 2,185 $ 1,876 $ 3,817 $ 5,658
Services............... 284 299 906 1,035 1,881 2,411 3,414 5,427
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 1,764 1,827 2,737 3,088 4,066 4,287 7,231 11,085
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of license fees... 230 233 246 261 60 86 143 169
Cost of services....... 103 252 654 1,143 1,201 1,673 2,232 4,319
Research and
development........... 894 1,148 1,470 2,116 2,207 2,460 3,148 3,437
Sales and marketing.... 1,065 1,083 1,453 1,835 2,000 3,141 4,016 4,955
General and
administrative........ 569 632 641 774 714 1,273 1,439 2,827
Amortization of
deferred stock
compensation.......... -- -- -- -- 96 234 537 1,430
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 2,861 3,348 4,464 6,129 6,278 8,867 11,515 17,137
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... $(1,097) $(1,521) $(1,727) $(3,041) $(2,212) $(4,580) $(4,284) $(6,052)
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License fees........... 84% 84% 67% 66% 54% 44% 53% 51%
Services............... 16 16 33 34 46 56 47 49
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of license fees... 13 13 9 8 1 2 2 2
Cost of services....... 6 14 24 37 30 39 31 39
Research and
development........... 51 63 54 69 54 57 43 31
Sales and marketing.... 60 59 53 59 49 73 56 45
General and
administrative........ 32 34 23 25 18 30 20 25
Amortization of
deferred stock
compensation.......... -- -- -- -- 2 6 7 13
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 162 183 163 198 154 207 159 155
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (62)% (83)% (63)% (98)% (54)% (107)% (59)% (55)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Cost of license fees declined by $0.2 million or 77% between the fourth
quarter of fiscal year 1998 and the first quarter of fiscal year 1999 primarily
due to a reseller's commission expense associated with license fee revenue
recognized in fiscal year 1998, which was not an expense item in the first
quarter of fiscal year 1999. Cost of services increased by $2.1 million or 94%
from the third to the fourth quarter of fiscal year 1999, as Portal continued
to increase headcount necessary to provide consulting and implementation
services to its customers. Sales and marketing expenses increased by $1.1
million or 57% from the first to the second quarter of fiscal year 1999
primarily due to growth in sales headcount in the United States, the United
Kingdom and Hong Kong in the second quarter.
28
<PAGE>
Portal's operating results may fluctuate substantially in the future as a
result of a variety of factors, many of which are outside Portal's control,
including those discussed elsewhere in this prospectus. See "Risk Factors--Our
quarterly operating results may fluctuate in future periods and we may fail to
meet expectations".
Liquidity and Capital Resources
Cash and cash equivalents totaled $11.8 million at January 31, 1999, down
from $14.6 million at January 31, 1998. The decrease resulted primarily from
cash used for operations.
Portal used $3.3 million in cash for operations in fiscal year 1999, an
increase of $0.6 million over the $2.7 million used in fiscal year 1998. Cash
used from operations was primarily comprised of a $17.4 million loss and an
$8.8 million increase in accounts receivable, partially offset by a $15.6
million increase in deferred revenue and an increase in other accrued
liabilities of $4.1 million.
In fiscal year 1999, Portal purchased computer servers, workstations,
networking equipment and other capital equipment amounting to $2.8 million.
This amount was funded almost entirely from Portal's equipment lease line
facility, primarily to further expand its product capability, increase internal
network communication, product demonstration and service capability.
Portal has raised equity capital from outside investors to fund its
operations. In fiscal year 1997, Portal raised approximately $2.4 million from
the sale of preferred stock. In fiscal year 1998, Portal raised approximately
$15.0 million from the sale of preferred stock. In fiscal year 1999, Portal
raised $0.4 million from the exercise of warrants for preferred stock issued in
connection with its capital lease line facility and its term loan, and raised
an additional $0.4 million from sales of common stock, primarily upon exercise
of stock options by employees. In fiscal year 1998, Portal also raised an
additional $0.1 million from sales of common stock, primarily upon exercise of
stock options by employees.
Portal has used debt and leases to partially finance its operations and
capital purchases. Portal has a $3.0 million capital lease line facility with
an equipment lessor which it established in fiscal year 1998. The lease line
has a term of 48 months and bears interest at a rate of 8.5% per annum. At
January 31, 1999, Portal had utilized $2.8 million of available borrowing under
the capital lease line facility. At January 31, 1999, Portal had outstanding a
$3.0 million term loan with a finance company, which bears interest at the
bank's prime rate plus 2.25%. The term loan is collateralized by substantially
all of Portal's assets, with the exception of new equipment purchased using
funds provided by the capital lease line facility. Portal repaid $1.5 million
of the term loan in February 1999 and $0.5 million in March 1999 and the term
loan matured as to the remaining $1.0 million in April 1999. On April 15, 1999,
Portal entered into a line of credit with Imperial Bank under which Portal may
borrow up to $5.0 million. Amounts borrowed under this line of credit bear
interest at a rate of Imperial Bank's prime rate plus 0.5% and mature on April
13, 2000. As of April 22, 1999, Portal had borrowed $1.0 million under the line
of credit, which it used to repay the remaining $1.0 million installment of the
term loan which matured in April 1999. Portal also converted a customer deposit
for prepaid services into a $1.1 million short-term liability in fiscal year
1999. This liability matures on November 30, 1999 and bears interest at a rate
of 10% per annum. The balance due in November may decline as services rendered
for this customer are deducted from the outstanding principal.
On April 12, 1999, Portal agreed to enter into a strategic alliance with
Andersen Consulting under which Andersen Consulting will provide services to
Portal, the parties will expand their existing marketing alliance and will work
closely together to expand their customer service and marketing relationship.
Under this agreement, Portal will pay Andersen Consulting for its services a
minimum services fee in cash of $2.8 million and a cash settled put for 200,000
of the shares to be purchased by Andersen Consulting in a private placement
concurrent with Portal's initial public offering. This put guarantees a closing
value of
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$6.0 million at the end of the first day of trading for these 200,000 shares.
Portal will pay Andersen Consulting in cash for any difference between the
closing value of these shares and $6.0 million.
The capital lease line facility, the term loan, and the customer debt
comprised the entire amount of the debt obligations on Portal's balance sheet
as of January 31, 1999. The capital lease line facility and term loan include
certain covenants requiring minimum liquidity, tangible net worth and
profitability over time. The capital lease line facility and term loan become
due immediately if Portal fails to meet these covenants. In addition, under the
term loan, the lender would have the right to effect its security interest in
the collateral to satisfy any amounts due upon acceleration. Portal is
currently, and has always been, in compliance with these covenants.
Portal's capital requirements depend on numerous factors, including market
acceptance of Portal's products, the resources Portal devotes to developing,
marketing, selling and supporting its products, the timing and extent of
establishing international operations, and other factors. Portal expects to
devote substantial capital resources to hire and expand its sales, support,
marketing and product development organizations, to expand marketing programs,
to establish additional facilities worldwide and for other general corporate
activities. Although Portal believes that its current cash balances and the net
proceeds from this offering and the concurrent placement will be sufficient to
fund its operations for at least the next 12 months, Portal may require
additional financing within this time frame. Additional funding, if needed, may
not be available on terms acceptable to Portal, or at all.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
Portal has conducted a limited review of the products for which it currently
provides maintenance, including certain previous versions of Infranet. This
review included a search of the software code, and Portal believes that it has
identified all instances where date specific information is required. Based on
this limited review, Portal believes the products for which it currently
provides maintenance and support, when configured, maintained and used in
accordance with its documentation, correctly recognize Year 2000 date code and
function properly. Portal has no plans to conduct further review of its
currently supported products.
Portal's software runs on several hardware platforms and operating systems,
including those provided by Compaq Computer Corporation, Hewlett-Packard
Company, Microsoft Corporation and Sun Microsystems, Inc. In addition, Portal's
software interfaces with third-party systems, such as credit card processing
services and customer-specific modifications that Portal service providers,
third-party integrators and customers have created to be used with Infranet.
Portal's software is, therefore, dependent upon the correct processing of dates
by these systems, interfaces and modifications.
Portal has undertaken to contact all partners for which Portal provides
integration as part of Infranet's standard product configuration. In contacting
these partners, we have attempted to ascertain what release or releases of
their products are Year 2000 compliant. To date, Portal has received assurances
from most of its material partners and will continue to pursue assurances from
all remaining partners. In a newly created test environment, Portal will review
Infranet and interfaces to partner products. We may not identify all Year 2000
failures in partner products because not all failures are within the scope of
these tests. Testing of these interfaces is currently underway, and Portal
expects to complete these tests by September 1999. Portal is currently testing
all releases of Infranet which are not scheduled for obsolescence prior to the
end of calendar year 1999.
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Some of our customers elect to integrate Infranet with interfaces not
ordinarily supported by Portal. This integration, whether performed by Portal,
the customer or a third-party systems integrator, is not within the scope of
Portal's in-house testing efforts. Portal has advised all customers that they
must independently test these integrations for Year 2000 compliance.
Portal uses multiple software systems for its internal business purposes,
including accounting, human resources, e-mail, engineering development and
testing tools, customer service and support, professional services and sales
tracking applications. Portal has adopted a formal plan for determining the
Year 2000 compliance of its major internal systems. Portal will obtain
verification of Year 2000 compliance for its major internal hardware equipment
and software systems by October 1999.
Portal is in the early stages of assessing its Year 2000 readiness. To date,
the costs for conducting its assessment have not been material. Portal
currently estimates that the costs of ensuring that its products and internal
systems are Year 2000 compliant will be approximately $500,000 to $750,000.
Portal is unable to predict to what extent its business may be affected if its
software or the systems that operate in conjunction with its software or its
internal systems experience a material Year 2000 failure. Known or unknown
errors or defects that affect the operation of Portal's software could result
in delay or loss of revenue, interruption of customer management and billing
services, cancellation of customer contracts, diversion of development
resources, damage to Portal's reputation, increased service and warranty costs
and litigation costs, any of which could adversely affect Portal's business,
financial condition and results of operations.
Portal does not have a contingency plan to remediate any Year 2000 problems
that may arise and affect its products or internal systems in the future. If
such problems arise, Portal will need to make the necessary expenditures to
assess and remedy such problems. The nature, timing and extent of such
expenditures cannot be estimated. Such expenditures, if required, may have a
material adverse effect on its business, financial condition and results of
operations.
Portal believes that the following consequences are possible in a "worst
case" Year 2000 scenario:
. a significant number of operational inconveniences and inefficiencies for
Portal and its customers that will divert management's time and
attention; and
. costly business disputes, litigation and claims for pricing adjustments,
product returns and warranty obligations.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. Portal expects that the adoption of SOP
No. 98-1 will not have a material impact on its financial position or results
of operations. Portal will be required to implement SOP No. 98-1 for fiscal
year 2000.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. Portal expects that the adoption of SOP No. 98-5 will not have a
material impact on its financial position or results of operations. Portal will
be required to implement SOP No. 98-5 for fiscal year 2000.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because
Portal does not currently hold any derivative instruments and does not engage
in hedging activities, Portal expects that the adoption of
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FAS No. 133 will not have a material impact on its financial position or
results of operations. Portal will be required to implement FAS No. 133 for
fiscal year 2000.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions, or SOP 98-
9. SOP 98-9 amends SOP 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. Portal has not yet determined the effect of the final adoption of SOP
98-9 on its future revenues and results of operations.
Qualitative and Quantitative Disclosures about Market Risk
Portal develops products in the United States and sells them in North
America, South America, Asia and Europe. As a result, Portal's financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all sales are
currently made in U.S. dollars, a strengthening of the dollar could make
Portal's products less competitive in foreign markets. Portal's interest income
is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of its investments are in short-term
instruments. Due to the nature of Portal's short-term investments, Portal has
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
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BUSINESS
Portal
Portal develops, markets and supports real-time, scalable customer management
and billing software, or CM&B software, for providers of Internet-based
services. Portal's Infranet software is a comprehensive solution that meets the
complex, mission-critical provisioning, accounting, reporting and marketing
needs of providers of Internet-based services. Portal's Real Time No Limits
Infranet solution enables the real-time provisioning and reporting of services,
including such functions as account creation, user authentication and
authorization, activity tracking, pricing and rating, billing and customer
service, including self-service, all on a scale of up to millions of users.
Portal has built Infranet using an open architecture with fully documented
APIs, which facilitate customization, integration with existing software
applications and creation of new services by its customers, partners and third
parties.
Founded in 1985 as an on-line service and one of the first ISPs, Portal began
focusing in late 1993 on developing and marketing real-time CM&B software for
the Internet. This heritage has given Portal a unique perspective into the
needs of providers of Internet-based services. As Portal developed CM&B
software for its own use, its managers realized that a real-time, scalable CM&B
software solution offered significant potential advantages, relative to
existing solutions, in the areas of revenue enhancement, cost reduction and
customer service and satisfaction. Recognizing that all providers of Internet-
based services shared a set of common customer management and billing needs and
system requirements, Portal evolved its focus toward selling software
exclusively. Portal shipped the first generally available version of its
flagship product, Infranet, in May 1996. Portal's approximately 80 Infranet
customers include ISPs such as Concentric Network and UUNET Technologies; on-
line enterprises, such as Juno Online Services and Palm.net; and on-line
divisions of telecommunications carriers, such as BellSouth and U S West.
Industry Background
The Telecommunications Industry
Today's worldwide telecommunications industry, having undergone a radical
transformation that began with the deregulation wave of the early 1980's, is
becoming increasingly complex, decentralized and competitive. The
telecommunications industry is being driven by a number of powerful global
trends such as the proliferation of service providers, an increase in the
number of services and marketing plans offered and an increased focus on
customer support.
New entrants, such as Level 3 Communications, Inc. and Qwest Communications
International Inc. now compete domestically with traditional providers such as
AT&T Corp., MCI Worldcom, Inc., Sprint, the Regional Bell Operating Companies,
or RBOCs, and internationally with government-owned telecommunications
carriers. Competition has increased through the introduction of wireless
technologies, digital subscriber lines and cable technologies that have
lessened the dependence on monopoly-owned, "last mile" wired infrastructure. In
addition, new technologies and competitive forces have combined to produce a
wide array of new services. Finally, rather than being limited to one service
provider, the customer has gained relatively greater freedom of choice. This
has prompted service providers to focus increasingly on the various aspects of
customer management and billing as a means of competitive differentiation.
Customer Management and Billing Market
Traditionally, telecommunications carriers created their own in-house billing
systems or utilized outside billing service bureaus. These solutions have
generally proven inadequate to meet the demands of an increasingly competitive
and dynamic environment. In many cases, in-house systems have failed to keep
pace with improvements in computing technology, and are prone to the so-called
"Y2K problem". Service bureaus, on the other hand, remain focused on providing
a relatively limited set of high-volume, standardized
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services, and are generally not equipped to provide cost-effective, customized
solutions. In addition, many telecommunications service providers downsized
their in-house IT staffs in the early 1990's and subsequently have encountered
difficulty hiring skilled staff to upgrade and maintain older, legacy systems.
As carrier requirements have become more complex and IT budgets more
constrained, an increasing number of carriers have sought third-party solutions
for mission-critical CM&B functions, leading to the growth of the customer
management and billing software industry.
Today there are a multitude of CM&B solution providers, offering a wide range
of products and services to the telecommunications market. According to a
research report on the CM&B market, the total market for CM&B software and
services is estimated to grow to $14 billion by 2000. Today, third-party
software handles billing and customer care for millions of subscribers
worldwide on a daily basis. For the most part, however, each vendor's solution
is oriented toward supporting a limited set of services provided by
telecommunications carriers and cable system operators. Many vendors specialize
in particular sub-segments of the market, such as wireless telephony, and are
not designed for broad market applications.
On-line Services and the Internet
Since 1994, the Internet and the Worldwide Web have grown at an explosive
pace. International Data Corporation, or IDC, estimates that there were over 68
million Web users worldwide at the end of 1997. IDC projects this number to
increase to over 319 million by the end of 2002, implying an annual growth rate
of over 36%. The growth of the Internet is a global phenomenon that is
fundamentally changing the nature of the telecommunications industry. Web user
growth, coupled with the growth of new types of on-line and electronic
commerce, or e-commerce, services, has driven the emergence of new service
providers such as ISPs, on-line communities, Internet telephony providers and
many others. In addition, traditional telecommunications carriers have entered
the on-line market, providing Internet connections and e-commerce services to
businesses and consumers.
Existing third-party CM&B solutions have experienced significant difficulties
in adapting to the needs of providers of Internet-based services as well as the
Internet operations of traditional providers. Providers of Internet-based
services continually introduce new services and programs that address the
dramatically changing nature of the Internet. Consequently, they need flexible,
powerful CM&B software that is readily adaptable to a wide range of services
and smoothly scales from hundreds to millions of users. To be most effective,
Internet-compatible CM&B software must be capable of operating in real time,
handling high transaction volume, processing many different types of
transactions and tracking multiple flows of information associated with the
usage of various services.
The Internet service environment is dominated by technologies and interfaces
that are fundamentally different from a traditional telephone or cable network.
For example, Internet service providers tend to operate distributed networks of
UNIX or Windows NT-based Web servers, any or all of which may be servicing a
given customer at a given moment. Traditional CM&B systems were typically
designed to interface with and process data from the equipment and technologies
used in telephone and cable television networks rather than in Internet service
environments.
