<PAGE>
As filed with the Securities and Exchange Commission on August 30, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PORTAL SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7375 77-0369737
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
---------------
20883 Stevens Creek Boulevard
Cupertino, California 95014
(408) 343-4400
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
---------------
Mr. John E. Little
President and Chief Executive Officer
Portal Software, Inc.
20883 Stevens Creek Boulevard
Cupertino, California 95014
(408) 343-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
J. Stephan Dolezalek, Esq. Kevin P. Kennedy, Esq.
Timothy R. Curry, Esq. SHEARMAN & STERLING
David A. Makarechian, Esq. 1550 El Camino Real
Elizabeth A.R. Yee, Esq. Menlo Park, California 94025
BROBECK, PHLEGER & HARRISON LLP (650) 330-2200
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
(650) 424-0160
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
---------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 5,750,000 $51.3125 $295,046,875 $82,023.04
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 750,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933, as amended, and based on the average of the high and low prices of
the common stock reported on the Nasdaq National Market on August 27, 1999.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary prospectus is not complete and +
+may be changed. These securities may not be sold until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus is not an offer to sell nor does it seek an offer to buy +
+these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated August 30, 1999.
5,000,000 Shares
Portal Software, Inc.
[LOGO OF PORTAL APPEARS HERE]
Common Stock
-----------
Portal Software, Inc. is offering 2,000,000 shares to be sold in the
offering. The selling stockholders identified in this prospectus are offering
an additional 3,000,000 shares. Portal will not receive any of the proceeds
from the sale of shares by the selling stockholders.
Portal's common stock is traded on the Nasdaq National Market under the
symbol "PRSF". On August , 1999 the last reported sale price for the common
stock on the Nasdaq National Market was $ per share.
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 price to public.............................. $ $
Underwriting discount................................ $ $
Proceeds, before expenses, to Portal................. $ $
Proceeds, before expenses, to the selling
stockholders........................................ $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 750,000 shares from Portal at the initial price to public less the
underwriting discount.
-----------
The underwriters expect to deliver the shares in New York, New York on ,
1999.
Goldman, Sachs & Co.
BancBoston Robertson Stephens
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
Hambrecht & Quist
-----------
Prospectus dated , 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.
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 130
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.
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
3
<PAGE>
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 with and into Portal
Information Network, Inc. In October 1997, Portal Information Network, Inc.
changed its name to Portal Software, Inc. Portal Software, Inc. reincorporated
in Delaware in April 1999. 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(TM), Real Time No Limits(TM), Infranet FreeServ(TM) and
Infranet DNA(TM) 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>
<CAPTION>
<S> <C>
Common stock offered by Portal........................ 2,000,000 shares
Common stock offered by the selling stockholders. .... 3,000,000 shares
Common stock to be outstanding after the offering .... 77,440,381 shares
Use of proceeds....................................... For general corporate
purposes, working
capital, including sales
and marketing
activities, product
development and support
and capital
expenditures. See "Use
of Proceeds". Portal
will not receive any
proceeds from the sale
of common stock by any
selling stockholders.
Nasdaq National Market symbol......................... PRSF
</TABLE>
The common stock outstanding after this offering excludes:
. 9,562,830 shares of common stock issuable upon exercise of stock options
and warrants outstanding as of July 31, 1999 at a weighted average
exercise price of $7.09 per share
. 4,028,872 shares of common stock available for grant under our 1999 Stock
Incentive Plan 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 Note 6 of Notes to Consolidated Financial Statements.
Summary Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Year Ended January 31, Ended July 31,
-------------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
----------- -------- -------- -------- -------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $ 1,517 $ 1,862 $ 5,045 $ 9,416 $ 26,669 $ 8,353 $35,975
Total costs and
expenses............... 1,717 2,347 7,299 16,802 43,797 15,145 46,274
Loss from operations.... (200) (485) (2,254) (7,386) (17,128) (6,792) (10,299)
Net loss................ (197) (535) (2,274) (7,587) (17,408) (6,656) (6,310)
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.30) $(0.12) $ (0.10)
======== ======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 58,084 55,687 66,244
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
July 31, 1999
--------------------
Actual As Adjusted
-------- -----------
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................. $ 71,044 $
Working capital............................................ 84,847
Total assets............................................... 139,898
Long-term obligations, net of current portion.............. 2,119 2,119
Stockholders' equity....................................... 95,502
</TABLE>
The consolidated balance sheet data is set forth on an actual basis and as
adjusted to reflect the sale of 2,000,000 shares of common stock in this
offering at the initial price to public of per share and after deducting the
estimated underwriting discount and the estimated offering expenses. See "Use
of Proceeds" and "Capitalization".
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 predict our business because we have a limited history
operating as a provider of CM&B software
Our results of operations for the six months ended July 31, 1999 contained in
this prospectus are not necessarily indicative of our results for the fiscal
year ending January 31, 2000 or any other future period. Moreover, Portal has a
relatively brief operating history as a provider of CM&B software and had no
meaningful license revenue until 1996. Therefore, Portal will experience 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 prove 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
In order to become profitable, we must increase our revenues. 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 $6.3 million for the six months ended July 31, 1999,
$17.4 million for fiscal year 1999, $7.6 million for fiscal year 1998 and $2.3
million for fiscal year 1997. 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 any increase in 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;
. our ability to develop and attain market acceptance of enhancements to
Infranet and new products and services;
. delays in introducing new products and services;
6
<PAGE>
. 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 generally 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.
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
7
<PAGE>
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 commercial acceptance of Infranet, and it is
uncertain to what extent 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. Our future revenues will also depend on our customers licensing
software for additional applicants or for additional subscribers. Their failure
to do so could harm our business.
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 and our ability to increase revenues in the future
depend considerably upon the growth and productivity of our direct sales force
which has historically generated a majority of our license revenues. This
productivity and growth will depend to a large degree on our success in
recruiting, training and retaining additional direct salespeople. There is a
shortage of direct sales personnel with the skills and expertise necessary to
sell our products. 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, because we currently rely on indirect sales for a significant
portion of our market opportunities, 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".