In addition, the growth of the Internet has led to a dramatic rise in data
transmission volume in all service provider networks. If current growth trends
continue, not only will both voice and data traffic continue to grow, but data
traffic will rapidly eclipse traditional, circuit-switched voice-traffic as the
fundamental type of information being transmitted. Data traffic has many
characteristics that are different from those of traditional voice
transmissions. Existing CM&B systems used by many traditional
telecommunications carriers are not oriented toward "always on", data-oriented
services such as digital subscriber line, Internet telephony and virtual
private networks. Many of these older systems will need to be upgraded or
replaced in order to adapt to the changing environment.
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Traditional CM&B solutions can generally be characterized as (1) inflexible,
(2) capable only of periodic processing or "batch-oriented", (3) proprietary,
(4) centralized and (5) difficult to scale to meet the complex requirements of
providers of Internet-based services. In addition to a general lack of
Internet-based capability, traditional systems were typically designed to
service one particular type and size of service provider -- a large,
traditional RBOC-type carrier, for example, or a small competitive cellular
telephone provider. As a result, there is often no smooth migration path; as
the numbers of subscribers and services grow, a "forklift upgrade" to an
entirely different CM&B product is often required. Finally, existing CM&B
solutions are often not able to address one of the most fundamental
requirements facing providers of Internet-based services: minimizing the time
to market for new products and services.
Portal believes that providers of Internet-based services will increasingly
require a CM&B solution that is real-time, distributed, scalable, flexible and
easily adaptable to a vast number of emerging products and services. Providers
of Internet-based services and telecommunications carriers are demanding
enhanced capabilities from their CM&B systems as the relentless pace of change
and innovation mandates a new level of CM&B performance and functionality.
The Portal Software Solution
Portal develops, markets and supports CM&B software that is specifically
designed to meet the complex, mission-critical provisioning, accounting,
reporting and marketing needs of providers of Internet-based services. Portal's
Infranet software is a real-time, scalable solution that enables service
providers to address the critical business needs of customer management,
services support and accurate and timely billing. Portal believes that its
trademarked phrase, Real Time No Limits, accurately describes Infranet as the
only CM&B solution that provides these capabilities in real time, while also
providing a broad and flexible platform for both the integration of existing
products and services and the rapid development and deployment of new ones.
Infranet is designed to enable service providers to capture the business
benefits of increased revenues, reduced costs and improved customer service.
Increased Revenues. By helping to accelerate the time to market for new
services, Infranet enables service providers to offer a variety of services
quickly and to bundle and price these services in an optimal manner. Infranet
enables services to be activated immediately when ordered by a subscriber, so
that the service provider can immediately begin to collect revenue. Subscriber
activity can then be monitored in real time, which allows the service provider
to promote the consumption of more services through such means as targeted
offers or increased credit limits. In addition, Infranet enables a service
provider to analyze and "mine" subscribers' service usage data in real time,
which can in turn be used to measure the success of marketing and targeting
efforts and to identify new opportunities for subscriber revenue. Using
Infranet's data analysis features, a service provider can quickly determine
which offerings are not successful and easily make appropriate adjustments. For
example, an unsuccessful pricing offer can quickly be terminated or tuned for
better subscriber response. Finally, increased billing accuracy reduces the
incidence of uncollected revenue and fraud.
Reduced Costs. Infranet is designed to be an out-of-the-box solution that
works with all relevant Internet standards and minimizes the service provider's
software installation, maintenance and subscriber servicing costs. Through the
immediate validation of subscriber data and verification of credit, Infranet
reduces the need for data correction and the incidence of credit problems. In
addition, subscribers can access their billing and service information
directly, which reduces the degree of costly person-to-person service required
to satisfy the subscriber. Real-time monitoring and authentication
substantially reduce the opportunities for fraud by ensuring that access to the
service provider's network is granted only if the user has been properly
verified. Infranet's monitoring and data analysis capabilities can help the
service provider pinpoint unprofitable
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offerings or identify a degree of usage that justifies volume purchases of
specific resources such as high-speed data circuits at a lower cost.
Improved Customer Service. Infranet enables service providers to offer
improved billing accuracy, enhanced customer service quality and responsiveness
to their subscribers. Using Infranet, service providers can easily tailor their
offerings on a bundled or unbundled basis, substantially increasing customer
choice without incurring additional costs. Up-to-the-minute account balances
and status information can be made available to users on a 24x7 basis, either
over the Internet or via customer service representatives. Potential customer
account issues can be identified and resolved quickly, since there is no need
to wait for regular billing cycles to expose these issues. Infranet's real-time
capability enhances responsiveness to subscribers' needs, which can help reduce
subscriber "churn", or turnover.
Infranet is the culmination of the experience and insights gained through
Portal's years as an ISP, as well as Portal's five-year history as a software
developer. This experience has enabled Portal to design and develop Infranet to
meet the critical functional requirements sought by service providers. These
requirements include scalability, enterprise integration and interoperability,
comprehensive functionality and ease of use, flexibility and improved time to
market--all operating on a real-time basis.
Scalability and Reliability. Infranet will run on a wide range of systems,
from a laptop computer running Windows NT to a large cluster of UNIX-based
servers. Infranet has been designed, using object-oriented programming
methodologies, to scale from hundreds to millions of users through the
incremental addition of servers. This capability allows a service provider to
grow its CM&B infrastructure incrementally as its level of business grows
without the need for architecture redesign or large-scale system replacements.
For example, new servers can be added without taking the system offline,
eliminating costly downtime. By running Infranet on multiple servers, a service
provider can reduce exposure to various types of failures, including individual
server failure, power failure and loss of physical facilities. This level of
reliability and redundancy, long present in the traditional telephone network,
is increasingly required in the Internet environment. Automatic load balancing
features smooth out usage spikes and ensure high availability. Infranet's
object-to-relational data model is optimized for high performance on-line
transaction processing and high reliability.
Enterprise Integration and Interoperability. Infranet has been designed with
fully documented, open APIs that allow Portal, its customers, partners and
third party software developers to integrate Infranet with existing
applications and services requiring minimal effort and programming overhead.
This capability enables new services to be deployed quickly and efficiently
while maintaining smooth interoperability with pre-established services. For
example, a telecommunications carrier might use Infranet to add Internet-
related services which then appear on a subscriber's monthly telephone bill.
Infranet runs on server operating systems from Hewlett-Packard, Microsoft and
Sun Microsystems and utilizes database software from Microsoft and Oracle.
Infranet also can be readily integrated with a variety of packaged software
applications, such as help desk, accounting, taxation and payment systems.
Comprehensive Functionality and Ease of Use. Portal has drawn on its own
experiences to develop a comprehensive suite of pre-defined, ready-to-use CM&B
functions, such as customer registration, business policies, pricing plans and
payment methods. Portal also seeks to provide upgrades and enhancements to
Infranet on a regular basis, with a strong emphasis on response to customer
feedback. Infranet employs a simple, intuitive Windows-based user interface for
efficient addition and deletion of services and functions, as well as a set of
templates for Web-based capabilities such as subscriber registration, password
changes and account balance inquiries. Infranet addresses the entire
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customer management and billing life cycle, from account creation to
monitoring and pricing to back-end management and reporting.
Flexibility and Improved Time to Market. Infranet is designed to be a
modular, extensible software product. This flexibility allows each Portal
customer to tailor its individual Infranet installation to meet the exact
needs of a particular environment, set of services and group of subscribers.
The service provider is thereby empowered to respond quickly to the rapidly
changing needs of the Internet marketplace. In addition, Infranet can
generally be customized to a service provider's needs relatively quickly,
enabling its customers to improve their time to market with new products and
services.
The Portal Software Strategy
Portal's strategy is to establish itself as the CM&B platform of choice for
providers of Internet-based services. Key elements of this strategy are:
Extend Market Leadership Position. Portal's objective is to extend its
position as a leader in the Internet-based CM&B market to establish itself as
the broad platform of choice for providers of Internet-based services. Portal
intends to take advantage of its technological leadership, strategic
partnerships, significant customer relationships, broad-based sales and
marketing efforts and scalable business model to create a widespread customer
base that will be difficult for potential competitors to penetrate. Moreover,
Portal believes that its products enable each customer to design and deploy
new, profitable services, which in turn increase the customer's use of
Portal's products and services and generates additional opportunities for
Portal to grow.
Target Leading Providers of Advanced Communications Services Worldwide. The
scalability and flexibility of its Infranet products enables Portal to target
a broad range of providers of Internet-based services. Portal's targeted
customer segments, and some representative existing customers, include:
. on-line service divisions of traditional major telecommunications
providers worldwide, such as France Telecom SA, NTT Soft and U S West;
. on-line and Internet service providers, such as Concentric Network,
Microsoft, UUNET and Viag Interkom & CO. GmbH; and
. companies that use the Internet to provide entirely new types of
communications services, such as Juno Online Services, Palm.net and
USinternetworking, Inc.
The unique capabilities of Infranet enable Portal to take this portfolio
approach to targeting customers. Portal believes this approach offers the
greatest opportunity for sustained growth, as many of these companies are or
will be the market leaders in their respective industries.
Build a Long-Term, High Margin, Software-Driven Business Model. Portal's
business model is predicated on the sale of standard software products, rather
than the service-intensive, customer-specific solutions offered by many of its
competitors. The scalability, comprehensive functionality and extensibility of
Infranet, combined with Portal's strategic partnerships, are designed to allow
Portal to achieve and maintain a high margin, software-driven business model
without needing to provide an inordinate degree of consulting and integration
services.
Leverage Partnerships and Alliances with Systems Integrators, and with
Platform, Software and Services Providers. Portal has established a series of
partnerships and alliances with systems integrators, such as Andersen
Consulting, Cap Gemini, NTT Soft and PricewaterhouseCoopers and hardware
platform, software and services providers, such as Cisco, Compaq, Hewlett-
Packard, Microsoft, Oracle and Sun Microsystems. These partners and alliances
provide a global extension of Portal's direct sales force and are a
significant source of leads and referrals. This network of partners also
enables Portal to focus on being the CM&B software platform provider while
offering a complete customer solution using third-party components that
perform ancillary functions such as tax or payment processing. In
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addition, Portal's systems integrator partners are trained to integrate
Infranet with customers' existing legacy systems. Portal seeks "best of breed"
partners in each particular area, to associate Infranet with market-leading
technologies, products and systems integrators. Portal believes that this
partnership strategy is unique in breadth and scope within its market, provides
it with a competitive advantage and serves as a "force multiplier" which
leverages Portal's own internal capabilities.
Grow with Customers and the Internet. While initial sales to customers are
often substantial, Portal's strategy is to maximize its available opportunities
for long-term revenue growth by targeting service providers with excellent
growth prospects and capitalizing on additional sales opportunities with its
customers. Portal's subsequent revenue growth can then occur through the
addition of subscribers, add-on component sales, additional service revenues
and maintenance and support agreements. In turn, Portal intends to continue to
evolve and refine its business to track the growth of Internet-based services,
so that as these services proliferate, Portal's revenue growth opportunities
will also increase. Accordingly, Portal typically prices its products on a per-
subscriber basis so that they are more affordable for new, promising service
providers that may in time grow to be leaders in their market segments and
long-term, loyal customers.
Products and Services
Portal develops, markets and supports CM&B software specifically designed to
meet the complex, mission-critical provisioning, accounting, reporting and
marketing needs of providers of Internet-based services. Portal's Infranet
product is an easily integrated, highly flexible enterprise solution comprising
the critical elements necessary for registering, managing, monitoring and
billing users of Internet-based services. Infranet unifies the management of
core business operations and its Real Time No Limits solution differentiates it
from traditional, batch-oriented CM&B solutions.
Portal also offers Infranet IPT, a complete end-to-end CM&B software solution
based on the Infranet platform and specifically tailored to the needs of
Internet telephony service providers. Internet telephony is a growing industry
that uses Internet technologies to bring low-cost, flexible voice
communications services to customers worldwide. Since Internet telephony
providers tend to be startup businesses, they do not have a long history of
using legacy systems, unlike many traditional voice service providers.
Therefore, Portal has an opportunity to be first-to-market with a leading-edge
CM&B solution for this emerging market.
In addition to providing maintenance and support for Infranet, Portal
provides implementation planning and management, training and technical support
and development and customization support through its professional services
organization.
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Infranet
Infranet integrates the functionality for each stage of customer interaction
with a single, unified customer database and a coordinated set of features and
functions. The database acts as the repository for all data collected in real
time during each stage of the customer life cycle, as follows:
Diagram. A circle of arrows connected end to end enclosing a box containing the
word "Infranet." Inside the circle are the areas of data which Infranet tracks:
Account Creation & Service Provisioning, Authentication & Authorization,
Activity Tracking, Rating/Pricing, Billing & Accounts Receivable, Customer
Management and Reporting.
Account Creation and Service Provisioning. Infranet supports a variety of
registration standards and has all of the features necessary to register
subscribers quickly. The Infranet registration process collects the data needed
to provision and bill the subscriber for service, while also allowing service
providers to collect additional subscriber profile information they may desire.
As the data is collected and verified, Infranet creates customer accounts and
activates the selected services in real time.
Authentication and Authorization. Infranet authenticates users based on user
name and password, checks account status and authorizes access to individual
services. Infranet can also check for duplicate user names and available credit
or resources, enabling service providers to more effectively detect and prevent
fraud and bad debt.
Activity Tracking. By recording all events in real time in its unified
customer database, Infranet gives service providers the ability to build a
detailed picture of individual customer behavior, either currently or
historically. This also provides a complete audit
trail of customer usage to resolve any issues that may subsequently arise.
Rating/Pricing. Infranet offers a powerful and flexible "rating engine",
which enables service providers to create a wide variety of pricing plans for a
broad array of services. Infranet can price any tracked event as it occurs, so
that customers and service representatives have real-time access to account
balances and available credit. Infranet's rating engine supports multiple
resource balances and limits, such as cash balances, free hours of usage,
megabytes of server storage or any other resource defined by
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the service provider. The rating of a single event can update any or all
existing balances.
Billing and Accounts Receivable. Infranet's billing and payment system has
been designed for flexibility from the ground up. Billing cycles can be any
multiple of a month and can begin on any day of the month. Because of
Infranet's real-time capability, accounts can be accurately closed at the end
of the billing cycle, irrespective of when the billing process actually takes
place. Infranet also supports multiple currencies and payment in real time,
through interfaces with credit card processing systems such as Paymentech and
ICVerify, or by invoice. A modular payment interface lets customers integrate
additional payment methods and a general ledger interface lets service
providers allocate journal entries using a general ledger code. Infranet
supports both open item and balance forward accounting.
Customer Management. Customer service representatives can access customer
data through an intuitive, Windows-based graphical user interface. Infranet
organizes customer information into a variety of standard screens, which can
also be readily customized. Service representatives can:
. create, search and modify customer accounts;
. view activity, balances and invoices;
. perform billing operations; and
. view and modify account hierarchy.
Infranet enables providers to configure permissions and track customer service
activity, ensuring a complete audit trail on each account.
Infranet supplements these capabilities with a browser-based interface that
enables customers to view selected account information directly. This self-
service feature increases customer convenience and can help reduce customer
service costs.
Reporting. Using the data in the Infranet unified customer database, service
providers can create reports using a powerful, enterprise-wide reporting
infrastructure called Infranet Insite. Insite report templates provide business
intelligence to operations, finance, sales and marketing personnel. Insite
includes a full set of customizable reports, and also supports new report
development.
Portal has structured the pricing of Infranet to accommodate all of its
target customer segments, which range from startups to large on-line service
providers with millions of subscribers. Portal typically prices Infranet on a
per subscriber basis, with customary volume discounts for the upfront purchase
of a large number of licenses. Supplemental purchases of additional components
are also priced on a per subscriber basis, while annual maintenance and support
contracts are priced as a percentage of the associated license revenues.
Portal's initial sales of licenses and associated services, maintenance and
support generally range from the low hundreds of thousands to several million
dollars.
Infranet IPT
Introduced in September 1998, Infranet IPT incorporates Infranet's core
functionality to deliver the CM&B features needed by providers of Internet
telephony services, such as:
. real-time architecture;
. support for a broad range of services and pricing plans;
. out-of-the-box gateway integration;
. prepaid calling card support; and
. zone-based rating.
Infranet IPT is designed to optimize resources for each step of the Internet
telephony process, such as setting up calls, monitoring calls in progress,
tracking usage and billing users. Infranet IPT enables account creation,
authentication and fraud prevention, authorization and credit control, activity
tracking, pricing and billing and customer management and reporting.
Customer Service and Support
Portal believes that a high level of customer service and support is critical
to the successful marketing and sale of Infranet. Portal provides support to
its customers through maintenance and support agreements. Support includes
assistance with technical problems related to the use of Portal's software and
software maintenance and upgrade releases.
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Portal generally provides its base level of customer support via an Internet-
based customer management system and higher levels of support via telephone and
on-site technical assistance. Portal provides customer technical support for
its products primarily from its Cupertino, California location. Portal plans to
establish additional customer support sites domestically and internationally
commensurate with customer needs.
Portal also offers project implementation services to assist customers in the
project planning, installation and implementation of the Portal solution.
Portal consulting services are also available for customers requiring
additional software customization, upgrade assistance or other Infranet-related
technical services. Portal professional services consultants are located in
several cities in the United States and various countries outside the United
States. Portal has a leveraged business model based on using systems integrator
partners to provide jointly or separately a range of services, including first-
line technical support and project implementation services, in various
locations around the world.
Partnerships
Portal has established a series of partnerships and alliances with systems
integrators such as Andersen Consulting, Cap Gemini, NTT Soft and
PricewaterhouseCoopers and hardware platform, software and services
providers such as Cisco, Compaq, Hewlett-Packard, Microsoft, Oracle and Sun
Microsystems. Portal employs this network of partnerships to both expand its
sales, service and marketing capabilities and to extend the technical and
functional application of its solution. Portal's network of partnerships allows
Portal to maintain its focus as a product company while simultaneously
obtaining sales, technical and service leverage through its partners.