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
8
<PAGE>
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 quarterly revenue is generated from a limited number of customers and 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 July 31,
1999, we had more than 412 employees, compared to a total of 242 employees on
January 31, 1999. 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. Although we have entered into a lease for new facilities for
our headquarters in Cupertino, California, we expect that we will have to
continue 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 six months ended July 31, 1999 and the year ended January 31, 1999,
we derived approximately 31% and 27% of our revenue, respectively, from sales
outside North America. 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;
. difficulties in staffing and managing foreign operations;
. longer sales and payment cycles;
. greater difficulties in collecting accounts receivable;
9
<PAGE>
. 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 currently have offices in a number of foreign locations, including
Australia, France, Germany, Hong Kong, Japan, Spain and the United Kingdom and
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 or collection of receivables more
difficult. 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. 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. 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.
Others may develop technologies that are similar or superior to our technology.
Moreover, as the number of competitors in our industry segments grow and the
functionality of products in different industry segments overlaps, we expect
that our software products may in the future become subject to third party
infringement claims. Some of our competitors in the market for CM&B software
may have filed or may intend to file patent applications covering 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. Any litigation, brought
by us or by others, could be time-consuming and costly and could divert the
attention of our technical and management personnel. In
10
<PAGE>
addition, litigation could cause product shipment delays or require us to
develop non-infringing technology or enter into royalty or licensing
agreements. These 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, 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. Computer
software such as ours always contains undetected errors. 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 significant 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, particularly if the damages
relate to Year 2000 liability 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, damaging our reputation 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".
Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of Infranet
Concern over, and problems associated with the impact of the occurrence of
the Year 2000 on our software products, internal systems, customers, suppliers
and the overall software industry could affect our future operating results in
several ways. Errors or defects that affect the operation of our software could
result in:
. delay or loss of revenue;
. cancellation of customer contracts;
11
<PAGE>
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.
We are still in the process of completing our Year 2000 readiness plans,
tests and analyses 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 previously undetected errors or
defects associated with Year 2000 date functions. Furthermore, our testing to
date has been limited to the current version of Infranet and two prior releases
of Infranet. Several of our customers may continue to use versions of Infranet
that predate these versions of the product. We may not identify all Year 2000
failures in our partners' products. We have attempted to ascertain which
release or releases of our partners' products are Year 2000 compliant.
To date, Portal has received compliance information from most of its material
partners. However, Portal may be unable to obtain compliance information from
all of these partners. Moreover, our partners may detect errors in their
products after previously indicating that their products are Year 2000
compliant. Such revelations by our partners, have occurred in the past and may
occur in the future; and these revelations have and could cause us to make
changes in our products in response. 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 are in the process of evaluating and assessing Year 2000 compliance
of many of 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
which could cause an increase in short-term demand from those customers and a
possible decrease in future demand. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
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
12
<PAGE>
delayed or lost sales and increased costs and could harm our business in the
short-term.
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 % of our outstanding common stock
following the completion of this offering. In addition, Cisco, which owns
3,000,000 shares of common stock, 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 and Selling Stockholders" and "Description of
Capital Stock--Private Placement".
We are subject to anti-takeover provisions that could delay or prevent an
acquisition of our company
Our board of directors has 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, our 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, we have entered into an agreement with Cisco that could delay or
prevent us from being acquired. Subject to certain limitations, if we enter
into negotiations with certain third parties regarding a potential merger,
acquisition or other business combination, we 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 our notification to prepare
its own offer for consideration by us and our board of directors. See
"Description of Capital Stock--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.
13
<PAGE>
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 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,
which was recently acquired by ADC Telecommunications, Inc.; emerging providers
of Internet-specific billing software, such as Belle Systems S/A, Solect
Technology Group and TAI Corporation, which was recently acquired by Convergys
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 use to compete more effectively. 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.
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
14
<PAGE>
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, particularly qualified sales 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 may experience 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
Our management has broad discretion as to how to spend the proceeds from this
offering 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".
The price of our common stock has been, and will be, volatile
The trading price of our common stock has fluctuated in the past and will
fluctuate in the future. This future fluctuation could be 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.
15
<PAGE>
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, including ours, and which have often been unrelated to the
operating performance of these companies or our company. Decreases in the
trading price of stocks of technology companies are often precipitious.
Moreover, of the 75,440,381 currently outstanding shares, approximately
29,169,064 shares are currently subject to lockup agreements in connection with
this offering that prohibit their sale in the public market until , 1999.
In addition, approximately 38,183,176 shares are currently subject to lockup
agreements in connection with our initial public offering that prohibit their
sale in the public market until November 2, 1999. If our stockholders sell
substantial amounts of our common stock, including shares issued upon the
exercise of outstanding options and warrants, in the public market, the market
price of our common stock could fall.
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, in the
public market following this offering, the market price of our common stock
could fall. These 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, we will have outstanding
77,440,381 shares of common stock, based upon 75,440,381 shares outstanding as
of July 31, 1999, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after July 31, 1999.
Of these shares, the 5,000,000 shares sold in this offering will be freely
tradable. The 4,000,000 shares sold in our initial public offering are freely
tradable. Of the remaining shares, 38,183,176 shares, which are currently
subject to lockup agreements related to our initial public offering, eligible
for sale in the public market beginning November 2, 1999 and 29,169,064 shares,
which are currently subject to lockup agreements related to this offering,
eligible for sale in the public market beginning , 1999.
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 within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are not historical facts but
rather are based on current expectations, estimates and projections about our
business and 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 2,000,000 shares
of common stock offered by Portal will be $ million (approximately $
million if the underwriters' over-allotment option is exercised in full), at
the public offering price of $ per share after deducting the underwriting
discount and estimated offering expenses. Portal is conducting this offering
primarily to increase its working capital. Portal intends to use the net
proceeds for general corporate purposes, including sales and marketing
activities, product development and support and capital expenditures.
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 will be invested in short-term, interest-bearing,
investment grade securities. Portal will not receive any proceeds from the sale
of stock by the selling stockholders. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
PRICE RANGE OF COMMON STOCK
Portal common stock has been quoted on the Nasdaq National Market under the
symbol PRSF since Portal's initial public offering in May 1999. Prior to such
time, there was no public market for the common stock of Portal. The following
table sets forth, for the periods indicated, the high and low sale prices per
share of the common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
Fiscal Year 2000 ------ ------
<S> <C> <C>
Second Quarter (from May 6, 1999).............................. $59.93 $27.75
Third Quarter (to August 27, 1999)............................. $51.31 $35.75
</TABLE>
On August , 1999, the reported last sale price of the common stock on the
Nasdaq National Market was $ per share. As of August 3, 1999, there were
approximately 599 stockholders of record of the common stock.
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 July 31,
1999, on an actual basis; and as adjusted to reflect the net proceeds from the
sale of 2,000,000 shares of common stock offered by Portal in this offering at
the offering price of $ per share 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>
July 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands,
except share and
per share amounts)
<S> <C> <C>
Current portion of long-term obligations.................. $ 479 $ 479
======= =======
Long-term obligations, excluding current portion.......... $ 2,119 $ 2,119
Stockholders' equity:
Convertible preferred stock: 5,000,000 shares, $0.001 par
value per share, authorized, actual and as adjusted;
no shares, issued and outstanding, actual and as
adjusted................................................. -- --
Common stock: 250,000,000 shares, $0.001 par value per
share, authorized, actual and as adjusted; 75,440,381
shares, issued and outstanding, actual; 77,440,381
shares, issued and outstanding, as adjusted.............. 75
Additional paid-in capital................................ 139,546
Net unrealized loss on investments and other.............. (66) (66)
Notes receivable from stockholders........................ (359) (359)
Deferred stock compensation............................... (9,445) (9,445)
Accumulated deficit....................................... (34,249) (34,249)
------- -------
Stockholders' equity...................................... 95,502
------- -------
Total capitalization...................................... $97,621 $
======= =======
</TABLE>
The number of shares of common stock outstanding as of July 31, 1999
excludes:
. 9,562,830 shares of common stock issuable upon exercise of stock options
and warrants outstanding at a weighted average exercise price of $7.09
per share;
. 4,028,872 shares of common stock available for grant under the 1999 Stock
Incentive Plan; and
. 1,800,000 shares of common stock reserved for issuance under Portal's
1999 Employee Stock Purchase Plan.
See "Management--Benefit Plans", "Description of Capital Stock" and Note 6 of
Notes to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value (deficit) of Portal at July 31, 1999, was
approximately $91,692,000, or $1.22 per share. 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 shares of common stock offered in this offering at an offering
price of $ per share, and after deducting the underwriting discount and
estimated offering expenses, Portal's net tangible book value at July 31, 1999
would have been $ , or $ per share. This represents an immediate
increase in net
tangible book value of $ per share to existing stockholders and an
immediate dilution of $ 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
2,000,000 shares in this offering, 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 price to public............................................ $
Net tangible book value (deficit) per share prior to the
offering........................................................ $ 1.22
Increase per share attributable to new investors.................
------
Pro forma net tangible book value per share after the offering.....
-----
Dilution per share to new investors................................ $
=====
</TABLE>
The following table summarizes, as of July 31, 1999, 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 price to public of $ per share (before deducting the estimated
underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration
------------------ ----------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 75,440,381 97.4% $ % $
New investors................ 2,000,000 2.6
---------- ----- --------- -----
Totals....................... 77,440,381 100.0% $ 100.0%
========== ===== ========= =====
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of July 31, 1999 and exclude:
. 9,562,830 shares of common stock issuable upon exercise of stock options
and warrants outstanding at a weighted average exercise price of $7.09
per share;
. 4,028,872 shares of common stock available for grant under the 1999 Stock
Incentive Plan; and
. 1,800,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan.
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 Note 6 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 ended 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 consolidated
statement of operations data for the six month periods ended July 31, 1998 and
1999 and the balance sheet data as of July 31, 1998 and 1999 are derived from
unaudited financial statements of Portal Software, Inc. included elsewhere in
this prospectus and include all adjustments consisting only of normal,
recurring adjustments, which we consider necessary for a fair presentation of
that data. 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
and warrants, since their effect would be antidilutive. Pro forma basic and
diluted net loss per share reflect the conversion of preferred stock into
common stock from the date of original issuance. 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>
Six Months
Year Ended January 31, Ended July 31,
------------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
----------- ------ -------- -------- --------- ------- -------
(unaudited) (unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License fees.......... $ -- $ -- $ 3,944 $ 6,892 $ 13,536 $ 4,061 $21,715
Services.............. 1,517 1,862 1,101 2,524 13,133 4,292 14,260
------ ------ -------- -------- --------- ------- -------
Total revenues....... 1,517 1,862 5,045 9,416 26,669 8,353 35,975
------ ------ -------- -------- --------- ------- -------
Costs and expenses:
Cost of license fees.. -- 13 62 970 458 146 506
Cost of services...... 791 267 518 2,152 9,425 2,874 8,990
Research and
development.......... 432 517 2,527 5,628 11,252 4,667 10,456
Sales and marketing... -- 44 2,371 5,436 14,112 5,141 16,157
General and
administrative....... 494 1,506 1,821 2,616 6,253 1,987 5,154
Amortization of
deferred stock
compensation......... -- -- -- -- 2,297 330 5,011
------ ------ -------- -------- --------- ------- -------
Total costs and
expenses............ 1,717 2,347 7,299 16,802 43,797 15,145 46,274
------ ------ -------- -------- --------- ------- -------
Loss from operations.... (200) (485) (2,254) (7,386) (17,128) (6,792) (10,299)
Interest income
(expense) and other
income, net............ 3 (50) (20) (201) 435 151 4,805
------ ------ -------- -------- --------- ------- -------
Loss before income
taxes.................. (197) (535) (2,274) (7,587) (16,693) (6,641) (5,494)
Provision for income
taxes.................. -- -- -- -- (715) (15) (816)
------ ------ -------- -------- --------- ------- -------
Net loss................ $ (197) $ (535) $ (2,274) $ (7,587) $ (17,408) $(6,656) $(6,310)
====== ====== ======== ======== ========= ======= =======
Basic and diluted net
loss per share ........ $(0.10) $(0.16) $ (0.18) $ (0.37) $ (0.59) $ (0.24) $ (0.13)
====== ====== ======== ======== ========= ======= =======
Shares used in computing
basic and diluted net
loss per share......... 2,017 3,394 12,432 20,786 29,531 27,234 50,224
====== ====== ======== ======== ========= ======= =======
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.30) $ (0.12) $ (0.10)
========= ======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 58,084 55,687 66,244
========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
January 31, July 31,
------------------------------------------- -----------
1995 1996 1997 1998 1999 1999
----------- ------ ------ ------- ------- -----------
(unaudited) (in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents ........... $ 16 $ 328 $1,540 $14,646 $11,809 $71,044
Short-term investments
and restricted short-
term investments....... -- -- -- -- -- 38,359
Working capital
(deficit).............. (373) (1,045) (651) 6,581 (9,150) 84,847
Restricted long-term
investments............ -- -- -- -- -- 2,259
Total assets............ 549 881 3,527 23,125 32,344 139,898
Long-term obligations,
net of current
portion................ 170 98 447 1,500 2,022 2,119
Stockholders' equity
(net capital
deficiency)............ (26) (652) 111 7,763 (6,551) 95,502
</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. When software services are considered essential,
license revenue under the arrangement is recognized using contract accounting.