The following diagram below illustrates Portal's approach to partnerships by
listing certain of the markets it addresses and some of its current partners:
Diagram entitled "The Portal Market Partnership Model" consisting of a box
representing Portal's approach to partnerships. The middle of the diagram is an
arrow pointing left to right containing the word "Infranet." The arrow
separates Portal's two types of partners: Representative market partners and
representative platform partners.
There are four boxes across the top of the diagram, each representing a
different type of market partner. The first box on the left represents consumer
Internet service providers consisting of integrators, including Andersen, Cap
Gemini, Deloitte & Touche and NTT Soft, and services, including iPass,
Microsoft MCIS & Site Server and Software.Com. The second box represents
business Internet service providers consisting of integrators, including
Andersen, Deloitte & Touche, NTT Soft and PWC and services, including Cisco
NetFlow, HP SIU and XACCT. The third box represents Internet protocol telephony
consisting of integrators such as Finsiel and KPMG and services such as Cisco
and VocalTec. The fourth box represents hosting consisting of integrators such
as Deloitte & Touche and Hewlett-Packard and services such as Microsoft MCIS &
Site Server and Netscape SuiteSpot.
There are six boxes across the bottom of the diagram, each representing a
different type of platform partner. The first box represents hardware partners
such as Compaq, Hewlett-Packard and Sun. The second box represents database
partners such as Microsoft and Oracle. The third box represents customer care
partners such as Clarity, Remedy and Vantive. The fourth box represents
accounting reporting partners such as Oracle and Seagate. The fifth box
represents payment partners such as FDC, Group I, Paymentech, Cybercash and
VeriFone. The sixth box represents tax partners such as Taxware and Vertex.
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There are two types of partners in Portal's "Market Partnership Model":
Market Partners. Portal leverages its own sales and marketing efforts by
taking advantage of the marketing and lead generation capabilities of its
market partners. Market partners are specialized technology and services firms
that adapt Portal's products to the needs of a specified market segment. For
example, in the consumer ISP market, iPass, Inc., Microsoft and Software.com,
Inc. provide complementary services and technologies, which are fully
integrated with Infranet through Portal's open APIs. In turn, a set of systems
integrators, such as Andersen Consulting, Cap Gemini, NTT Soft and
PricewaterhouseCoopers, adapts this combination of Infranet and add-on
technologies to the specific environment of each provider of on-line services.
This combination of add-on technology and systems integration allows Portal to
serve as the enabling technology for a complete solution in each of its
markets. This approach also provides a mechanism for Portal to enter new
markets as opportunities develop.
In April 1999, Portal agreed to enter into a strategic alliance with Andersen
Consulting under which Andersen Consulting will provide services to Portal, the
parties will expand their existing marketing alliance and will work closely
together to expand their customer service and marketing relationship. Under
this arrangement, Andersen Consulting will purchase 380,184 shares of common
stock from Portal in the concurrent placement and Portal will pay Andersen
Consulting a services fee of between $2.8 million and $8.8 million, dependent
upon the performance of Portal's stock after this offering. See "Description of
Capital Stock--Concurrent Private Placement".
Platform Partners and Alliances. Portal's technology strategy is to focus
exclusively on Infranet to enable real-time, mission-critical, Internet-based
services. Given this focus, Portal forms partnerships and alliances with
hardware platform providers, such as Cisco, Compaq, Hewlett-Packard and Sun
Microsystems, database software developers such as Microsoft and Oracle, and
software applications developers with best-of-breed products to provide
superior solutions to its customers. By providing its platform partners and
alliances with a fully documented set of open APIs, Portal ensures that
Infranet can interoperate with their products. This allows Portal to partner
with the leading-edge vendors in each area of functionality and provides the
flexibility to adopt new products and technologies rapidly. Portal also seeks
to generate referral sales from its platform partners' sales forces.
In April 1999, Portal entered into a strategic alliance with Cisco under
which Portal and Cisco will jointly develop, market and sell integrated
hardware and software products targeted at providers of Internet-based
services. Under this arrangement, Portal will be Cisco's strategic CM&B
solution provider and Cisco will be Portal's strategic solution provider of
equipment for next generation IP networks. Portal and Cisco have agreed to
cooperate in the development, marketing and sale of these integrated products.
Technology
Portal's software architecture consists of the Infranet platform, upon which
CM&B functionality is layered using fully documented open APIs. This approach,
designed from the start to use object-oriented programming techniques, enables
new processes and services to be readily incorporated, thus allowing an
evolving multi-service model to be built without the need to change the
underlying software foundations. Similarly, changes can be made in the object-
based platform without affecting the behavior of the CM&B functions.
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Infranet's advanced, four-tier client-server architecture was designed from
the ground up to be scalable, reliable, secure and extensible. The four tiers
of Infranet's architecture are:
Diagram entitled "Four Tier Architecture" depicting the four tiers:
Application, Business Process, Object and Data. The application tier contains
the client applications. The business process tier contains the process
modules, the object request broker. The Object tier contains the object server
which consists of the payment and reporting engines. The data tier contains the
database where all the data is stored. Along the bottom of the four tiers are
several machines depicting the hardware infrastructure shown as operating on
either a network or single machine utilizing the four tier architecture.
. Application Tier: includes client applications for registration, customer
service and billing, as well as interfaces to event sources such as
terminal, mail or Web servers.
. Business Process Tier: includes an object request broker, or ORB, that
arbitrates requests between this tier and the object tier and functional
modules that implement the core business operations supported by
Infranet. These modules are driven by business policies that are fully
customizable by the provider.
. Object Tier: manages all account, service, event and pricing information
using a high-level, objected-oriented data model that greatly enhances
the extensibility of the system.
. Data Tier: includes the relational database management systems such as
Oracle and Microsoft SQL Server where all Infranet data is stored, as
well as TCP/IP-based links to external systems such as payment, tax,
credit card authorization and directory-based systems.
Infranet's four-tier architecture has several advantages:
Scalability and Performance. Infranet easily scales to handle subscriber
growth and large numbers of subscribers while maintaining high levels of
performance. Providers can add multiple servers as needed to any or all levels
of the system, generally without incurring downtime. In addition, automatic
load balancing is used to minimize the effect of usage spikes on performance.
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Reliability. Infranet provides 24x7 telecommunications-grade reliability with
features such as automatic reconnection in the event of a lost link and
automatic re-routing in case of a failed re-connect. Both features occur
without interrupting the client application. In addition, Infranet utilizes the
features of the underlying database management system to improve transactional
integrity and account reliability. Because Infranet is designed to take
advantage of redundancy, adding additional systems to the architecture
increases reliability.
Security. Firewalls, proxies and filters can be installed between every tier
of the Infranet architecture to prevent unauthorized access to programs and
data. Providers can determine and audit who has access to the system. Critical
business functions run at the most secure business process tier, and access
lists restrict the use of critical operations. Session monitoring, analysis and
control occur in real time so that problems can be identified and stopped
rapidly.
Extensibility. Infranet offers fully documented open APIs at every level of
the system. These interfaces give providers the ability to integrate Infranet
with legacy and external software. Value-added services, even those developed
by third parties, can be rapidly customized as well.
Sales and Marketing
Sales
Portal's sales strategy is to pursue targeted accounts both through its
direct sales force and indirectly through its strategic partners. Portal has to
date targeted its sales efforts at medium and large ISPs, on-line service
divisions of traditional telecommunications providers and other providers of
Internet-based services.
Portal maintains direct sales personnel in ten states across the United
States, and internationally in Australia, Canada, China, Hong Kong and the
United Kingdom. The direct sales force is organized into individual account
teams, which include both sales representatives and systems engineers. Portal
generates leads from contacts made through marketing partners, seminars and
conferences, which are usually co-sponsored by marketing partners, market
research, its Web site, trade shows, customers and its ongoing public relations
program. The direct sales force is complemented by telemarketing
representatives based at Portal's headquarters in Cupertino, California. Portal
qualifies the leads and assigns an account team to prospective customers. The
account team then initiates the sales process, which generally involves
multiple presentations to information technology and business professionals
within the prospective customer's organization. Portal intends to increase the
size of its direct sales force and establish additional sales offices
domestically and internationally.
Portal complements its direct sales force with a series of partnerships and
alliances with systems integrators such as Andersen Consulting, Cap Gemini, NTT
Soft and PricewaterhouseCoopers, as well as with hardware platform and software
applications developers and service providers such as Cisco, Compaq, Hewlett-
Packard, Microsoft and Sun Microsystems. These partners provide a global
extension of Portal's direct sales force and are a significant source of leads
and referrals. Portal believes these relationships also serve to validate its
technology and facilitate broad market acceptance of Infranet services.
Portal's direct sales force works closely with its indirect distribution
partners. After a partner has introduced Portal's products to a potential
customer, an in-house account team is assigned to complete the sales process.
Portal has derived, and anticipates continuing to derive, a significant
portion of its revenues from customers that have significant relationships with
Portal's market and platform partners. Many of these partners also work with
competing software companies, and Portal's success will depend on their
willingness and ability to devote sufficient resources and efforts to marketing
Portal's products. Portal's agreements with these parties typically are in the
form of non-exclusive referral fee or reseller agreements that may be
terminated by either party without cause or penalty and with limited notice.
Therefore, there is no guarantee any
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single party will continue to market Portal's products. If these relationships
fail, Portal will have to devote substantially more resources to the
distribution, sales and marketing, implementation and support of Infranet.
Portal intends to establish additional indirect channels in the future.
However, there can be no assurance that Portal will be able to establish
relationships with additional partners on a timely basis or at all, or that
such relationships will be successful.
Marketing
Portal's marketing programs are targeted at providers of Internet-based
services and are currently focused on creating awareness of, and generating
interest in, Infranet. Portal engages in a variety of marketing activities,
including:
. managing and maintaining its Web site;
. conducting direct mailings and ongoing public relations campaigns;
. conducting seminars;
. creating and placing advertisements; and
. establishing and maintaining close relationships with recognized industry
analysts.
Portal is an active participant in technology-related conferences and
demonstrates its products at trade shows targeted at providers of Internet-
based services. Portal also focuses on a range of joint marketing strategies
and programs with its partners in order to leverage their existing strategic
relationships and resources.
Customers
Portal's typical customers are providers of Internet-based services that
benefit from a scalable CM&B software solution. As of January 31, 1999, Portal
had licensed Infranet to approximately 80 customers worldwide, including:
BellSouth, Concentric Network, CyberCash, Inc., FlashNet Communications, Inc.,
France Telecom, Grolier Incorporated, Juno Online Services, Microsoft, NTT
Soft, OzeMail, Palm.net, Sage Networks, Inc., SegaSoft Networks, Inc., Shanghai
Online, USinternetworking, U S West, UUNET and Viag Interkom.
In fiscal year 1999, no customer accounted for 10% or more of Portal's total
revenues. In the fiscal years 1998 and 1997, respectively, Compuserve and
Sprint each individually accounted for more than 10% of Portal's total
revenues.
Although Portal's customers include both small and large providers of
Internet-based services, a substantial portion of Portal's license and services
revenues in any given quarter has, and is expected to continue to be, generated
from a limited number of customers with large financial commitment contracts.
As a result, if a contract is cancelled or deferred or an anticipated contract
does not materialize, Portal's revenues would be materially adversely affected.
Research and Development
Portal believes that strong product development capabilities are essential to
its strategy of enhancing its core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of its product and service offerings. Portal has invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within Portal and is designed to provide a framework for defining and
addressing the activities required to bring product concepts and development
projects to market successfully. In addition, Portal has recruited key
engineers and software developers with experience in the CM&B, enterprise,
database and operating system software markets and has complemented these
individuals by hiring senior management with experience in software used by
providers of Internet-based services.
Portal's research and development expenses totaled approximately $11.3
million for the fiscal year ended January 31, 1999, $5.6 million for the fiscal
year ended January 31, 1998 and $2.5 million for the fiscal year ended January
31, 1997. As of April 1, 1999, approximately 109 employees were engaged in
research and development activities.
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Competition
Portal competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Portal competes on the basis of performance,
scalability, extensibility, ease of integration and price. Portal faces
competition from providers of traditional CM&B software such as Amdocs, Kenan
Systems (recently acquired by Lucent), LHS Group and Saville Systems; emerging
providers of Internet-specific billing software, such as Belle Systems, Solect
Technology and TAI; and providers of Internet-based services that develop
proprietary systems. Portal also competes with systems integrators and with
internal MIS departments of large telecommunications carriers. Portal is aware
of numerous other major ISPs, software developers and smaller entrepreneurial
companies that are focusing significant resources on developing and marketing
products and services that will compete with Infranet.
Portal believes it competes favorably in performance, scalability,
extensibility, ease of integration and price, particularly due to Infranet's
ability to run on a wide range of systems, Infranet's ability to integrate with
existing applications, Infranet's comprehensive functionality and ease of use,
and its flexibility. The failure of Portal to develop products that compete
successfully with those of other suppliers in the market would harm our
business.
Portal anticipates continued growth and competition in the telecommunications
industry and the entrance of new competitors into the CM&B software market, and
that the market for its products and services will remain intensely
competitive. Many of Portal's current and future competitors have significantly
more personnel and greater financial, technical, marketing and other resources
than Portal.
Intellectual Property
Portal relies upon a combination of patent, copyright, trade secret and
trademark law to protect its intellectual property. Portal currently has three
U.S. patent applications pending related to its relational database and real-
time billing technology. In addition, Portal has two U.S. registered trademarks
and four U.S. trademark applications pending. While Portal relies on patent,
copyright, trade secret and trademark law to protect its technology, Portal
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to Portal's technology.
Portal generally enters into confidentiality or license agreements with its
employees, consultants and corporate partners, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite Portal's efforts to protect proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology or to develop products with the same functionality as
Portal's products. Policing unauthorized use of its products is difficult, and
Portal cannot be certain that the steps it has taken will prevent
misappropriation of its technology, particularly in foreign countries where the
laws may not protect proprietary rights as fully as do the laws of the United
States. In addition, certain of Portal's license agreements require it to place
the source code for Infranet into escrow. Such agreements generally provide
that these parties will have a limited, non-exclusive right to use this code
if:
. there is a bankruptcy proceeding by or against Portal;
. Portal ceases to do business without a successor; or
. Portal discontinues providing maintenance and support.
Substantial litigation regarding intellectual property rights exists in the
software industry. Portal expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in its
industry segments grows and the functionality of products in different industry
segments
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overlaps. Some of Portal's competitors in the market for CM&B software may have
filed or may intend to file patent applications covering aspects of their
technology that they may claim Portal's technology infringes. Portal cannot be
certain that any of these competitors will not make a claim of infringement
against it with respect to its products and technology.
Portal's success and ability to compete are substantially dependent upon its
internally developed technology. However, portions of Infranet incorporate
software developed and maintained by third-party software vendors, such as
operating systems, tools and database vendors. Portal may have to rely on
third-party software vendors and developers to a larger degree in future
products. Although Portal believes it could find other sources for these
products, any significant interruption in the supply of these products could
adversely impact Portal's sales unless and until it can secure another source.
Employees
As of April 1, 1999, Portal had 303 full-time employees, 59 of whom were
engaged in customer service and support, 89 in sales and marketing, 109 in
engineering, and 46 in finance, administration and operations. Portal's future
performance depends in significant part upon the continued service of its key
technical, sales and senior management personnel, none of whom is bound by an
employment agreement requiring service for any defined period of time. The loss
of the services of one or more of Portal's key employees could harm its
business. Portal's future success also depends on its continuing ability to
attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, particularly in the
San Francisco Bay Area where Portal is headquartered, due to the limited number
of people available with the necessary technical skills and understanding of
the Internet, and there can be no assurance that Portal can retain or attract
key personnel in the future. None of Portal's employees are represented by a
labor union. Portal has not experienced any work stoppages and considers its
relations with its employees to be good.
Facilities
Portal leases an aggregate of approximately 47,000 square feet in two
separate offices in an office complex located in Cupertino, California. Portal
occupies these premises under two leases expiring in May 2000 and October 2003.
In addition to its principal office space in Cupertino, California, Portal also
leases facilities and offices domestically in Westport, Connecticut; Boston,
Massachusetts; New York, New York; McLean, Virginia; Dallas, Texas; Chicago,
Illinois and internationally in North Sydney, New South Wales, Australia;
Slough, United Kingdom; and Hong Kong. These leases are for terms expiring from
March 1999 to October 2003. Portal believes that the facilities it currently
leases are sufficient to meet its needs through at least the next twelve
months. However, Portal believes it will require up to 50,000 additional square
feet of office space after that time and is currently seeking facilities
totaling 100,000 square feet in the same geographic area as Cupertino,
California.
Legal Proceedings
Portal is not currently a party to any legal proceeding.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Portal as of April 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
---------------------------- --- --------------------------------------------
<C> <C> <S>
John E. Little.............. 41 Chief Executive Officer, President and
Chairman of the Board of Directors
Jack L. Acosta.............. 51 Chief Financial Officer and Vice President,
Finance
David S. Labuda............. 35 Chief Technology Officer and Vice President,
Engineering
Steven R. Sommer............ 44 Vice President, Marketing and Business
Development
Kevin P. Mosher............. 42 Vice President, Sales
Annette D. Surtees.......... 43 Vice President, Human Resources
Michael E. Regan............ 42 Vice President, Professional Services
Mitchell L. Gaynor.......... 39 General Counsel and Secretary
Arthur C. Patterson(1)(2)... 55 Director
Edward J. Zander(2)......... 52 Director
David C. 51 Director
Peterschmidt(1)(2).........