Services revenues are primarily comprised of revenues from systems
integration or other consulting activities, maintenance agreements and training
of customers and partners. Portal recognizes services revenues as these
services are performed. 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. Portal has not incurred any shipping,
packaging or documentation costs, as its product has been delivered
electronically over 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, $17.4 million for fiscal year 1999, $6.7 million for the six months ended
July 31, 1998 and $6.3 million for the six months ended July 31, 1999. As of
July 31, 1999, Portal had an accumulated deficit of $34.2 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 and related services to achieve and maintain profitability.
Portal has generated a substantial portion of its historical Infranet
revenues from approximately 130 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>
Six Months
Year Ended Ended
January 31, July 31,
------------------ --------------
1997 1998 1999 1998 1999
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.......................... 78% 73% 51% 49% 60%
Services.............................. 22 27 49 51 40
--- --- --- ----- -----
Total revenues...................... 100 100 100 100 100
--- --- --- ----- -----
Costs and expenses:
Cost of license fees.................. 1 10 2 2 1
Cost of services...................... 10 23 35 34 25
Research and development.............. 50 60 42 56 29
Sales and marketing................... 47 58 53 62 45
General and administrative............ 36 28 23 24 15
Amortization of deferred stock
compensation......................... -- -- 8 4 14
--- --- --- ----- -----
Total costs and expenses............ 144 179 163 182 129
Loss from operations.................... (44) (79) (63) (82) (29)
Interest income (expense) and other
income, net............................ -- (2) 1 2 13
--- --- --- ----- -----
Loss before income taxes................ (44) (81) (62) (80) (16)
Provision for income taxes.............. -- -- (3) -- (2)
--- --- --- ----- -----
Net loss................................ (44)% (81)% (65)% (80)% (18)%
=== === === ===== =====
</TABLE>
22
<PAGE>
Six Months Ended July 31, 1998 and 1999
Revenues
Total revenues were $36.0 million in the six months ended July 31, 1999, an
increase of approximately $27.6 million or 331% over the comparable period in
1998. License fees revenues increased as a percentage of total revenues in the
six months ended July 31, 1999 compared to the six months ended July 31, 1998
primarily because license fees revenue growth exceeded services revenue growth.
This was due to increased license sales as a result of the maturization of the
Infranet product and the expansion of the sales and marketing operations. No
customer accounted for more than 10% of total revenue for the six months ended
July 31, 1999 or 1998.
License fees totaled $21.7 million in the six months ended July 31, 1999, an
increase of approximately $17.7 million or 435% over the comparable period in
1998. The increase in license fees was primarily due to continued expansion in
marketing activities and growth in Portal's sales force as well as greater
demand for and the acceptance of Infranet.
In order to meet the needs of its customers, 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. Implementations of special features may in the future result in the
deferral of revenues until the features are delivered. However, as Infranet
matures, Portal expects that fewer orders will require features not yet
available.
Services revenues were $14.3 million in the six months ended July 31, 1999,
an increase of approximately $10.0 million or 232% over the comparable period
in 1998. The increase in services revenues resulted from the increase in
support and maintenance service fees related to Portal's growing customer base
and the renewal of maintenance contracts. In addition, increased demand for
Portal's consulting and training services to meet the increasingly complex
demands of Portal's customers and its expanding customer base contributed to
this increase.
North American revenues, which are defined by Portal as revenues from the
United States and Canada, were $25.0 million in the
six months ended July 31, 1999, an increase of approximately $17.9 million or
252%, over the comparable period in 1998. The increase in North American
revenues was primarily due to expanded marketing activities in North America
and growth in sales force as well as greater acceptance of Infranet and growth
in Portal's sales forces in the North American market.
International revenues for Europe and Intercontinental, which is defined by
Portal as Asia-Pacific, Japan and Latin America, totaled $11.0 million in the
six months ended July 31, 1999, an increase of approximately $9.8 million or
775% over the comparable period ended July 31, 1998. European revenues were
$8.6 million in the six months ended July 31, 1999, an increase of
approximately $7.7 million or 924% over the comparable period in 1998.
Intercontinental revenues were $2.5 million in the six months ended July 31,
1999, an increase of approximately $2.0 million or 482% over the comparable
period in 1998. The increase in international revenues was primarily due to
growth in Portal's direct sales force and increased marketing efforts worldwide
including the establishment of a sales presence in France, Germany, Spain and
Singapore during the period as well as the establishment of Portal's European
headquarters in the United Kingdom in April 1999.
International revenues represented 31% of total revenues in the six months
ended July 31, 1999, compared with approximately 15% in the comparable period
in 1998. In the six months ended July 31, 1999, revenues from Europe were 24%
of total revenues and revenues from Intercontinental were 7% of total revenues.