William T. Coleman III(2)... 51 Director
</TABLE>
- --------
(1) Member of audit committee
(2) Member of compensation committee
John E. Little. Mr. Little founded Portal in March 1985 and has been Chief
Executive Officer and a Director since its inception. In addition, Mr. Little
served as President from inception to March 1996 and has served as President
since November 1996. Prior to founding Portal, Mr. Little was an independent
consultant for a number of companies including Knight-Ridder Inc., AT&T Corp.,
Raytheon Company, Dow Jones News Retrieval, a subsidiary of Dow Jones &
Company, Inc., Victor Company of Japan (JVC) and Sun Microsystems, Inc.
Jack L. Acosta. Mr. Acosta joined Portal in February 1999 as Chief Financial
Officer and Vice President, Finance. In addition, Mr. Acosta served as
Secretary from February 1999 through April 1999. From July 1996 to January
1999, Mr. Acosta served as Executive Vice President and Chief Financial Officer
for Sybase, Inc., a database company. From December 1994 until July 1996,
Mr. Acosta served as Vice President, Engineering Services, Integration and
Business Management of Sybase. From March 1993 until December 1994, Mr. Acosta
served as President, Chief Operating Officer and a director of Tanon
Manufacturing, Inc., a manufacturing and engineering services company. Prior to
March 1993, Mr. Acosta held various management positions at Ungermann-Bass
Inc., Atari, Inc., Diablo Systems, Inc. and Ford Motor Company.
David S. Labuda. Mr. Labuda joined Portal in March 1994 as Vice President,
Engineering and Chief Technology Officer. From June 1990 to March 1994, Mr.
Labuda was employed by Sun Microsystems, Inc., a network computing company, as
a Director of UNIX Development. From August 1985 to June 1990, Mr. Labuda
worked for Sun Microsystems as a Senior Engineer and Manager, including
managing the software development for the SparcStation 1 and SparcStation 2
projects. Mr. Labuda received the first Sun Presidential Award and holds three
patents from his tenure there.
Steven R. Sommer. Mr. Sommer joined Portal in July 1997 as Vice President,
Marketing and Business Development. From May 1993 to July 1997, Mr. Sommer
served as Vice President, Worldwide Marketing and Enterprise Solutions for
Informix Corporation,
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an enterprise database company. From February 1990 until April 1993, Mr. Sommer
served as Vice President, Marketing for Cognos, Inc., an applications and tools
development software company. Prior to February 1990, Mr. Sommer held various
other marketing positions at Digital Equipment Corporation, Scitex America
Corp., McKinsey & Company, Inc. and Procter and Gamble Company.
Kevin P. Mosher. Mr. Mosher joined Portal in March 1997 as Vice President,
Sales. From January 1996 to February 1997, Mr. Mosher served as Vice President
of Sales for Software Emancipation, Inc., a software development and testing
company. From May 1995 to November 1995, Mr. Mosher served as Vice President,
National Sales at Watermark Software, Inc., an enterprise software company.
From February 1991 to May 1995, Mr. Mosher served as Regional Vice President at
Interleaf, Inc., a software tool company. From 1985 to 1991, Mr. Mosher held
various senior sales management positions at Oracle Corporation.
Annette D. Surtees. Ms. Surtees joined Portal in August 1998 as Vice
President, Human Resources. From February 1998 through July 1998, Ms. Surtees
served as Director of Human Resources for VLSI Technology, Inc., an integrated
circuit design and manufacturing company. From February 1997 to February 1998,
Ms. Surtees was an independent consultant. From May 1988 until February 1997,
Ms. Surtees held various human resources management positions at Seagate
Technology, Inc., a data technology company, most recently as Vice President,
Human Resources for Corporate, U.S. and European Operations.
Michael E. Regan. Mr. Regan joined Portal in February 1999 as Vice President,
Professional Services. From June 1998 to February 1999, Mr. Regan served as
Vice President, Professional Services for Siebel Systems, Inc., a supplier of
enterprise relationship management systems. From February 1988 to June 1998,
Mr. Regan served as Vice President, Professional Services for Sybase.
Mitchell L. Gaynor. Mr. Gaynor joined Portal in April 1999 as General Counsel
and Secretary. From January 1997 to April 1999, Mr. Gaynor served as Vice
President, General Counsel and Secretary of Sybase. From May 1996 to January
1997, he served as Vice President and Associate General Counsel of Sybase and
from February 1993 to May 1996, Mr. Gaynor served as Senior Corporate Counsel
of Sybase.
Arthur C. Patterson. Mr. Patterson has been a Director of Portal since March
1996. Mr. Patterson is a founder and General Partner of Accel Partners, a
venture capital firm. Mr. Patterson invests in enterprise software and
communications services companies. Mr. Patterson also serves as a director of
PageMart Wireless, Inc., a communications services company, Unify Corporation,
an enterprise software company, Actuate Software Corporation, an enterprise
reporting software company, Viasoft, Inc., a software tools company, as well as
several private enterprise software and communications companies.
Edward J. Zander. Mr. Zander has been a Director of Portal since August 1997.
Since January 1998, Mr. Zander has served as Chief Operating Officer of Sun
Microsystems. From February 1995 until January 1998, Mr. Zander served as
President of Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems. From January 1991 to February 1995, Mr. Zander was President of
SunSoft, Inc., the software subsidiary of Sun Microsystems. From October 1987
to January 1991, Mr. Zander was Vice President of Marketing at Sun
Microsystems. Mr. Zander also serves as a director of Documentum, Inc., a
developer of Internet and client/server software-based solutions, Rhythms Net
Connections, Inc. and the Jason Foundation for Education.
David C. Peterschmidt. Mr. Peterschmidt has served as a Director of Portal
since April 1998. Mr. Peterschmidt has been President, Chief Executive Officer
and a Director of Inktomi Corporation, an internet search engine company, since
July 1996. He was appointed Chairman of the Board of Directors of Inktomi in
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<PAGE>
December 1997. From 1991 through June 1996, he served as Chief Operating
Officer and Executive Vice President of Sybase. Mr. Peterschmidt also served as
a Captain in the United States Air Force for nine years, where he was Lead
Contract Negotiator on Rockwell International's B1 Bomber Program.
William T. Coleman III. Mr. Coleman has served as a Director of Portal since
April 1998. Mr. Coleman is a founder of BEA Systems, Inc., a software company,
and has been its President, Chief Executive Officer and Chairman of the Board
of Directors since BEA's inception in January 1995. From December 1985 to
January 1995, Mr. Coleman held various positions at Sun Microsystems, most
recently as Vice President and General Manager of the Sun Integration Division.
Board of Directors and Committees
Portal currently has authorized five directors. Following this offering, the
board will consist of five directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Messrs. Patterson and Coleman
are Class I directors whose terms will expire in 2000, Mr. Zander is a Class II
director whose term will expire in 2001, and Messrs. Little and Peterschmidt
are Class III directors whose terms will expire in 2002. The officers serve at
the discretion of the board.
Portal has established an audit committee, which reviews and supervises
Portal's financial controls, including the selection of its auditors, reviews
the books and accounts, meets with its officers regarding its financial
controls, acts upon recommendations of auditors and takes further actions as
the audit committee deems necessary to complete an audit of Portal's books and
accounts. The audit committee also evaluates potential conflicts of interest
between Portal and its executive officers and directors and serves to evaluate
any transactions or events which could be deemed improper, as well as other
matters which may come before it or as directed by the board. The audit
committee currently consists of two directors, Messrs. Patterson and
Peterschmidt.
Portal has established a compensation committee, which reviews and approves
the compensation and benefits for Portal's executive officers, administers its
stock plans and performs other duties as may from time to time be determined by
the board. The compensation committee currently consists of four directors,
Messrs. Patterson, Zander, Peterschmidt and Coleman.
Compensation Committee Interlocks and Insider Participation
None of Portal's executive officers serve on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of Portal's board or compensation committee.
Director Compensation
Portal currently does not compensate any non-employee member of the board.
Members of the board will be eligible to receive discretionary option grants
and stock issuances under the 1999 Stock Incentive Plan. In addition, under the
1999 Stock Incentive Plan, non-employee directors will receive automatic option
grants on the date of each annual meeting of stockholders. The 1999 Stock
Incentive Plan also contains a director fee option grant program. Should this
program be activated in the future, each non-employee board member will have
the opportunity to apply all or a portion of any annual retainer fee otherwise
payable in cash to the acquisition of a below-market option grant. At this
time, Portal does not anticipate paying any annual retainer fee or other cash
compensation to any non-employee members of the board of directors. See
"Management--Benefit Plans".
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<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to the compensation of Portal's Chief Executive
Officer and Portal's four next most highly compensated executive officers who
earned more than $100,000 for the fiscal year ended January 31, 1999
(collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Fiscal Year --------------------
Name and Principal Position Ended Salary ($) Bonus ($)
--------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
John E. Little............................... 1999 $185,000 $ 40,000
Chief Executive Officer, President and
Chairman of the Board of Directors
Richard C. Spalding(1)....................... 1999 160,000 6,000
Chief Financial Officer and Vice President,
Finance
David S. Labuda.............................. 1999 208,000 52,000
Chief Technology Officer and Vice President,
Engineering
Steven R. Sommer............................. 1999 180,000 50,000
Vice President, Marketing and Business
Development
Kevin P. Mosher.............................. 1999 140,000 110,000
Vice President, Sales
Dong Joo (Karen) Ha(2)....................... 1999 150,000 43,000
Vice President, Client Services
</TABLE>
- --------
(1) Mr. Spalding resigned as Chief Financial Officer, Vice President, Finance
and Secretary effective January 31, 1999 but remained an employee of Portal
until April 30, 1999.
(2) Ms. Ha resigned as Vice President, Client Services on October 31, 1998 but
remained an employee of Portal until April 30, 1999. Ms. Ha earned $150,000
in the fiscal year ended January 31, 1999 based on an annual salary of
$180,000.
The bonus component of an executive officer's annual compensation is based on
the compensation committee's assessment of Portal's financial performance, such
as revenue growth, for the fiscal year and the individual officer's
contribution to that performance, as well as the achievement of individual and
corporate milestones.
Under a letter agreement dated December 24, 1998, Mr. Jack L. Acosta,
Portal's Chief Financial Officer, Vice President, Finance and Secretary, is to
receive an annual salary of $200,000 for the fiscal year ending January 31,
2000, has received a one-time signing bonus of $25,000 and is eligible to
receive up to an aggregate of $80,000 upon the achievement of certain
performance milestones. Mr. Acosta was granted an option to purchase 1,080,000
shares of common stock, of which 216,000 shares will vest upon consummation of
this offering and the balance will vest monthly from the date of grant over
four years of Mr. Acosta's continued employment with Portal.
Under a letter agreement dated January 31, 1999, Mr. Michael E. Regan,
Portal's Vice President, Professional Services, is to receive an annual salary
of $200,000 for the fiscal year ending January 31, 2000 and receive a one-time
signing bonus of $25,000 and is eligible to receive up to an aggregate of
$80,000 upon the achievement of certain performance milestones. Mr. Regan was
granted an option to purchase 750,000 shares of common stock, twenty-five
percent of which will vest one year from the date of grant and the balance of
which will vest in thirty-six equal monthly installments of Mr. Regan's
continued employment with Portal.
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<PAGE>
Option Grants. No option grants or stock appreciation rights were granted to
any Named Executive Officer during the fiscal year ended January 31, 1999.
Aggregate Option Exercises and Option Values. The following table sets forth
information concerning option exercises and option holdings for the Named
Executive Officers as of January 31, 1999. No stock appreciation rights were
exercised during the fiscal year ended January 31, 1999 and no stock
appreciation rights were outstanding at the end of the fiscal year. The value
realized is based on the fair market value of Portal's common stock on the date
of exercise, as determined by the board, less the exercise price payable for
such shares. The value of unexercised in-the-money options at fiscal year end
is based on the fair market value of Portal's common stock on January 31, 1999,
as determined by the board at that time, less the option exercise price payable
for such shares. The value of unexercised in-the-money options at the initial
public offering price is based on the initial public offering price of $14.00
per share, less the exercise price payable for such shares.
Option Exercises in the Fiscal Year Ended January 31, 1999 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money
Shares Options at FY-End Options at FY-End
Acquired on Value ------------------------- -------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable($) Unexercisable($)
- ---- ----------- -------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John E. Little.. -- -- -- -- -- --
Richard C. Spalding -- -- -- -- -- --
David S.
Labuda......... -- -- -- -- -- --
Steven R. Sommer.. -- -- -- -- -- --
Kevin P. Mosher.. -- -- -- -- -- --
Dong Joo (Karen) Ha 99,999 0 200,001 -- $666,670 --
<CAPTION>
Value of Unexercised
in-the-Money
Options at the
Initial Public Offering Price
-------------------------------
Name Exercisable($) Unexercisable($)
- ---- -------------- ----------------
<S> <C> <C>
John E. Little.. -- --
Richard C. Spalding -- --
David S.
Labuda......... -- --
Steven R. Sommer.. -- --
Kevin P. Mosher.. -- --
Dong Joo (Karen) Ha $2,790,014 --
</TABLE>
The options held by Ms. Ha are immediately exercisable for all the option
shares, but any shares purchased under the options will be subject to
repurchase by Portal at the original exercise price per share upon the
optionee's cessation of service prior to vesting in these shares. As of January
31, 1999, Portal's repurchase right had lapsed as to all 99,999 shares which
Ms. Ha had exercised. Ms. Ha's employment with Portal terminated as of April
30, 1999 and all of her unexercised options were cancelled.
Benefit Plans
1999 Stock Incentive Plan.
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to Portal's 1995 Stock Option/Stock Issuance Plan. Portal's
1999 Stock Incentive Plan was adopted by the board in February 1999 and
approved by the stockholders in April 1999. The 1999 Stock Incentive Plan
became effective when the underwriting agreement for this offering was signed.
At that time, all outstanding options under Portal's existing 1995 Stock
Option/Stock Issuance Plan will then be transferred to the 1999 Stock Incentive
Plan, and no further option grants will be made under the 1995 Stock
Option/Stock Issuance Plan. The transferred options will continue to be
governed by their existing terms, unless Portal's compensation committee
decides to extend one or more features of the 1999 Stock Incentive Plan to
those options. Except as otherwise noted below, the transferred options have
substantially the same term as will be in effect for grants made under the
discretionary option grant program of Portal's 1999 Stock Incentive Plan.
Share Reserve. 13,290,062 shares of Portal's common stock have been
authorized for issuance under the 1999 Stock Incentive Plan. This share reserve
consists of the number of shares carried over from the 1995 Stock Option/Stock
Issuance Plan plus an additional increase of approximately 875,000 shares. The
share reserve under Portal's 1999 Stock Incentive Plan will automatically
increase on the first trading day of February each year, beginning February 1,
2000, by an amount equal to four percent of the total number of
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<PAGE>
shares of common stock outstanding on the last trading day of the prior month,
but in no event will this annual increase exceed 5,250,000 shares. In addition,
no participant in Portal's 1999 Stock Incentive Plan may be granted stock
options or direct stock issuances for more than 1,000,000 shares of common
stock in total in any calendar year.
Programs. Portal's 1999 Stock Incentive Plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in Portal's employ may be granted options to purchase shares of Portal's
common stock at an exercise price not less than the fair market value of
those shares on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or upon the completion of a period of service or
as a bonus for past services;
. the salary investment option grant program, under which Portal's
executive officers and other highly compensated employees may be given
the opportunity to apply a portion of their base salary to the
acquisition of special below market stock option grants;
. the automatic option grant program, under which option grants will be
made at periodic intervals to eligible non-employee board members to
purchase shares of common stock at an exercise price equal to the fair
market value of those shares on the grant date; and
. the director fee option grant program, under which Portal's non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
The individuals eligible to participate in Portal's 1999 Stock Incentive Plan
include Portal's officers and other employees, Portal's board members and any
consultants Portal hires.
Administration. The discretionary option grant and stock issuance programs
will be administered by Portal's compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under federal tax laws, the vesting schedule to be in
effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
Plan Features. Portal's 1999 Stock Incentive Plan will include the following
features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of Portal's common stock valued at fair market value on
the exercise date. The option may also be exercised through a same-day
sale program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from Portal's 1995 Stock Option/Stock Issuance Plan,
in return for the grant of new options for the same or different number
of option shares with an exercise price per share based upon the fair
market value of Portal's common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election to
surrender their outstanding options for a payment from Portal equal to
the fair market value
53
<PAGE>
of the shares subject to the surrendered options less the exercise price
payable for those shares. Portal may make the payment in cash or in shares
of Portal's common stock. None of the options under Portal's 1995 Stock
Option/Stock Issuance Plan have any stock appreciation rights.
Change in Control. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
. In the event that Portal is acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent that Portal's
repurchase rights with respect to those shares are to be assigned to the
successor corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with Portal or the acquiring entity is subsequently terminated.
The vesting of any outstanding shares under Portal's 1999 Stock Incentive
Plan may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of Portal's outstanding voting stock or a change
in the majority of Portal's board through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
. The options currently outstanding under Portal's 1995 Stock Option/Stock
Issuance Plan will immediately vest upon an acquisition of Portal by
merger or asset sale, unless Portal's repurchase rights with respect to
the unvested shares subject to those options are assigned to the
successor entity. There are no other change in control provisions
currently in effect for those options. However, the compensation
committee may extend the acceleration provisions of Portal's 1999 Stock
Incentive Plan to any or all of those options.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of Portal's executive officers and other highly compensated
employees may elect to reduce his or her base salary for the calendar year by
an amount not less than $10,000 nor more than $50,000. Each selected
individual who makes such an election will automatically be granted, on the
first trading day in January of the calendar year for which his or her salary
reduction is to be in effect, an option to purchase that number of shares of
common stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Portal's common stock on the grant date.
The option will have an exercise price per share equal to one-third of the
fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares
on the grant date less the exercise price payable for those shares will be
equal to the amount of the salary reduction. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the salary reduction is to be in effect.
Automatic Option Grant Program. On the date of each annual stockholders
meeting following this offering, each individual who is to continue to serve
as a non-employee board member will automatically be granted an option to
purchase 6,000 shares of Portal's common stock, provided he or she has served
on the
54
<PAGE>
board for at least six months. Each grant will have a term of ten years,
subject to earlier termination following the optionee's cessation of board
service, and will be immediately exercisable for all the option shares.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the
number of shares subject to the option will be determined by dividing the
amount of the retainer fee applied to the program by two-thirds of the fair
market value per share of Portal's common stock on the grant date. As a
result, the option will be structured so that the fair market value of the
option shares on the grant date less the exercise price payable for those
shares will be equal to the portion of the retainer fee applied to that
option. The option will become exercisable in a series of twelve equal monthly
installments over the calendar year for which the election is in effect.
However, the option will become immediately exercisable for all the option
shares upon the death or disability of the optionee while serving as a board
member.
Additional Program Features. Portal's 1999 Stock Incentive Plan will also
have the following features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if Portal is acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
Portal's outstanding voting stock or a change in the majority of Portal's
board through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to Portal upon the successful completion of a
hostile tender offer for more than 50% of Portal's outstanding voting
stock. In return for the surrendered option, the optionee will be
entitled to a cash distribution from Portal in an amount per surrendered
option share based upon the highest price per share of Portal's common
stock paid in that tender offer.
. The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive
Plan will terminate no later than February 23, 2009.
1999 Employee Stock Purchase Plan.
Introduction. Portal's 1999 Employee Stock Purchase Plan was adopted by the
board in February 1999 and approved by the stockholders in April 1999. The
plan became effective immediately upon the execution of the underwriting
agreement for this offering. The plan is designed to allow eligible employees
of Portal and its participating subsidiaries to purchase shares of common
stock, at semi-annual intervals, with their accumulated payroll deductions.
Share Reserve. 1,800,000 shares of common stock will initially be reserved
for issuance. The reserve will automatically increase on the first trading day
in February each year, beginning February 1, 2000, by an amount equal to two
percent of the total number of Portal's outstanding shares of common stock on
the last trading day of the prior month. In no event will any such annual
increase exceed 2,000,000 shares.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering
period will start on the date the underwriting agreement for the offering
covered
55
<PAGE>
by this prospectus is signed and will end on the last business day in May 2001.
The next offering period will start on the first business day in June 2001, and
subsequent offering periods will set by Portal's compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per week
for more than five calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of June and December each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her cash
earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and November
each year. In no event, however, may any participant purchase more than 1,250
shares on any purchase date, and not more than 300,000 shares may be purchased
in total by all participants on any purchase date.
Reset Feature. If the fair market value per share of Portal's common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Change in Control. Should Portal be acquired by merger or sale of
substantially all of Portal's assets or more than fifty percent of Portal's
voting securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to 85% of the market value per share on the
participant's entry date into the offering period in which an acquisition
occurs or, if lower, 85% of the fair market value per share immediately prior
to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of May 2009.
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
Employment Contracts,
Termination of Employment Agreements
and Change in Control Arrangements
Portal does not currently have any employment agreements or severance
programs in effect for any of the Named Executive Officers. Portal provides
incentives such as salary, cash bonuses and option grants (which typically vest
over a four-year period) to attract and retain qualified executives and other
members of senior management.
In the event that the employment of Mr. Acosta, Portal's Chief Financial
Officer, Vice President, Finance and Secretary, is terminated by Portal or its
successor for any reason other than for cause, Mr. Acosta will receive one year
of severance pay based on his base salary for that year. In addition, if Mr.
Acosta is terminated, or his role is materially diminished, within 18 months of
a change in control or acquisition of Portal, all of his unvested options will
vest in full.
In connection with an acquisition of Portal by merger or asset sale, Portal's
repurchase right with respect to the shares of common stock acquired by Mr.
Spalding (pursuant to an incentive stock issuance), Mr. Mosher (pursuant to the
exercise of stock options) and Mr. Regan (pursuant to the exercise of stock
options) issued under the 1995 Stock Option/Stock Issuance Plan will
automatically lapse and the shares will vest in full, unless the repurchase
56
<PAGE>
right is assigned to the successor entity. In addition, Mr. Sommer, Portal's
Vice President, Marketing and Business Development, will vest in the lesser of
(i) twenty-five percent of the purchased shares or (ii) fifty percent of his
unvested shares upon a merger or asset sale. In addition, the compensation
committee as plan administrator of the 1999 Stock Incentive Plan will have the
authority to grant options and to structure repurchase rights under that plan
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a change in control of Portal, whether by
merger, asset sale, successful tender offer for more than fifty percent of the
outstanding voting stock or by a change in the majority of the board by reason
of one or more contested elections for board membership, with this vesting to
occur either at the time of this change in control or upon the subsequent
involuntary termination of the individual's service within a designated
period, not to exceed 18 months, following a change in control.
Limitation of Liability and Indemnification
Portal's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, subject to certain
exceptions, directors' personal liability to Portal or its stockholders for
monetary damages for breaches of fiduciary duties. The certificate of
incorporation does not, however, eliminate or limit the personal liability of
a director for the following:
. any breach of the director's duty of loyalty to Portal or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
Portal's bylaws provide that Portal shall indemnify its directors and
executive officers to the fullest extent permitted under the Delaware General
Corporation Law and may indemnify its other officers, employees and other
agents as set forth in the Delaware General Corporation Law. In addition,
Portal has entered into an indemnification agreement with each of its
directors and officers. The indemnification agreements contain provisions that
require Portal, among other things, to indemnify its directors and executive
officers against certain liabilities (other than liabilities arising from
intentional or knowing and culpable violations of law) that may arise by
reason of their status or service as directors or executive officers of Portal
or other entities to which they provide service at the request of Portal and
to advance expenses they may incur as a result of any proceeding against them
as to which they could be indemnified. Portal believes that these bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified directors and officers. Prior to the consummation of the offering,
Portal will obtain an insurance policy covering directors and officers for
claims they may otherwise be required to pay or for which Portal is required
to indemnify them, subject to certain exclusions.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Portal where indemnification will be
required or permitted, and Portal is not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
57
<PAGE>
CERTAIN TRANSACTIONS
Options to Purchase Common Stock
The following table summarizes the option grants made to Portal's executive
officers, directors and 5% stockholders since February 1, 1996.
<TABLE>
<CAPTION>
Number of Securities Exercise
Underlying Options Price Date of
Name Granted (#) ($/Sh) Grant
---- -------------------- -------- --------
<S> <C> <C> <C>
Jack L. Acosta...................... 1,080,000 $2.67 12/23/98
Steven R. Sommer.................... 1,079,796 $0.02 07/28/97
Kevin P. Mosher..................... 675,000 $0.02 03/12/97
................... 450,000 $10.00 04/01/99
Annette D. Surtees.................. 75,000 $1.33 08/10/98
................... 45,000 $1.33 08/10/98
................... 60,000 $4.00 01/27/99
Michael E. Regan.................... 750,000 $10.00 02/22/99
Edward J. Zander.................... 150,000 $0.02 08/15/97
.................... 83,334 $0.02 01/20/98
David C. Peterschmidt............... 150,000 $0.33 04/17/98
Richard C. Spalding................. 1,508,436 $0.02 02/07/97
Dong Joo (Karen) Ha................. 600,000 $0.02 05/15/97
................. 300,000 $0.67 05/22/98
</TABLE>
Sales of Preferred Stock
In March 1996, Portal sold an aggregate of 13,544,895 shares of Series A
Preferred Stock at a price of $0.17 per share (after giving effect to a 5-for-1
stock split effected by Portal in June 1996) to entities affiliated with Accel
Partners. In January 1997, upon the exercise of Series A Preferred Stock
Warrants, Portal issued 3,075,000 shares of Series A Preferred Stock for an
aggregate consideration of $512,500 to entities affiliated with Accel Partners.
In January, May and August 1998, Portal sold an aggregate of 10,235,997 shares
of Series B Preferred Stock at a price of $1.50 per share. The following table
summarizes the shares of preferred stock purchased by Portal's executive
officers, directors and 5% percent stockholders and persons associated with
them since March 1996. The number of total shares on an as-converted basis
reflects a one-to-one conversion to common stock ratio for each share of Series
A and Series B Preferred Stock and a three-for-one stock split effected prior
to effectiveness of this offering.
<TABLE>
<CAPTION>
Total Shares
Series A Series B on an As- Total
Preferred Preferred Converted Aggregate
Investor Stock Stock Basis Consideration
- -------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Entities affiliated with Accel
Partners(/1/)................. 5,539,965 1,000,000 19,619,895 $7,269,982
David C. Peterschmidt.......... -- 22,222 66,666 $ 99,999
Edward J. Zander............... -- 22,222 66,666 $ 99,999
William T. Coleman III......... -- 22,222 66,666 $ 99,999
</TABLE>
- --------
(1) Represents shares held by Accel Internet/Strategic Technology Fund LP,
Accel Investors '96 LP, Accel Keiretsu V LP, Accel V LP and Ellmore C.
Patterson Partners. Mr. Arthur C. Patterson, a director of Portal, is a
general partner of Accel Partners.
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<PAGE>
Holders of shares of preferred stock are entitled to certain registration
rights with respect to the common stock issued or issuable upon conversion
thereof. See "Description of Capital Stock--Registration Rights".
Other Related Party Transactions
Portal has entered into an Indemnification Agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors, other than liabilities arising from willful misconduct of a culpable
nature, and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified. See "Management--Limitation on
Liability and Indemnification".
Portal believes that all of the transactions set forth above were made on
terms no less favorable to Portal than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between Portal and its officers, directors and principal stockholders and their
affiliates and any transactions between Portal and any entity with which its
officers, directors or 5% stockholders are affiliated will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors of the board of directors and will be on terms
no less favorable to Portal than could be obtained from unaffiliated third
parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to Portal with respect to
the beneficial ownership of its common stock as of March 31, 1999 by:
. each stockholder known by Portal to own beneficially more than 5% of
common stock;
. each director of Portal;
. each of the Named Executive Officers; and
. all current directors and executive officers of Portal as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable. As of April 30, 1999, there were
67,352,244 shares of common stock outstanding. Except as otherwise noted, the
address of each person listed on the table is c/o Portal Software, Inc., 20883
Stevens Creek Boulevard, Cupertino, California 95014. The number of shares
outstanding after the offering assumes no exercise of the underwriters' over-
allotment option, and includes 3,380,184 shares sold in the concurrent
placement. 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. Shares of common stock subject to
options currently exercisable or exercisable within sixty days of the date of
this prospectus are deemed to be outstanding and to be beneficially owned by
the person holding these options for the purpose of computing the number of
shares beneficially owned and the percentage of this person or entity holding
these securities, but are not outstanding for the purpose of computing the
percentage ownership of any other person or entity.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned
Number of Shares ----------------------
Name and Address of Beneficial Beneficially Prior to After the
Owner Owned Offering Offering
- ------------------------------ ---------------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with Accel
Partners(/1/)
428 University Avenue
Palo Alto, CA 94301............... 21,138,756 31.4% 28.3%
John E. Little..................... 18,983,580 28.2 25.4
David S. Labuda(/2/)............... 6,499,356 9.6 8.7
Steven R. Sommer(/3/).............. 1,079,796 1.6 1.4
Kevin P. Mosher(/4/)............... 675,000 * *
Arthur C. Patterson(/1/)........... 21,138,756 31.4 28.3
Edward J. Zander(/5/).............. 300,000 * *
David C. Peterschmidt(/6/)......... 216,666 * *
William T. Coleman III(/7/)........ 216,666 * *
Richard C. Spalding(/8/)........... 785,643 1.2 1.1
Dong Joo (Karen) Ha(/9/)........... 312,501 * *
All current directors and executive
officers as a group
(twelve persons)(/10/)............ 50,309,820 73.4% 66.3%
</TABLE>
- --------
* Less than 1%.
(1) Represents 2,282,982 shares held by Accel Internet/Strategic Technology
Fund LP, 1,014,666 shares held by Accel Investors '96 LP, 338,223 shares
held by Accel Keiretsu V LP, 17,037,831 shares held by Accel V LP, and
465,054 shares held by Ellmore C. Patterson Partners (collectively the
"Accel Partnerships"). Mr. Patterson is a managing member of Accel
Partners, the General Partner of each of the Accel Partnerships, and a
director of Portal. However, Mr. Patterson disclaims beneficial ownership
of all these shares, except to the extent of his pecuniary interest in the
Accel Partnerships.
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<PAGE>
(2) Includes 4,632,870 shares held in trust by Mr. Labuda as trustee of the
David S. Labuda Separate Property Trust U/D/T dated December 30, 1998.
Also includes 1,496,100 shares held in trust by Mr. Labuda and Cindy A.
Labuda, Mr. Labuda's wife, as trustees of the Labuda Community Trust U/D/T
dated December 30, 1998. Also includes 220,386 shares of common stock held
by Cindy A. Labuda, trustee of the Cindy A. Labuda Separate Property Trust
U/D/T dated December 30, 1998 and 150,000 shares held in the name of the
Kira Anne Labuda Trust dated 12/31/97. Mr. Labuda disclaims beneficial
ownership of all of these 370,386 shares.
(3) Includes 75,000 shares held in trust for Allison Sommer, 75,000 shares
held in trust for Julia Sommer and 75,000 shares held in trust for Rachel
Sommer. Mr. Sommer disclaims beneficial ownership of all of these
225,000 shares. Includes 629,880 shares of common stock subject to
Portal's right of repurchase. This repurchase right lapses with respect to
22,497 shares per month.
(4) Includes 337,482 shares of common stock subject to Portal's right of
repurchase. This repurchase right lapses with respect to 14,064 shares per
month.
(5) Includes 140,979 shares of common stock subject to Portal's right of
repurchase. This repurchase right lapses with respect to 4,860 shares per
month.
(6) Includes 150,000 shares of common stock which are subject to Portal's
right of repurchase. Such repurchase right lapses as to 37,500 shares on
April 16, 1999 and as to 3,126 shares per month from April 17, 1999
through April 16, 2002.
(7) Includes 150,000 shares of common stock which are subject to Portal's
right of repurchase. Such repurchase right lapses as to 37,500 shares on
April 16, 1999 and as to 3,126 shares per month from April 17, 1999
through April 16, 2002.
(8) Includes 240,000 shares held by Francis A. Martin, III, trustee, for the
benefit of Charles T. Spalding, 240,000 shares held by Francis A. Martin,
III, trustee, for the benefit of Patrick M. Spalding and 240,000 shares
held by Francis A. Martin, III, trustee, for the benefit of Consuelo Tobin
and Martin Spalding. Mr. Spalding disclaims beneficial ownership of these
720,000 shares.
(9) Includes 152,502 shares held by Young Soo Ha and Dong Joo (Karen) Ha,
trustees of the Ha Family 1997 Trust, dated December 22, 1997. Also
includes 60,000 shares held by Linda Chang, trustee of the Perry Joo-Hyup
Ha 1997 Trust, dated December 22, 1997.
(10) Includes 1,200,000 shares of common stock issuable upon exercise of
immediately exercisable options, and 1,408,341 shares of common stock
subject to Portal's right of repurchase. This repurchase right lapses with
respect to 41,421 shares per month.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of Portal will
consist of 250,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value, after giving effect to the
amendment of Portal's certificate of incorporation to delete references to the
preferred stock following conversion of the stock. The following description of
capital stock gives effect to the certificate of incorporation to be filed upon
closing of this offering. Immediately following the completion of this
offering, and assuming no exercise of the underwriters' over-allotment option,
an aggregate of 74,732,428 shares of common stock will be issued and
outstanding, and no shares of preferred stock will be issued and outstanding.
The following description of Portal's capital stock is subject to and
qualified by Portal's certificate of incorporation and bylaws and by the
provisions of the applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any preferred stock that may come into existence, the holders of
common stock are entitled to receive ratably those dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available for dividends. See "Dividend Policy". In the event of liquidation,
dissolution or winding up of Portal, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be outstanding upon completion
of this offering will be fully paid and nonassessable.
Preferred Stock
Portal's board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of the
authorized but unissued shares of preferred stock of Portal with any dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of preferred stock may possess voting, dividend,
liquidation and redemption rights superior to that of the common stock. The
rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching Portal's board
of directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of Portal. Portal has no present plans to issue any shares of or
designate any series of preferred stock.
Warrants
At April 30, 1999, there were warrants outstanding to purchase a total of
242,598 shares of common stock on an as-converted basis. Warrants to purchase
12,501 shares of common stock at $0.02 per share will expire in January 2003.
Warrants to purchase 230,097 shares of common stock at $1.50 per share will
expire in September 2003.