23
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended July 31,
-------------------- Percent
1998 1999 Change
--------- ---------- -------
(in thousands,
except percentages)
Geographical Revenues:
<S> <C> <C> <C>
North America...................................... $ 7,095 $ 24,964 252%
Percentage of total revenues..................... 85% 69%
International
Europe............................................ 835 8,551 924%
Percentage of total revenues..................... 10% 24%
Intercontinental.................................. 423 2,460 482%
Percentage of total revenues..................... 5% 7%
--------- ---------- ----
Total international................................ 1,258 11,011 775%
Percentage of total revenues..................... 15% 31%
--------- ---------- ----
Total revenues..................................... $ 8,353 $ 35,975 331%
========= ========== ====
</TABLE>
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 the six months ended July 31, 1999, an increase of approximately
$0.4 million or 247% from the comparable period in 1998. The increase in cost
of license fees is primarily due to increased license revenue and increased
resellers' commissions resulting from Portal expanding its base of systems
integrator partners. Gross margin for license fees was approximately 98% in the
six months ended July 31, 1999 compared to approximately 96% in the comparable
period in 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 $9.0 million in the six months ended July 31,
1999, an increase of approximately $6.1 million or 213% over the comparable
period ended July 31, 1998. The increase in cost of services is 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 37% in the six
months ended July 31, 1999 compared to approximately 33% in the comparable
period ended July 31, 1998. The increase in gross margin was primarily due to a
decrease in the use of higher cost third-party personnel as a result of the
hiring of additional consulting employees for the six months ended July 31,
1999. Portal expects cost of services to increase substantially in the next few
quarters as a result of the hiring of additional personnel to meet the
increased demand for services.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs for Portal's development efforts. Research and development expenses were
$10.5 million in the six months ended July 31, 1999, an increase of
approximately $5.8 million or 124% over the comparable period in 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 and product publications
operations. Portal currently believes its investment in research and
development will increase substantially during the remainder of fiscal year
2000. 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
24
<PAGE>
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 $16.2 million in the six months ended July 31,
1999, an increase of approximately $11.0 million or 214% over the comparable
period ended July 31, 1998. The increase was due to a number of factors
including an increase in the number of sales and marketing personnel, the
opening of new sales offices in the United States, Europe and Hong Kong, the
establishment of a European headquarters in the United Kingdom, 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 12 months as
Portal hires additional sales and marketing personnel, increases spending on
advertising and marketing programs and establishes sales offices in additional
North American 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 and human resources as well as facilities and information system expenses
not allocated to other departments. General and administrative expenses were
$5.2 million in the six months ended July 31, 1999, an increase of
approximately $3.2 million or 159% over the comparable period in 1998. The
increase was primarily due to an increase in the number of general and
administrative personnel and an increase in legal and accounting costs incurred
in connection with business activities. Portal expects that general and
administrative expenses will increase substantially over the current fiscal
year as Portal hires additional general and administrative personnel and
continues to incur legal and accounting costs in connection with business
activities.
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 approximately $5.0 million during the six months ended
July 31, 1999 as compared to $0.3 million incurred during the comparable period
in 1998. This compensation expense relates to options awarded to individuals in
all operating expense categories. Total deferred compensation at July 31, 1999
of approximately $9.4 million is being amortized over the vesting periods of
the options using a graded vesting method. The amortization of deferred
compensation currently recorded is estimated to be $8.2 million for the
entirety of fiscal year 2000, $3.7 million in fiscal year 2001, $1.9 million in
fiscal year 2002 and $0.6 million in fiscal year 2003.
Interest Income (Expense) and Other Income, Net
Interest income (expense) and other income, net, includes interest and
dividend income from cash, cash equivalents short and long-term investments
offset by interest on capital leases. Interest income (expense) and other
income, net, was $4.8 million in the six months ended July 31, 1999, an
increase of approximately $4.7 million over the comparable period in 1998. The
increase was primarily due to the one-time, noncash gain of $3.8 million upon
remeasurement of the put option granted to Andersen Consulting which was
settled upon completion of our initial public offering in May 1999, and
interest income from the investment of funds received upon completion of our
initial public offering.
25
<PAGE>
Provision for Income Taxes
The $0.8 million income tax provision shown for the six months ended July 31,
1999, compared with no significant provision for income taxes for the
comparable period in 1998, is the result of foreign withholding taxes on
revenue and taxes on earnings generated from operations in certain foreign
jurisdictions. This increase in the provision for income taxes was primarily
due to an increase in the six months ended July 31, 1999 in foreign license
revenue and foreign corporate income taxes over the comparable period in 1998.
Under Statement of Financial Accounting Standards No. 109 (FAS 109), deferred
tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. FAS 109 provides for the recognition of
deferred tax assets if realization of such assets are more likely than not.
Based on the weight of available evidence, the Company has provided a valuation
allowance against certain deferred tax assets. The Company will continue to
evaluate the realizability of the deferred tax assets on a quarterly basis.
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.
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.
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------- Percent
1998 1999 Change
---------------------- -------
(in thousands,
Geographical Revenues: except percentages)
<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>
26
<PAGE>
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 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 is 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.
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.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs for Portal's development 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 and
product publications operations.
27
<PAGE>
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 $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.
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.
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.
Provision for Income Taxes
The $0.7 million income tax provision shown for the year ended January 31,
1999 is the result of alternative minimum taxes, foreign withholding taxes on
revenue, and tax on earnings generated from operations in certain foreign
jurisdictions.
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.
28
<PAGE>
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------- Percent
1997 1998 Change
----------- ----------- -------
(in thousands,
except percentages)
<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 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 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
29
<PAGE>
research and development personnel necessary to support expanded functionality
of Infranet and increases in Portal's quality assurance and product
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.