Concurrent Private Placement
In April 1999, Portal entered into strategic alliances and stock purchase
agreements with both Andersen Consulting and Cisco. Portal has agreed to sell
3,000,000 shares of
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<PAGE>
common stock to Cisco and 380,184 shares of common stock to Andersen
Consulting, which is the lesser of 400,000 shares of common stock or $4,950,000
divided by the initial public offering price less the underwriting discount,
for a per share price equal to the initial public offering price less the
underwriting discount. The stock purchase agreements further provide the
following:
Transfer Restrictions. Andersen Consulting and Cisco have agreed not to sell,
transfer, encumber or otherwise dispose of any of the common stock acquired in
the concurrent placement in a public or private sale for a period of one year
following the closing of the concurrent placement, except that Andersen
Consulting has certain registration rights in connection with any subsequent
registration by Portal of its securities prior to the second anniversary of the
closing of the concurrent placement.
In addition, Andersen Consulting has agreed that it will:
. notify Portal of and jointly announce any sale of Portal common stock;
and
. vote all shares of common stock owned by it on the sale of all or
substantially all of the assets of Portal or a merger in which Portal is
not the surviving entity and take action with respect to a third-party
tender offer, other than a hostile tender offer, in accordance with the
direction of Portal's chief executive officer.
Cisco has agreed that it will:
. notify Portal of any sale of Portal common stock; and
. at any time after it owns in excess of 9.5% of Portal's outstanding
common stock and Portal's board of directors approves a sale of
substantially all of Portal's assets or a merger in which Portal is not
the surviving entity, vote its shares of Portal common stock in the same
proportion as the other stockholders of Portal.
Control Provisions. In the event that Portal enters into negotiation with
certain third parties regarding a potential merger, acquisition or other
business combination, Portal must notify Cisco of its intent to enter into such
transaction, no later than seven days prior to executing a definitive
agreement. Cisco has seven days from the date of Portal's notification to
prepare its own offer for consideration by Portal and its board of directors.
This right of notification terminates if:
. Cisco sells or transfers more than 25% of the common stock acquired in
the concurrent placement; or
. Cisco announces or otherwise indicates its intention to acquire a
controlling interest in Portal.
Registration Rights. After the closing of the concurrent placement, Andersen
Consulting and Cisco will have the following rights with respect to the
registration of their shares of common stock under the Securities Act. During
the period between the first anniversary and second anniversary of the closing
of the concurrent placement, Cisco may require Portal to register all but not
less than all of its shares of common stock on Form S-3 under the Securities
Act, provided that such form is available to Portal. Through the second
anniversary of the closing of the concurrent placement, if Portal proposes to
register any of its securities under the Securities Act either for its own
account or the account of other securityholders, Andersen Consulting is
entitled to receive notice of the registration and in general to include its
shares of common stock in the registration statement. Portal has agreed to pay
all expenses related to such registrations, except for underwriting discounts
and commissions.
Registration Rights
Under the Amended and Restated Investor Rights Agreement dated as of
January 29, 1998, as amended on March 3, 1998 and April 17, 1998, among Portal
and certain holders of its securities, the holders of approximately 30,171,948
shares of common stock, or Registrable Securities, after this offering will be
entitled to certain rights with respect to the registration of the Registrable
Securities under
63
<PAGE>
the Securities Act. Under the Investor Rights Agreement, if Portal proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other stockholders, the holders of Registrable
Securities are entitled to notice of such registration and are entitled to
include their Registrable Securities in the registration. In addition, if at
any time beginning three months after the date of this prospectus, Portal
receives a request from certain holders of at least 20% of the Registrable
Securities, Portal is obligated to cause these shares to be registered under
the Securities Act, provided that the offering size would exceed $10,000,000.
Certain holders of Registrable Securities have the right to cause three demand
registrations. Further, holders of Registrable Securities may require Portal to
register all or a portion of their Registrable Securities on Form S-2 or Form
S-3 under the Securities Act, provided that the offering size would exceed
$1,000,000, when these forms become available for use by Portal, and subject to
certain other conditions and limitations. The holders' rights with respect to
all these registrations are subject to certain conditions, including the right
of the underwriters of any of these offerings to limit the number of shares
included in any of these registrations. Portal has agreed to pay all expenses
related to certain of these registrations, except for underwriting discounts
and commissions, to effect the registration and sale of the Registrable
Securities.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws,
Delaware Law and Certain Provisions of a Strategic Partner Agreement
Portal's certificate of incorporation authorizes the board to establish one
or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance. See "--Preferred Stock". The
certificate of incorporation also provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by a consent in
writing. In addition, the certificate of incorporation and bylaws do not permit
stockholders of Portal to call a special meeting of stockholders. Only Portal's
Chief Executive Officer, President, Chairman of the Board or a majority of the
board are permitted to call a special meeting of stockholders. The certificate
of incorporation also provides that the board is divided into three classes,
with each director assigned to a class with a term of three years, and that the
number of directors may only be determined by the board of directors. The
bylaws also require that stockholders give advance notice to Portal's Secretary
of any nominations for director or other business to be brought by stockholders
at any stockholders' meeting, and that the Chairman has the authority to
adjourn any such meeting. The bylaws also require a supermajority vote of
stockholders or a majority vote of the board of directors to amend the bylaws.
These provisions of the restated certificate of incorporation and the bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of Portal. These provisions also may have the effect of
preventing changes in the management of Portal. See "Risk Factors--Our officers
and directors will be able to exert significant control on Portal" and "--We
are subject to anti-takeover provisions that could delay or prevent an
acquisition of our company".
Portal is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
(i) prior to that date, the board of directors of the corporation
approved either the business combination or the transaction that resulted
in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding for purposes of
64
<PAGE>
determining the number of shares outstanding those shares owned:
(x) by persons who are directors and also officers; and
(y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
(iii) on or subsequent to that date, the business combination is approved
by the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
If Portal enters into negotiation with certain third parties regarding a
potential merger, acquisition or other business combination, Portal must notify
Cisco of its intent to enter into such transaction no later than seven days
prior to executing a definitive agreement. Cisco has seven days from the date
of Portal's notification to prepare its own offer for consideration by Portal
and its board of directors. This right of notification terminates if:
. Cisco sells or transfers more than 25% of the common stock acquired in
the concurrent placement; or
. Cisco announces or otherwise indicates its intention to acquire a
controlling interest in Portal.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is EquiServe.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the common
stock. Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options or warrants, in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of a substantial amount of common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price and the ability of Portal to raise equity capital in the future.
Upon completion of this offering and the concurrent placement, Portal will
have 74,732,428 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of options and warrants
after April 30, 1999. Of these shares, the 4,000,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
Portal, as that term is defined in Rule 144 under the Securities Act, may
generally only be sold pursuant to an effective registration statement under
the Securities Act or in compliance with the limitations of Rule 144 as
described below.
The remaining 70,732,428 shares of common stock are "Restricted Securities"
as that term is defined in Rule 144. Of these shares, 67,352,244 restricted
shares will be available for sale in the public market following the expiration
of the one hundred eighty (180) day lock-up agreement further described below
and up to 3,380,184 shares will be available for sale to the public following
the expiration of the one-year lock-up period under the stock purchase
agreements entered into in connection with the concurrent placement, subject in
each case to restrictions on these sales. In addition, the holders of warrants
for 242,598 shares of common stock can exercise these warrants at any time, but
these shares cannot be sold until the expiration of the 180 day lockup period
following the date of this prospectus. Beginning six months after the date of
this prospectus the holders of 33,552,132 restricted shares and the holders of
warrants for 242,598 shares of common stock are entitled to certain rights with
respect to registration of these shares for sale in the public market. If these
holders sell in the public market these sales would have a material adverse
effect on the market price of the common stock.
All of the officers and directors and certain stockholders and optionholders
of Portal have entered into lock-up agreements generally providing that they
will not offer, pledge, sell, offer to sell, contract to sell, sell any option
or contract to purchase, purchase any option to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of common stock or any securities convertible
into, or exercisable or exchangeable for, common stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, for a
period of 180 days after the effective date of this offering, without the prior
written consent of Goldman, Sachs & Co. subject to certain limited exceptions.
Goldman, Sachs & Co. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. Goldman, Sachs & Co. currently has no plans to release any portion
of the securities subject to lock-up agreements. When determining whether to
release shares from the lock-up agreements, Goldman, Sachs & Co. will consider,
among other factors, the stockholder's reasons for requesting the release, the
number of shares for which the release is being requested and market conditions
at the time. Following the expiration of the 180-day lock-up period, all
67,352,244 shares of common stock will be available for sale in the public
market subject to compliance with Rule 144 or Rule 701.
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<PAGE>
In general, under Rule 144 as currently in effect, an affiliate of Portal or
a person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year, including the holding period of any
prior owner other than a person who may be deemed an affiliate of Portal, is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of 1% of the then-outstanding shares of
common stock (approximately 747,324 shares after giving effect to this offering
and the concurrent placement) and the average weekly trading volume of the
common stock on The Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 notice with respect to this sale. Sales
under Rule 144 of the Securities Act are subject to certain restrictions
relating to manner of sale, notice and the availability of current public
information about Portal. Under Rule 144(k), a person who is not an affiliate
of Portal at any time during the ninety days preceding a sale, and who has
beneficially owned shares for at least two years including the holding period
of any prior owner other than a person who may be deemed an affiliate of
Portal, would be entitled to sell those shares immediately following this
offering without regard to the volume limitations, manner of sale provisions or
notice or other requirements of Rule 144 of the Securities Act. However, the
transfer agent may require an opinion of counsel that a proposed sale of shares
comes within the terms of Rule 144 of the Securities Act prior to effecting a
transfer of these shares.
Portal intends to file, immediately after the effectiveness of this offering,
a registration statement on Form S-8 under the Securities Act covering all
shares of common stock reserved for issuance under its 1999 Stock Incentive
Plan and its 1999 Employee Stock Purchase Plan. See "Management--Benefit
Plans". Shares registered under such registration statement would be available
for sale in the open market in the future unless these shares are subject to
vesting restrictions with Portal or the contractual restrictions described
above.
Lock-up Agreements
Holders of substantially all shares of common stock and options and warrants
to purchase common stock have agreed that they will not, without the prior
written consent of Goldman, Sachs & Co. offer, sell, contract to sell or
otherwise dispose of any shares of common stock beneficially owned by them or
any shares issuable upon exercise of stock options or warrants for a period of
180 days from the effective date of this offering. See "Underwriting". In
addition, Andersen Consulting and Cisco have agreed that they will not, without
the prior written consent of Portal, sell, contract to sell or otherwise
dispose of the common stock beneficially owned by them for a period of one year
from the closing date of the concurrent placement.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Portal by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Members of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 12,000 shares
of Portal's common stock. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Portal's consolidated
financial statements at January 31, 1998 and 1999 and for each of the three
years in the period ended January 31, 1999, as set forth in their report, which
is included in this prospectus. Portal's consolidated financial statements are
included in this prospectus in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
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ADDITIONAL INFORMATION
We have filed with the SEC, Washington, D.C. 20549, under the Securities Act,
as amended, a registration statement on Form S-1 relating to the common stock
offered in this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information with respect to Portal and the shares Portal
is offering pursuant to this prospectus you should refer to the registration
statement, including its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of
that contract or other document filed as an exhibit to the registration
statement or any other document. You may inspect a copy of the registration
statement without charge at the Public Reference Section of the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the SEC's
regional offices at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The SEC maintains an Internet site that contains reports,
proxy information statements and other information regarding registrants that
file electronically with the SEC. The SEC's world wide Web address is
www.sec.gov.
Portal intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. Portal intends to furnish these other reports as
it may determine or as may be required by law.
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PORTAL SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Portal Software, Inc.
We have audited the accompanying consolidated balance sheets of Portal
Software, Inc. as of January 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for the three years in the period ended January 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Portal Software,
Inc. at January 31, 1998 and 1999 and the consolidated results of its
operations and its cash flows for the three years in the period ended January
31, 1999 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
February 24, 1999
Except for the fifth and sixth paragraphs of Note 8,
as to which the date is April 29, 1999
F-2
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity (Net
January 31, Capital Deficiency)
------------------ at January 31,
1998 1999 1999
-------- -------- -------------------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 14,646 $ 11,809
Accounts receivable, net of allowance
for doubtful accounts of $50 and $940
at January 31, 1998 and 1999......... 5,697 14,474
Other current assets.................. 100 1,440
-------- --------
Total current assets................. 20,443 27,723
Property and equipment, net............ 2,537 4,417
Other assets........................... 145 204
-------- --------
$ 23,125 $ 32,344
======== ========
Liabilities and Stockholders' Equity
(Net Capital Deficiency)
Current liabilities:
Accounts payable...................... $ 1,542 $ 2,567
Accrued compensation.................. 903 1,147
Other accrued liabilities............. 1,076 5,214
Current portion of long-term debt..... 1,500 4,122
Current portion of capital lease
obligations.......................... -- 479
Deferred revenue...................... 8,841 23,344
-------- --------
Total current liabilities............ 13,862 36,873
Long-term debt......................... 1,500 --
Long-term portion of capital lease
obligations........................... -- 2,022
Commitments
Stockholders' equity (net capital
deficiency):
Convertible preferred stock, no par
value, issuable in series: 28,311 and
28,652 shares issued and outstanding
at January 31, 1998 and 1999 (none
pro forma); aggregate liquidation
preference of $18,423 at January 31,
1999 (none pro forma)................ 18,117 18,482 $ --
Common stock, no par value, 35,000
shares authorized (250,000 shares pro
forma, $0.001 par value per share);
39,184 and 42,594 shares issued and
38,172 and 39,183 shares outstanding
at January 31, 1998 and 1999 (67,836
pro forma)........................... 177 927 68
Additional paid-in capital............ -- 16,753 36,094
Notes receivable from stockholders.... -- (318) (318)
Deferred stock compensation........... -- (14,456) (14,456)
Accumulated deficit................... (10,531) (27,939) (27,939)
-------- -------- --------
Stockholders' equity (net capital
deficiency)......................... 7,763 (6,551) $ (6,551)
-------- -------- ========
$ 23,125 $ 32,344
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
License fees..................................... $ 3,944 $ 6,892 $ 13,536
Services......................................... 1,101 2,524 13,133
------- ------- --------
Total revenues.................................. 5,045 9,416 26,669
------- ------- --------
Costs and expenses:
Cost of license fees............................. 62 970 458
Cost of services................................. 518 2,152 9,425
Research and development......................... 2,527 5,628 11,252
Sales and marketing.............................. 2,371 5,436 14,112
General and administrative....................... 1,821 2,616 6,253
Amortization of deferred stock compensation...... -- -- 2,297
------- ------- --------
Total costs and expenses........................ 7,299 16,802 43,797
------- ------- --------
Loss from operations.............................. (2,254) (7,386) (17,128)
Interest and other income, net.................... 20 39 540
Gain on sale of investment........................ -- -- 311
Interest expense.................................. (40) (240) (416)
------- ------- --------
Loss before income taxes.......................... (2,274) (7,587) (16,693)
Provision for income taxes........................ -- -- (715)
------- ------- --------
Net loss.......................................... $(2,274) $(7,587) $(17,408)
======= ======= ========
Basic and diluted net loss per share.............. $ (0.18) $ (0.37) $ (0.59)
======= ======= ========
Shares used in computing basic and diluted net
loss per share................................... 12,432 20,786 29,531
======= ======= ========
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.30)
========
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 58,084
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Convertible Note Stockholders'
Preferred Stock Common Stock Additional Receivable Deferred Equity
------------------ ----------------- Paid-In From Stock Accumulated (Net Capital
Shares Amount Shares Amount Capital Stockholder Compensation Deficit Deficiency)
---------- ------- ---------- ------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January
31, 1996............ -- $ -- 26,322,105 $ 19 $ -- $ -- $ -- $ (670) $ (651)
Issuance of Series A
preferred stock for
cash and note
receivable.......... 11,520,000 1,920 -- -- -- (20) -- -- 1,900
Conversion of
convertible
promissory notes and
accrued interest
into Series A
preferred stock..... 3,616,590 603 -- -- -- -- -- -- 603
Issuance of Series A
preferred stock upon
exercise of
warrants............ 3,075,000 512 -- -- -- -- -- -- 512
Issuance of common
stock upon exercise
of stock options.... -- -- 226,500 4 -- -- -- -- 4
Issuance of common
stock for cash, net
of repurchases...... -- -- 1,616,511 17 -- -- -- -- 17
Issuance of common
stock upon exercise
of warrants......... -- -- 1,500,000 1 -- -- -- -- 1
Net loss............ -- -- -- -- -- -- -- (2,274) (2,274)
---------- ------- ---------- ---- ------- ----- -------- -------- -------
Balances at January
31, 1997............ 18,211,590 3,035 29,665,116 41 -- (20) -- (2,944) 112
Payment received on
notes receivable.... -- -- -- -- -- 20 -- -- 20
Issuance of Series A
preferred stock upon
exercise of
warrants............ 100,050 17 -- -- -- -- -- -- 17
Issuance of Series B
preferred stock net
of issuance costs of
$39................. 9,999,999 14,961 -- -- -- -- -- -- 14,961
Issuance of common
stock upon exercise
of options, net of
repurchases......... -- -- 8,297,670 136 -- -- -- -- 136
Issuance of Series B
preferred stock
warrants in
connection with
long-term debt...... -- 104 -- -- -- -- -- -- 104
Net loss............ -- -- -- -- -- -- -- (7,587) (7,587)
---------- ------- ---------- ---- ------- ----- -------- -------- -------
Balances at January
31, 1998............ 28,311,639 18,117 37,962,786 177 -- -- -- (10,531) 7,763
Issuance of Series A
preferred stock upon
exercise of
warrants............ 104,550 17 -- -- -- -- -- -- 17
Issuance of Series B
preferred stock..... 235,998 348 -- -- -- -- -- -- 348
Issuance of common
stock upon exercise
of stock options,
net of repurchases.. -- -- 1,201,896 749 -- (318) -- -- 431
Issuance of common
stock upon exercise
of warrants......... -- -- 18,861 1 -- -- -- -- 1
Deferred stock
compensation........ -- -- -- -- 16,753 -- (16,753) -- --
Amortization of
deferred stock
compensation........ -- -- -- -- -- -- 2,297 -- 2,297
Net loss............ -- -- -- -- -- -- -- (17,408) (17,408)
---------- ------- ---------- ---- ------- ----- -------- -------- -------
Balances at January
31, 1999............ 28,652,187 $18,482 39,183,543 $927 $16,753 $(318) $(14,456) $(27,939) $(6,551)
========== ======= ========== ==== ======= ===== ======== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(2,274) $(7,587) $(17,408)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 236 525 940
Amortization of deferred stock compensation....... -- -- 2,297
Issuance of preferred stock upon conversion of
interest payable................................. 56 -- --
Changes in operating assets and liabilities:
Accounts receivable, net......................... (682) (4,966) (8,777)
Other current assets............................. (35) (52) (1,340)
Other assets..................................... (10) (39) (59)
Accounts payable................................. 193 1,222 1,025
Accrued compensation............................. (1) 569 244
Other accrued liabilities........................ 724 232 4,138
Deferred revenue................................. 1,420 7,421 15,625
------- ------- --------
Net cash used in operating activities........... (373) (2,675) (3,315)
------- ------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment............... (943) (1,855) --
------- ------- --------
FINANCING ACTIVITIES:
Payment received on stockholder note receivable... -- 20 --
Repayment of convertible notes.................... (250) -- --
Issuance of long-term debt........................ 400 3,000 --
Repayment of long-term debt....................... (56) (498) --
Principal payments under capital lease
obligations...................................... -- -- (319)
Proceeds from issuance of common stock, net of
repurchases...................................... 22 136 432
Proceeds from issuance of preferred stock......... 2,412 14,978 365
------- ------- --------
Net cash from financing activities.............. 2,528 17,636 478
------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 1,212 13,106 (2,837)
Cash and cash equivalents at beginning of year..... 328 1,540 14,646
------- ------- --------
Cash and cash equivalents at end of year........... $ 1,540 $14,646 $ 11,809
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest............ $ 40 $ 43 $ 361
======= ======= ========
Supplemental disclosures of noncash financing
activity:
Conversion of principal portion of convertible
notes into shares of Series A preferred stock.... $ 547 $ -- $ --
======= ======= ========
Issuance of Series A preferred stock for
stockholder note receivable....................... $ 20 $ -- $ --
======= ======= ========
Issuance of Series B preferred stock warrants in
connection with long-term debt.................... $ -- $ 104 $ --
======= ======= ========
Issuance of debt upon conversion of customer
deposit included in deferred revenue.............. $ -- $ -- $ 1,122
======= ======= ========
Equipment acquired under capital lease
obligations....................................... $ -- $ -- $ 2,820
======= ======= ========
Deferred stock compensation related to options
granted........................................... $ -- $ -- $ 16,753
======= ======= ========
Issuance of common stock for stockholder notes
receivable........................................ $ -- $ -- $ 318
======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1999
(1) Significant Accounting Policies:
Nature of Business and Basis of Presentation
Portal Software, Inc. or Portal, formerly Portal Information Network, Inc., a
California corporation, was incorporated in 1994. Portal markets and supports
real-time customer management and billing software, or CM&B software, for
providers of Internet-based services. Portal's software is a comprehensive
solution that is designed to meet the complex, mission-critical provisioning,
accounting, reporting and marketing needs of providers of Internet-based
services. Portal markets its products worldwide through a combination of a
direct sales force and distribution partners. Substantially all of Portal's
license revenues are derived from sales of its Infranet product.