30
<PAGE>
Quarterly Results of Operations
The following table presents Portal's operating results for each of the six
quarters in the period ended July 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,
1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- --------
(in thousands, except percentages; unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License fees................ $ 2,185 $ 1,876 $ 3,817 $ 5,658 $ 9,064 $12,651
Services.................... 1,881 2,411 3,414 5,427 6,101 8,159
------- ------- ------- ------- ------- -------
Total revenues............ 4,066 4,287 7,231 11,085 15,165 20,810
------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of license fees........ 60 86 143 169 185 321
Cost of services............ 1,201 1,673 2,232 4,319 4,195 4,795
Research and development.... 2,207 2,460 3,148 3,437 4,285 6,171
Sales and marketing......... 2,000 3,141 4,016 4,955 7,329 8,828
General and
administrative............. 714 1,273 1,439 2,827 2,235 2,919
Amortization of deferred
stock compensation......... 96 234 537 1,430 2,026 2,985
------- ------- ------- ------- ------- -------
Total costs and expenses.. 6,278 8,867 11,515 17,137 20,255 26,019
------- ------- ------- ------- ------- -------
Loss from operations......... $(2,212) $(4,580) $(4,284) $(6,052) $(5,090) $(5,209)
======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License fees................ 54% 44% 53% 51% 60% 61%
Services.................... 46 56 47 49 40 39
------- ------- ------- ------- ------- -------
Total revenues............ 100 100 100 100 100 100
------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of license fees........ 1 2 2 2 1 2
Cost of services............ 30 39 31 39 28 23
Research and development.... 54 57 43 31 28 30
Sales and marketing......... 49 73 56 45 49 42
General and
administrative............. 18 30 20 25 15 14
Amortization of deferred
stock compensation......... 2 6 7 13 13 14
------- ------- ------- ------- ------- -------
Total costs and expenses.. 154 207 159 155 134 125
------- ------- ------- ------- ------- -------
Loss from operations......... (54)% (107)% (59)% (55)% (34)% (25)%
======= ======= ======= ======= ======= =======
</TABLE>
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.
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<PAGE>
Sales and marketing expenses increased by $2.4 million or 48% from the fourth
quarter of fiscal 1999 to the first quarter of fiscal year 2000 and $1.5
million or 21% from the first to the second quarter of fiscal year 2000 due to
growth in headcount, the opening of additional sales offices in the United
States, Europe and Singapore and the establishment of Portal's European
headquarters in the United Kingdom.
Portal's operating results may fluctuate substantially in the future both in
absolute dollars and as a percentage of total revenues 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, cash equivalents and short-term investments totaled $109.4 million at
July 31, 1999, compared to a balance of $11.8 million at January 31, 1999.
Portal generated $5.1 million in cash from operations in the six months ended
July 31, 1999, an increase of $10.2 million over the $5.1 million used in the
comparable period ended July 31, 1998. Amortization of deferred stock
compensation, which is included in the net loss line in the cashflow statement,
but does not require the use of cash, amounted to $5.0 million for the six
months ended July 31, 1999 compared to $0.3 million for the six months ended
July 31, 1998. Net cash from operations in the six months period was primarily
comprised of a $6.3 million loss and a $1.9 million increase in other current
assets, offset by a $4.0 million increase in deferred revenue, a $1.8 million
decrease in accounts receivable and a combined increase in accounts payable and
accrued compensation of $5.7 million.
Portal has continued to make significant investments in equipment. During the
six months ended July 31, 1999, Portal purchased computer servers,
workstations, networking equipment and other capital equipment amounting to
approximately $3.4 million, primarily to further expand its product capability,
increase internal network communication, product demonstration and service
capability. Of this amount, $0.3 million was funded from Portal's equipment
lease line facility.
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 1998 and fiscal
year 1999, Portal also raised an additional $0.1 million and $0.4 million,
respectively, from sales of common stock, primarily upon exercise of stock
options by employees and in fiscal year 1999 $0.4 million from the exercise of
warrants for preferred stock issued in connection with its capital lease line
facility and its term loan. In the six months ended July 31, 1999, Portal
completed an initial public offering which raised approximately $102.4 million,
including sales of stock to Cisco Systems, Inc. and Andersen Consulting. During
the same period, Portal raised an additional $0.5 million from sales of common
stock upon the exercise of stock options by employees and warrants by third
parties.
Historically, 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. Separately, during the six months ended July 31, 1999, Portal repaid an
outstanding $3.0 million term loan with a finance company. The term loan was
collateralized by substantially all of Portal's assets, with the exception of
new equipment purchased using funds provided by the capital lease line
facility. On April 15, 1999, Portal entered into a line of credit with a bank
under which Portal may borrow up to $5.0 million. Amounts borrowed under this
line of credit bear interest at a rate of the bank's prime rate plus 0.5% and
mature on April 13, 2000. Portal had borrowed $1.0 million under the line of
credit, which it used to repay the remaining $1.0 million installment of the
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<PAGE>
term loan which matured in April 1999. The outstanding balance on the line of
credit was repaid in May 1999 from the proceeds of Portal's initial public
offering. Portal also converted a customer deposit for prepaid services into a
$1.1 million short-term liability in fiscal year 1999. This liability bore
interest at a rate of 10% per annum and was repaid in July 1999.
The capital lease line facility comprised the entire amount of the debt
obligations on Portal's balance sheet as of July 31, 1999. The capital lease
line facility includes certain covenants requiring minimum liquidity, tangible
net worth and profitability over time and becomes due immediately if Portal
fails to meet these covenants. Portal is currently, and has always been, in
compliance with these covenants.
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 which were purchased by Andersen Consulting in a private
placement concurrent with Portal's initial public offering. This put guaranteed
a closing value of $6.0 million at the end of the first day of trading. Because
the closing value exceeded $6.0 million, Portal was not required to make any
payment with respect to this put.
In the normal course of business, Portal enters into leases for new or
expanded facilities in both domestic and international locations. In June 1999,
Portal entered into a lease for its worldwide headquarters which will expire in
December 2010. In connection with the lease, Portal will make payments of $0.6
million, $4.5 million, $4.6 million, $4.8 million and $4.9 million in the years
ending January 31, 2000, 2001, 2002, 2003 and 2004, respectively, and a total
of $37.7 million thereafter until expiration of the lease. In connection with
this lease, Portal issued a letter of credit for $2.3 million as a deposit for
the facilities. See Note 5 of the financial statement notes for more
information on lease commitments.
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 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 current version of Infranet and
the two immediately preceding releases. 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 these Infranet releases, when configured, maintained (including the
installation of all maintenance releases and bug fixes) and used in accordance
with its documentation, correctly recognize and properly process Year 2000 date
code and function properly. Portal has no plans to conduct further reviews of
other releases of Infranet and products that are scheduled for obsolescence
prior to the end of the calendar year 1999.
Portal's software runs on several hardware platforms and operating systems,
including
33
<PAGE>
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 plans to contact all partners for which Portal provides integration as
part of Infranet's standard product configuration. In contacting these
partners, Portal has 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 obtaining such information from
all remaining partners. Portal may be unable to obtain compliance information
from all of these partners. Moreover, Portal's partners may detect errors in
their products after previously indicating that their products are Year 2000
compliant. Such revelations by Portal's partners have occurred in the past and
may occur in the future; and these revelations have caused and could cause
Portal to make changes in its products in response. In a newly created test
environment, Portal will review Infranet and interfaces to partner products.
Portal 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.
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 plans to obtain
verification of Year 2000 compliance for its major internal hardware equipment
and software systems by October 1999.
Portal is in the process 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. Year 2000 compliance is complex and is
subject to various uncertainties, including those described in this section and
under "Risk Factors."
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
34
<PAGE>
. 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 adopted on
February 1, 1999 with no material impact on its financial position or results
of operations.
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
adopted SOP No. 98-5 on February 1, 1999 with no material impact on its
financial position or results of operations.
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 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 2002.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. 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 does not
expect the final adoption of SOP 98-9 to have a material impact on its future
revenues and results of operations.
Qualitative and Quantitative Disclosures about Market Risk
Short-term investment portfolio
We do not hold derivative financial instruments in our short-term investment
portfolio. Our short-term investments consist of instruments that meet high
quality standards consistent with our investment policy. This policy dictates
that we diversify our holdings and limit our short-term investments to a
maximum of $5 million to any one issuer. Our policy also dictates that all
short-term investments mature in 24 months or less.
Impact of foreign currency rate changes
During fiscal year 1999, most local currencies of our international
subsidiaries weakened against the U.S. dollar. As of July 31, 1999, the
currency of our Asian subsidiary has strengthened and the currency of our other
subsidiaries have remained essentially stable since the end of our 1999 fiscal
year. Because we translate foreign currencies into U.S. dollars for reporting
purposes, currency fluctuations can have an impact, though generally
immaterial, on our results. We believe that historically our exposure to
currency exchange fluctuation risk has been minimal primarily due to the fact
that all activities are denominated in U.S. dollars. For the six months ended
July 31, 1999, there was an immaterial currency exchange impact from our
intercompany transactions. As of July 31, 1999, we did not engage in foreign
currency hedging activities.
35
<PAGE>
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 130 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, the combination of these 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 may be 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
36
<PAGE>
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
142 million Web users worldwide at the end of 1998. IDC projects this number to
increase to over 502 million by the end of 2003, implying an annual growth rate
of over 29%. 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 core product,
Infranet, 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 a number of optional additional features to Infranet as well as two
versions of Infranet designed to address the unique requirements of the
internet telephony and free internet services markets.
Infranet IPT is 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.
Infranet FreeServ is a customer management solution that enables businesses
to rapidly develop and bring to market free Internet-based services. Free
Internet-based service is a rapidly expanding market in which providers are
offering free unlimited access to the Internet, free e-mail capabilities and
other Internet-based services. Portal believes that it is well positioned to
allow these providers the ability to upgrade their systems to add and bill for
value-added services in the future. With Infranet FreeServ, providers of free
Internet services can register customers and capture valuable demographic
information in real time, quickly authenticate and authorize service usage and
effectively track, manage and analyze their customers' activities.
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.
[CHART OF THE INFRANET INTEGRATING STAGES OF A CUSTOMER LIFECYCLE]
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.
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.
Infranet FreeServ
Introduced in June 1999, Infranet FreeServ, is a customer management solution
that enables businesses to rapidly develop and bring to market free Internet-
based services. With Infranet FreeServ, providers of free Internet-based
services can register customers and capture valuable demographic information in
real-time; quickly authenticate and authorize service usage and effectively
track, manage and analyze their customers' activities.
In addition, Infranet FreeServ can be upgraded at any time to include real-
time billing functionality, whenever the provider decides to offer subscribers
value-added, fee-based services. Portal's complete real-time customer
management and billing solution can support both free and paid services within
the same installation enabling providers to easily transition their subscriber
base to fee-based pricing options when desired.
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Pricing
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.
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. 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.
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The following diagram illustrates Portal's approach to partnerships by
listing representative 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.
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 purchased 380,184 shares of common stock
from Portal in a placement concurrent with Portal's initial public
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offering and Portal agreed to pay Andersen Consulting a services fee of $2.8
million. See "Description of Capital Stock--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 are jointly developing and marketing integrated hardware
and software products targeted at providers of Internet-based services. Under
this arrangement, Portal is Cisco's strategic CM&B solution provider and Cisco
will be Portal's strategic solution provider of equipment for next generation
IP networks.
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, in March 1999, Portal
introduced Infranet DNA, a technology solution for distributing an Infranet
implementation geographically. This allows providers to offer uninterrupted
services access and usage even when a main Infranet database is down or
inaccessible. Finally, 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 France, Germany, Australia, Canada, China, Hong
Kong, Japan, Spain 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
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<PAGE>
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 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 July 31, 1999, Portal had
licensed Infranet to approximately 130 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 the six months ended July 31, 1998 and 1999 and in fiscal year 1999, no
customer accounted for 10% or more of Portal's total revenues. In the fiscal
year ended January 31, 1998, Compuserve accounted for more than 10% of Portal's
total revenues, and Sprint accounted for more than 10% of Portal's total
revenues in the fiscal year ended January 31, 1997.
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
49
<PAGE>
year ended January 31, 1999, $5.6 million for the fiscal year ended January 31,
1998, $2.5 million for the fiscal year ended January 31, 1997, $10.5 million
for the six months ended July 31, 1999 and $4.7 million for the six months
ended July 31, 1998. As of July 31, 1999, approximately 149 employees were
engaged in research and development activities.