Portal has incurred operating losses to date and, at January 31, 1999, had an
accumulated deficit of $27.9 million and a working capital deficit of $9.2
million. Portal's activities have been primarily financed through private
placements of equity securities. Portal may need to raise additional capital
through the issuance of debt or equity securities. Such financing may not be
available on terms satisfactory to Portal, if at all.
Principles of Consolidation
The consolidated financial statements include the accounts of Portal and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
License revenues are comprised of fees for multiyear or perpetual licenses
which are primarily derived from contracts with corporate customers and
resellers. Revenue from license fees is recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
Portal obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable. For electronic delivery, the
software is considered to have been delivered when Portal has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee
is collected. Revenue on arrangements with customers who are not the ultimate
users (primarily resellers) is not recognized until the product is delivered to
the end user.
Services revenues are primarily comprised of revenue from systems integration
or other consulting fees, maintenance agreements and training. Arrangements
that include software services are evaluated to determine whether those
services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software services are
not considered essential, the revenue allocable to the software services is
recognized as the services are performed. Portal generally considers software
services essential, unless the software is paid for before the services
commence and the services are limited to training or minimal installation.
Maintenance agreements provide technical support and include the right to
unspecified upgrades on an if-and-when-available basis. Maintenance revenue is
deferred and recognized on a straight-line basis as services revenue over the
life of the related agreement, which is typically one year. Customer advances
and billed amounts due from customers in excess of revenue recognized are
recorded as deferred revenue.
F-7
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Revenue Recognition (continued)
Portal adopted Statement of Position 97-2, Software Revenue Recognition, or
SOP 97-2, and Statement of Position 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition, or SOP 98-4, as of
February 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing
revenue on software transactions and supersede SOP 91-1, Software Revenue
Recognition. The adoption of SOP 97-2 and SOP 98-4 did not have a material
impact on Portal's financial results. However, full implementation guidelines
for this standard have not yet been issued. Once available, the current revenue
accounting practices may need to change and such changes could affect Portal's
future revenues and results of operations.
In December 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, or SOP 98-9. SOP 98-
9 amends SOP 98-4 to extend the deferral of the application of certain passages
of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before
March 15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. Portal has not yet
determined the effect of the final adoption of SOP 98-9 on its future revenues
and results of operations.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on Portal's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by Portal between the completion
of the working model and the point at which the product is ready for general
release have been insignificant. Therefore, through January 31, 1999, Portal
has charged all such costs to research and development expense in the period
incurred.
Concentration of Credit Risk
Portal sells its software and services to customers consisting mainly of
North American and European Internet service providers and enhanced service
developers. Portal performs ongoing credit evaluations of its customers and
does not require collateral. Portal maintains an allowance for potential credit
losses and such losses have been within management's expectations. During the
years ended January 31, 1998 and 1999, Portal added approximately $50,000 and
$1.4 million to its allowance for doubtful accounts. Write-offs of
uncollectible accounts totaled $0.5 million for the year ended January 31,
1999. There were no bad debt charges or credits during the year ended
January 31, 1997.
Two different customers accounted for 36% and 47% of total revenue during the
years ended January 31, 1997 and 1998. No individual customer accounted for
greater than 10% of total revenue for the year ended January 31, 1999.
Segment Information
In June 1997, the Financial Accounting Standards Board or FASB issued
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information," or FAS 131, effective for
financial statements for periods beginning after December 15,
F-8
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Segment Information (continued)
1997. FAS 131 establishes standards for the way that public business
enterprises report financial and descriptive information about reportable
operating segments in annual financial statements and interim financial reports
issued to stockholders. Portal adopted FAS 131 effective February 1, 1998.
Portal operates solely in one segment, the development and marketing of CM&B
software, and therefore Portal is not impacted by the adoption of FAS 131.
Portal's foreign offices consist of sales, marketing and support activities
through its foreign subsidiaries and an overseas reseller network. Operating
losses generated by the foreign operations of Portal and their corresponding
identifiable assets were not material in any period presented.
Portal's export revenue represented 13%, 15% and 27% of total revenues in the
years ending January 31, 1997, 1998 and 1999. All of the export sales to date
have been denominated in U.S. dollars and were derived from sales to Europe and
Asia-Pacific. Total export revenues for these years were $0.4 million, $1.1
million and $4.4 million to customers in Europe and $0.3 million, $0.4 million
and $2.7 million to customers in the Asia-Pacific region.
Fair Value of Financial Instruments
The fair value of notes receivable is estimated by discounting the future
cash flows using the current interest rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The carrying value of the notes receivable approximated its fair
value.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to Portal for debt
instruments with similar terms, degrees of risk, and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
Cash and Cash Equivalents
Portal considers all highly liquid, low-risk debt instruments with an
original maturity at the date of purchase of three months or less to be cash
equivalents. The carrying amount for cash and cash equivalents approximates
their fair value at January 31, 1998 and 1999. Portal generally invests its
cash in money market accounts with major financial institutions.
Portal classifies, at the date of acquisition, its marketable securities into
available-for-sale categories in accordance with the provisions of the FASB's
Statement of Financial Accounting Standards No.115, "Accounting for Certain
Investments in Debt and Equity Securities". Currently, Portal classifies its
securities as available-for-sale, which are reported at fair market value, with
the related unrealized gains and losses included in stockholders' equity.
Unrealized and realized gains and losses were not material in the periods
presented.
Depreciation and Amortization
Depreciation on office and computer equipment and furniture is computed using
the straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the related lease term or their estimated useful lives, typically
four years.
F-9
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those estimates.
Net Loss Per Common Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", or FAS 128, for all periods presented.
Following the guidance given by the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock that
has been issued or granted for nominal consideration prior to the anticipated
effective date of the initial public offering must be included in the
calculation of basic and diluted net loss per common share as if these shares
had been outstanding for all periods presented. To date, Portal has not issued
or granted shares for nominal consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the consolidated
statements of operations, has been computed for the year ended January 31, 1999
as described above, and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss........................................... $(2,274) $(7,587) $(17,408)
======= ======= ========
Basic and diluted:
Weighted-average shares of common stock
outstanding...................................... 27,587 34,087 38,902
Less: Weighted-average shares subject to
repurchase....................................... (15,155) (13,301) (9,371)
------- ------- --------
Weighted-average shares used in computing basic and
diluted net loss per share........................ 12,432 20,786 29,531
======= ======= ========
Basic and diluted net loss per share............... $ (0.18) $ (0.37) $ (0.59)
======= ======= ========
Pro forma:
Net loss.......................................... $(17,408)
========
Shares used above................................. 29,531
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)...................................... 28,553
--------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 58,084
========
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.30)
========
</TABLE>
F-10
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Net Loss Per Common Share (continued)
Portal has excluded all convertible preferred stock, warrants for convertible
preferred stock, outstanding stock options, and shares subject to repurchase
from the calculation of diluted loss per common share because all such
securities are antidilutive for all periods presented. The total numbers of
shares excluded from the calculations of diluted net loss per share was
31,971,954, 38,259,900, and 40,185,846 for the years ended January 31, 1997,
1998 and 1999. Such securities, had they been dilutive, would have been
included in the computations of diluted net loss per share using the treasury
stock method. See Note 6 for further information on these securities.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. Unaudited pro forma stockholders' equity at January 31, 1999, as
adjusted for the assumed conversion of convertible preferred stock based on the
shares of convertible preferred stock outstanding at January 31, 1999, is
disclosed on the consolidated balance sheet.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", or FAS 123, encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. Portal has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for its stock options plans. See the pro forma
disclosures of applying FAS 123 included in Note 6.
Comprehensive Loss
Portal adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", or FAS 130, at January 31, 1999. Under FAS
130, Portal is required to display comprehensive income and its components as
part of the financial statements. Other comprehensive income includes certain
changes in equity that are excluded from net income (loss). Specifically, FAS
130 requires unrealized holding gains and losses on available-for-sale
securities, to be included in accumulated other comprehensive income. Portal
has no material components of other comprehensive loss and, accordingly, the
comprehensive loss is the same as net loss for all periods presented.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", or FAS
133. Portal is required to adopt FAS 133 for the year ending January 31, 2001.
FAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because Portal currently holds no derivative financial instruments
and does not currently engage in hedging activities, adoption of FAS 133 is
expected to have no material impact on Portal's financial condition or results
of operations.
F-11
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", or SOP 98-1. SOP 98-
1 requires that entities capitalize certain costs related to internal use
software once certain criteria have been met. Portal is required to implement
SOP 98-1 for the year ending January 31, 2000. Adoption of SOP 98-1 is expected
to have no material impact on financial condition or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," or SOP 98-5, SOP 98-5 requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all start-
up costs that were capitalized in the past must be written off when SOP 98-5 is
adopted. Portal expects that the adoption of SOP 98-5 will not have a material
impact on its financial position or results of operations. Portal will be
required to implement SOP 98-5 for the year ending January 31, 2000.
(2) Property and Equipment
Property and equipment is recorded at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
January 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Office and computer equipment............................... $2,947 $4,970
Furniture................................................... 576 1,237
Leasehold improvements...................................... 212 348
------ ------
3,735 6,555
Less accumulated depreciation and amortization.............. 1,198 2,138
------ ------
Property and equipment, net................................. $2,537 $4,417
====== ======
</TABLE>
Included in property and equipment at January 31, 1998 and 1999 were assets
acquired under capital lease obligations with a cost of approximately $25,000
and $2.8 million. Accumulated depreciation related to the assets acquired under
capital lease totaled $3,000 and $0.3 million at January 31, 1998 and January
31, 1999.
(3) Long-Term Debt
In July 1997, Portal entered into a $3.0 million note payable agreement with
a financial institution to finance working capital. The agreement was
subsequently amended in February 1999 to change the installment payment dates.
The note, bearing an interest rate at 10.75% per annum, is payable in three
installments of $1.5 million, $0.5 million, and $1.0 million on February 19,
1999, March 31, 1999, and April 30, 1999. In connection with these notes,
Portal issued warrants to the lender to purchase 130,098 shares of Series B
preferred stock at an exercise price of $1.50 per share (see Note 6).
(4) Convertible Promissory Notes
In February through December 1995, Portal issued convertible promissory notes
in the aggregate principal amount of $0.8 million to private investors. In
April through June 1996, convertible notes in the amount of $0.5 million plus
accrued interest of $55,765 were exchanged for
F-12
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Convertible Promissory Notes (continued)
3,616,590 shares of Series A preferred stock at a price of $0.17 per share and
convertible notes in the amount of $0.3 million plus accrued interest of
$16,163 were repaid.
Warrants to purchase 1,500,000 shares of common stock at an exercise price of
$0.001 per share were issued in connection with the original issuance of the
convertible notes in 1995. These warrants were exercised during the fiscal year
ended January 31, 1997.
In December 1998, Portal entered into an agreement with a customer to convert
$1.1 million from a deposit into a note payable. The note, bearing an interest
rate of 10% per annum, is due on November 30, 1999.
(5) Commitments
Operating Leases
Portal leases eight office facilities under noncancelable operating leases
that expire at various dates through March 2000. Portal also rents certain
property and equipment under operating leases. Rental expense for all operating
leases was $386,000, $740,000, and $1,610,000 for fiscal 1997, 1998, and 1999.
Future minimum lease payments as of January 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending January 31,
2000................................................................ $1,474
2001................................................................ 1,049
2002................................................................ 1,044
2003................................................................ 1,070
2004................................................................ 732
------
Total minimum lease payments......................................... $5,369
======
</TABLE>
Capital Lease Obligations
Portal leases certain furniture, computers, and equipment under noncancelable
capital leases. Obligations under capital leases represent the present value of
future noncancelable rental payments under various lease agreements.
Future minimum lease payments under capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending January 31,
2000................................................................ $ 668
2001................................................................ 856
2002................................................................ 902
2003................................................................ 496
------
Total minimum payments............................................... 2,922
Less amount representing interest.................................... (421)
------
Present value of future payments..................................... 2,501
Less current portion................................................. (479)
------
Long-term portion.................................................... $2,022
======
</TABLE>
F-13
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity
Convertible Preferred Stock
A summary of convertible preferred stock is as follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------------------------- ----------------------------------
Liquidation Liquidation
Authorized Outstanding Preference Authorized Outstanding Preference
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 18,900,000 18,311,640 $ 3,051,940 18,900,000 18,416,190 $ 3,069,365
Series B................ 10,800,000 9,999,999 14,999,998 10,800,000 10,235,997 15,353,995
---------- ---------- ----------- ---------- ---------- -----------
29,700,000 28,311,639 $18,051,938 29,700,000 28,652,187 $18,423,360
========== ========== =========== ========== ========== ===========
</TABLE>
At January 31, 1999, 20,000,000 shares of preferred stock were authorized.
Subsequent to the offering, 5,000,000 shares of preferred stock will be
authorized. (See Note 8).
The holders of Series A and B preferred stock are entitled to noncumulative
dividends of 8% of original issue price per share, per annum in preference and
priority to any payment of any dividend on common stock, when and as declared
by the board of directors. The holders of Series A and B preferred stock are
also entitled to liquidation preferences of $0.17 and $1.50 per share and all
declared but unpaid dividends in preference to common stock in the event of any
liquidation, dissolution, or winding up of Portal. No dividends have been
declared as of January 31, 1999.
Each share of preferred stock is convertible into one share of common stock,
subject to certain antidilution provisions, and will automatically convert upon
a public offering of Portal's common stock if the aggregate proceeds exceed
$7.5 million and the offering price is at least $10.00 per share.
Each share of preferred stock votes equally with shares of common stock on an
as-converted basis. Under certain protective provisions, a majority vote of the
existing preferred stockholders, voting together as one class, is required to
make certain capitalization adjustments, such as modifying the authorization,
preference, or class of stock or to effect a significant corporate transaction
such as a merger or dissolution of Portal.
Common Stock
Portal has issued shares of common stock which are subject to Portal's right
to repurchase at the original issuance price upon the occurrence of certain
events, as defined in the agreement relating to the sale of such stock. The
repurchase rights lapse ratably over a period of one to four years from the
date of issuance. At January 31, 1998 and 1999, approximately 14,713,647 and
6,510,846 shares were subject to repurchase. Of the shares subject to
repurchase, 8,428,914 and 5,947,011 shares were issued upon the exercise of
options under the 1995 Stock Option Plan. In the event that a stockholder
negotiates to sell all or part of the stock to a third party, Portal has a
right of first refusal to repurchase that stock at the negotiated price.
At January 31, 1999, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock................................. 28,652,187
Exercise of outstanding stock options......................... 5,596,200
Shares of common stock available for grant under the 1995
Stock Option/Stock Issuance Plan............................. 925,842
Exercise of preferred and common stock warrants outstanding... 583,698
----------
35,757,927
==========
</TABLE>
F-14
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity (continued)
Warrants
Warrants to purchase 31,362 shares of common stock for a price of $0.017 per
share were issued in connection with bridge loan financing in December 1995. As
of January 31, 1999, warrants to purchase 18,861 shares were exercised and
warrants to purchase 12,501 shares are outstanding. The warrants expire in
January 2003 and the value ascribed to the warrants is immaterial for financial
statement purposes.
Warrants to purchase 3,620,700 shares of Series A preferred stock at a price
of $0.17 per share were issued in connection with the issuance of Series A
preferred stock in March 1996. During the years ended January 31, 1997, 1998
and 1999, 3,075,000, 100,050 and 104,550 shares were exercised. At January 31,
1999, there were warrants outstanding to purchase 341,100 shares of Series A
preferred stock which expire in April 1999. The value ascribed to these
warrants is immaterial for financial statement purposes.
Warrants to purchase 230,097 shares of Series B preferred stock for a price
of $1.50 per share were issued in connection with the issuance of notes payable
and the signing of capital lease agreements in July 1997. None of these
warrants have been exercised and all shares were outstanding at January 31,
1999. The Series B preferred stock warrants expire in September 2003. The
warrants were appraised at the date of issuance and additional interest expense
of $104,000 was recorded. This amount was deferred and is being amortized to
interest expense over the term of the notes. During the year ended January 31,
1999, $38,310 of the additional interest expense was amortized.
Stock Options
During the year ended January 31, 1996, Portal adopted its 1995 Stock
Option/Stock Issuance Plan, or the Plan which authorizes the board of directors
to grant incentive stock options or nonqualified stock options to employees,
officers, and directors of Portal. The Plan allows for the grant of incentive
stock options to employees and grant of nonstatutory stock options to eligible
participants.
The option price is not less than 100% or 85% of the fair value on the date
of the grant as determined by the board of directors for incentive stock
options and nonqualified stock options, respectively, except for options
granted to a person owning greater than 10% of the total voting power of
Portal, for which the exercise price of the options must not be less than 110%
of the fair value at the time of grant. Options generally become exercisable
upon grant subject to repurchase rights in favor of Portal until vested. Shares
generally vest over a period of no more than five years. Options may be granted
with different vesting terms at the discretion of the board of directors.
Options are exercisable for a term of ten years after the date of grant except
those options granted to a person owning greater than 10% of the total voting
power of stock of Portal, which are exercisable for a term of five years after
the date of grant. In the event of a change in control in which options granted
under the Plan are not assumed, the options will accelerate and vest in full
and existing repurchase rights will lapse.
F-15
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity (continued)
Stock Options (continued)
A summary of Portal's stock option activity and related information follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 1,667,268 $0.01 891,684 $0.02
Options granted.................. 9,270,915 $0.02 6,891,000 $1.39
Options exercised................ (9,211,974) $0.02 (2,036,484) $0.43
Options canceled................. (834,525) $0.02 (150,000) $1.28
----------- ----------
Outstanding at end of year....... 891,684 $0.02 5,596,200 $1.53
=========== ==========
Exercisable at end of year....... 891,684 $0.02 5,596,200 $1.53
=========== ==========
Weighted-average fair value of
options granted................. $0.01 $0.36
</TABLE>
At January 31, 1998 and 1999, 8,428,914 and 5,947,011 shares which had been
issued upon exercise of options were subject to repurchase. At January 31, 1998
and 1999, options to acquire 50,193 and 139,473 shares were vested but not
exercised.
Exercise prices for options outstanding as of January 31, 1999 and the
weighted-average remaining contractual life are as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
------------------------------------
Weighted-
Average
Number Remaining Weighted-
Range of Outstanding at Contractual Average
Exercise January 31, Life Exercise
Prices 1999 (In years) Price
-------- -------------- ----------- ---------
<S> <C> <C> <C>
$0.001-$0.02 410,349 8.7 $0.02
$0.02-$0.33 484,500 9.2 $0.33
$0.34-$0.67 1,556,601 9.3 $0.67
$0.68-$1.33 762,000 9.5 $1.33
$1.34-$1.67 361,650 9.7 $1.67
$1.68-$2.67 1,768,950 9.8 $2.67
$2.68-$4.00 252,150 9.9 $4.00
---------
5,596,200 9.5 $1.53
=========
</TABLE>
During the year ended January 31, 1999, in connection with the grant of
certain share options to employees, Portal recorded deferred stock compensation
of $16.8 million representing the difference between the exercise price and the
deemed fair value of Portal's common stock on the date such stock options were
granted. Such amount is included as a reduction of stockholders' equity (net
capital deficiency) and is being amortized by charges to operations on a graded
vesting method. In fiscal 1999, Portal recorded amortization of deferred stock
compensation expense of approximately $2.3 million. At January 31, 1999, Portal
had a total of approximately $14.5 million remaining to be amortized over the
corresponding vesting period of each respective option, generally four years.
The amortization expense relates to options awarded to employees in all
operating expense categories. This amount has not been separately allocated to
these categories.
F-16
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity (continued)
Accounting for Stock-Based Compensation
As discussed in Note 1, Portal has elected to follow APB Opinion No. 25 and
related interpretations in accounting for its employee and director stock-based
awards because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock-based awards. Under APB Opinion
No. 25, Portal does not recognize compensation expense with respect to such
awards if the exercise price equals or exceeds the fair value of the underlying
security on the date of grant and other terms are fixed.
The fair value for these awards was estimated at the date of grant using the
minimum value options pricing model. This model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because Portal's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. The fair value of
options granted during the years ended January 31, 1997, 1998, and 1999 was
determined using the minimum value method with a risk-free interest rate of
6.0%, an expected life of six years, and a dividend yield of zero.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Portal's pro
forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported..................................... $(2,274) $(7,587) $(17,408)
Pro forma ...................................... (2,277) (7,607) (17,861)
Basic and diluted net loss per share:
As reported..................................... $ (0.18) $ (0.37) $ (0.59)
Pro forma....................................... (0.18) (0.37) (0.60)
</TABLE>
(7) Income Taxes
Portal's provision for income taxes of approximately $0.7 million for the
year ended January 31, 1999 consists of alternative minimum taxes, foreign
withholding and local income taxes. The reconciliation of income tax expense
(benefit) attributable to continuing operations computed at the U.S. federal
statutory rates to income tax expense (benefit) for the fiscal years ended
January 31, 1997, 1998, and 1999 is as follows (in thousands):
F-17
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Income Taxes (continued)
<TABLE>
<CAPTION>
Year Ended January
31,
-----------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate.... $(773) $(2,579) $(5,676)
Loss for which no tax benefit is currently
recognizable..................................... 773 2,579 5,676
Alternative minimum tax........................... -- -- 500
Foreign income and withholding taxes.............. -- -- 215
----- ------- -------
Total............................................. $ -- $ -- $ 715
===== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of Portal's deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
January 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,275 $ --
Tax credit carryforwards................................ 396 1,053
Deferred revenue........................................ 2,437 8,980
Accruals and reserves not currently deductible.......... 292 1,679
Other, net.............................................. -- 848
------- --------
Total deferred tax assets................................ 4,400 12,560
Valuation allowance...................................... (4,400) (12,560)
------- --------
Net deferred tax assets.................................. $ -- $ --
======= ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the deferred tax assets as of January 31, 1999
and 1998, has been established to reflect these uncertainties. The change in
the valuation allowance was a net increase of approximately $8.2 million and
$3.1 million for the years ended January 31, 1999 and 1998.
As of January 31, 1999, Portal had federal research and development tax
credit carryforwards of approximately $0.5 million, which will expire at
various dates from 2012 through 2019, if not utilized. In addition, Portal had
federal alternative minimum tax credit carryforwards of approximately $0.5
million which have an unlimited carryforward period.
Utilization of tax credit carryforwards may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in expiration of tax credit carryforwards before
full utilization.
F-18
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Subsequent Events (Unaudited)
1995 Stock Option/Stock Issuance Plan
In February 1999, the board of directors approved an amendment to the 1995
Stock Option/Stock Issuance Plan to increase the number of shares authorized
for issuance by 6,000,000 shares. This increase was subsequently approved by
the stockholders in April 1999.
1999 Stock Incentive Plan
In February 1999, the board of directors approved the adoption of the 1999
Stock Incentive Plan. This was approved by the stockholders in April 1999. A
total of 16,122,042 shares of common stock have been reserved for issuance
under the 1999 Stock Incentive Plan based on the number of shares of common
stock available for grant under the 1995 Stock Option/Stock Issuance Plan at
January 31, 1999; the number of options outstanding under the 1995 Stock
Option/Stock Issuance Plan as of January 31, 1999; and an additional 3,600,000
shares of common stock available for future issuance. The price at which the
options to purchase common stock may be issued is the fair market value of
Portal's common stock at the close of the previous business day.
1999 Employee Stock Purchase Plan
In February 1999, the board of directors approved the adoption of Portal's
1999 Employee Stock Purchase Plan. This was approved by the stockholders in
April 1999. A total of 1,800,000 shares of common stock has been reserved for
issuance under the 1999 Purchase Plan. The 1999 Purchase Plan permits eligible
employees to acquire shares of Portal's common stock through periodic payroll
deductions of up to 15% of total compensation. No more than 1,250 shares may be
purchased on any purchase date per employee. Each offering period will have a
maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of Portal's common
stock on the first day of the applicable offering period or on the last day of
the respective purchase period. The initial offering period will commence on
the effectiveness of the initial public offering and will end on the last
business day of May, 2001.
Line of Credit
On April 15, 1999, Portal entered into a line of credit with Imperial Bank
under which Portal may borrow up to $5 million. Amounts borrowed under this
line of credit bear interest at a rate of Imperial Bank's prime rate plus 0.5%
and mature on April 13, 2000.
Reincorporation, Amendment to the Articles of Incorporation and Stock Split
During February 1999, Portal's board of directors authorized the
reincorporation of the Company in the state of Delaware. This reincorporation
is to be effective upon shareholder approval which took place on April 29,
1999. Upon reincorporation, Portal will be authorized to issue 250,000,000
shares of common stock, $0.001 par value and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. The board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock.
In April 1999, Portal's board of directors approved a three-for-one split of
Portal's common and preferred stock. The stock split took place on April 29,
1999. All share and per share amounts in the accompanying consolidated
financial statements have been adjusted retroactively.
F-19
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Subsequent Events (Unaudited) (continued)
Agreement with Andersen Consulting
On April 12, 1999, Portal agreed to enter into a strategic alliance with
Andersen Consulting under which Andersen Consulting will provide services to
Portal, the parties will expand their existing marketing alliance and will work
closely together to expand their customer service and marketing relationship.
Under this arrangement, Andersen Consulting will purchase up to 400,000 shares
of common stock from Portal in a private placement concurrent with Portal's
initial public offering at the initial public offering price, less the
underwriting discount.
Under this agreement, Portal will pay Andersen Consulting for its services a
minimum services fee in cash of $2.8 million and a cash settled put for 200,000
of the shares to be purchased by Andersen Consulting. This put guarantees a
closing value of $6.0 million at the end of the first day of trading for these
200,000 shares. Portal will pay Andersen Consulting in cash for any differences
between the closing value of these shares and $6.0 million.
Portal anticipates recording the fair value of the put of approximately $4.0
million at April 12, 1999, the date Portal and Andersen Consulting entered into
the arrangement. The value of the put was determined using the Black-Scholes
model using a risk-free interest rate of 6.3%, an expected life of one month
and a volatility factor of 1.00. The final value of the put will be determined
at the end of the first trading day of Portal's common stock. Any change in
fair value of the liability at balance sheet dates prior to the initial public
offering and at the closing of the first day of trading will be reported as a
gain or loss in the respective periods.
The total of the minimum cash payment of $2.8 million and the initial fair
value of the put, approximately $4.0 million, will be classified as a prepaid
service asset and will be amortized systematically over the period of the
service agreement, which is anticipated to be between three and five years.
F-20
<PAGE>
UNDERWRITING
Portal and the underwriters named below will enter into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter will severally agree to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse
First Boston Corporation, BancBoston Robertson Stephens Inc. and Hambrecht &
Quist LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .............................................. 1,440,000
Credit Suisse First Boston Corporation............................. 640,000
BancBoston Robertson Stephens Inc. ................................ 560,000
Hambrecht & Quist LLC.............................................. 560,000
Advest, Inc........................................................ 76,000
Dain Rauscher Wessels.............................................. 76,000
a division of Dain Rauscher Incorporated
A.G. Edwards & Sons, Inc........................................... 140,000
EVEREN Securities, Inc............................................. 140,000
Jefferies & Company, Inc........................................... 76,000
SG Cowen Securities Corporation.................................... 140,000
SoundView Technology Group, Inc.................................... 76,000
Wit Capital Corporation............................................ 76,000
---------
Total............................................................ 4,000,000
=========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 600,000
shares from Portal to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Portal. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
Paid by Portal
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ 0.98 $ 0.98
Total................................................. $3,920,000 $4,508,000
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.55 per share from the initial public offering price. Any
of these securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $0.10
per share from the initial public offering price. If all the shares are not
sold at the initial offering price, the representatives may change the offering
price and the other selling terms.
Portal has agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This agreement does not apply to
any existing employee benefit plans. See "Shares Eligible for Future Sale" for
a discussion of certain transfer restrictions.
U-1
<PAGE>
Prior to this offering, there has been no public market for the shares. The
initial public offering price was negotiated among Portal and the
representatives. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, was
Portal's historical performance, estimates of the business potential and
earnings prospects of Portal, an assessment of Portal's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PRSF".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
At the request of Portal, the underwriters have reserved up to 450,000 shares
of common stock for sale, at the initial public offering price, to directors,
officers, employees and friends of Portal through a directed share program. The
number of shares of common stock available for sale to the general public in
the public offering will be reduced to the extent these persons purchase these
reserved shares.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
Portal estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, is approximately $1.3
million.
Portal has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
[DESCRIPTION OF ARTWORK]
[FAST TIME-TO-MARKET WITH NEW SERVICES DIAGRAM]
[A diagram, in the shape of steps, depicting Portal's Infranet Platform
representing Object APIs; Access Services, including Basic Dial-Up, ISDN,
xDSL, Roaming, Dedicated Internet Protocol Access, ATM and Frame Relay and
Cable Modem; Consumer Services, including Personal Web Pages, Online Gaming,
IP Telephony, Information Services and Content and Personal Finance Services;
and Business Services, including Web Site Hosting, VPN, IP Fax, Audio/Video
Conference and Application Hosting.]
INSIDE BACK COVER
The inside back cover of the prospectus has a caption centered across the
top of the page which reads "Infrastructure Software for Internet-Based
Services." Directly below the caption is a sentence which reads, "Portal
offers the software foundation for providers of Internet-based services to
rapidly deploy a wide range of new services, speeding time to market."
Along the right side of the back cover reading from bottom to top vertically
is the phrase "No Limits." "No Limits" is embedded in a red stripe which runs
from the bottom to the top of the page vertically.
In the center of the back cover there is a large blue circle. Contained
within the large blue circle is a medium red circle. Contained within the
medium red circle is a small white circle. Each smaller circle cuts out a
portion of the next large size circle. The medium and small circles are not
centered within the large circle; rather, they move further towards the top of
the circle towards what would be 12 o'clock if it were a clock. The small
white circle contains the Portal logo with the phrase "Real Time No Limits"
below the Portal logo. The medium red circle is cut into four parts, each part
which contains one type of Portal's customers and which reads counterclockwise
within the medium red circle: "Internet Service Providers," "Emerging
Communications Providers," "Traditional Telecommunications Providers" and
"Content Providers." The large blue circle is divided into three parts, each
part which contains a description of three main types of providers which
deploy Portal's software and which reads counterclockwise within the large
blue circle: "Access Services," "Consumer Services" and "Business Services."
Below each of the captions is a horizontal list which details which specific
services may be deployed by Internet-based service providers within that main
type of service. The bullet points below "Access Services" read: "Dial-Up,"
"Leased-Line," "xDSL," "Roaming" and "Cable Modem." The bullet points below
"Consumer Services" read "Personal Web Pages," "On-line Gaming," "IP
Telephony," "Information Services" and "Financial Services." The bullet points
below "Business Services" read "Web Site Hosting," "Virtual Private Networks,"
"IP Fax," "Video Conference" and "Application Hosting."
<PAGE>
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No dealer, salesperson or any other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 33
Management............................................................... 48
Certain Transactions..................................................... 58
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 66
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information................................................... 68
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
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Through and including May 30, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
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4,000,000 Shares
Portal Software, Inc.
Common Stock
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[LOGO OF PORTAL SOFTWARE, INC. APPEARS HERE]
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Goldman, Sachs & Co.
Credit Suisse First Boston
BancBoston
Robertson Stephens
Hambrecht & Quist
Representatives of the Underwriters
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