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, which was recently acquired by Lucent, LHS Group and Saville Systems
which was recently acquired by ADC Telecommunications; emerging providers of
Internet-specific billing software, such as Belle Systems, Solect Technology
and TAI, which was recently acquired by Convergys; and providers of Internet-
based services that develop proprietary systems. Portal also competes with
systems integrators and with internal MIS departments of larger
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 nine 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
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<PAGE>
. 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 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 July 31, 1999, Portal had 412 full-time employees, 79 of whom were
engaged in customer service and support, 121 in sales and marketing, 149 in
engineering, and 62 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 June 1999, Portal entered into a lease of a new Cupertino facility of
approximately 140,000 square feet. Portal plans to begin occupying this
facility in late fiscal year 2000. The lease for this property expires in
December 2010. 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 September 1999 to December 2010. 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
additional office space after that time and may seek additional facilities in
the same geographic area as Cupertino, California.
Legal Proceedings
Portal is not currently a party to any material 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 July 31, 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.............. 52 Chief Financial Officer and Vice President,
Finance
David S. Labuda............. 36 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............ 43 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.
Peterschmidt(1)(2)......... 52 Director
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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<PAGE>
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 April 1999, Mr. Zander has also served as President of Sun Microsystems,
and 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 Micro- systems. 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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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. The board consists 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.
Portal has also established a stock committee, which reviews and approves
stock option grants within certain guidelines established by the compensation
committee for non-executive officer employees. The stock committee currently
consists of Mr. Little.
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 are 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 May 7, 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 342,000 are vested and the balance continues
to vest monthly over 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 Portal's 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>
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 was adopted by the board in
February 1999 and approved by the stockholders in April 1999. The 1999 Stock
Incentive Plan became effective in May 1999. At that time, all outstanding
options under Portal's existing 1995 Stock Option/Stock Issuance Plan were
transferred to the 1999 Stock Incentive Plan, and no further option grants were
or 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 terms as will be in
effect for grants made under the discretionary option grant program of Portal's
1999 Stock Incentive Plan. As of July 31, 1999, options to purchase 9,332,733
shares of common stock were outstanding at an average exercise price of $7.23.
Share Reserve. 13,290,062 shares of Portal's common stock have been
authorized for issuance under the 1999 Stock Incentive Plan. The number of
shares authorized for issuance 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 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.
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<PAGE>
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
are administered by Portal's compensation committee and stock committee. These
committees 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
also has 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 includes 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 has 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 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.
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Change in Control. The 1999 Stock Incentive Plan includes 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 has 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, 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 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.
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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 also has 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 in May 1999. 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 have been 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 has a series of successive offering periods, each
with a maximum duration of 24 months. The initial offering period started May
5, 1999 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
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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 are also 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.
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 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 the event that
Mr. Gaynor's employment is terminated for any reason other than cause during
the first twelve months of his employment, 25% of his options will immediately
vest. 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
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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 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. Portal has obtained 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.
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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 July 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
................... 120,000 $10.00 04/01/99
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
Mitchell L. Gaynor.................. 150,000 $14.00 05/05/99
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 in
April 1999.
<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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Holders of shares of common stock issued upon conversion of preferred stock
are entitled to certain registration rights with respect to the common stock
issued 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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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to Portal with respect to
the beneficial ownership of its common stock as of July 31, 1999 by:
. each stockholder known by Portal to own beneficially more than 5% of its
common stock;
. each director of Portal;
. each of the Named Executive Officers; and
. all current directors and executive officers of Portal as a group; and
. each selling stockholder
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 July 31, 1999, there were
75,440,381 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. 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 July 31,
1999 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>
Number of Shares
Number of Shares Beneficially
Beneficially Owned Owned
Prior to this After the
Offering Shares Offering
Name and Address of Beneficial --------------------- to be -----------------
Owner Number Percentage Sold Number Percentage
------------------------------ ---------- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Accel
Partners(/1/)
428 University Avenue
Palo Alto, CA 94301............ 21,138,756 28.3%
John E. Little.................. 18,983,580 25.4
David S. Labuda(/2/)............ 6,499,356 8.7
Steven R. Sommer(/3/)........... 1,079,796 1.4
Kevin P. Mosher(/4/)............ 675,000 *
Arthur C. Patterson(/1/)........ 21,138,756 28.3
Edward J. Zander(/5/)........... 300,000 *
David C. Peterschmidt(/6/)...... 214,666 *
William T. Coleman III(/7/)..... 216,666 *
Richard C. Spalding(/8/)........ 801,356 1.1
Dong Joo (Karen) Ha(/9/)........ 312,501 *
All current directors and
executive officers as a group
(twelve persons)(/10/)......... 50,307,820 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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(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 539,892 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 278,042 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 121,539 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 99,996 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 99,996 shares of common stock which are subject to Portal's right
of repurchase as to 3,126 shares per month 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 1,242,657 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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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Portal consists of 250,000,000 shares of
common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001
par value. Immediately following the completion of this offering, and assuming
no exercise of the underwriters' over-allotment option, an aggregate of
77,440,381 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 July 31, 1999, there were warrants outstanding to purchase a total of
230,097 shares of common stock warrants at $1.50 per share. These warrants will
expire in September 2003.
Private Placement
In April 1999, Portal entered into strategic alliances and stock purchase
agreements with both Andersen Consulting and Cisco. Concurrent with its initial
public offering, Portal sold 3,000,000 shares of common stock to Cisco and
380,184 shares of common stock to Andersen Consulting. 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 private placement concurrent with our initial public offering in a public
or private sale for a period of one year following the closing of the
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<PAGE>
concurrent placement, except that Andersen Consulting has certain registration
rights in connection with any subsequent registration by Portal of its
securities prior to May 2001 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 offer.
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. Andersen Consulting and Cisco have the following rights
with respect to the registration of their shares of common stock under the
Securities Act. During the period between May 10, 2000 and May 10, 2001, 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 May 10, 2001, 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, are entitled to certain
rights with respect to the registration of the Registrable Securities under 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 the prospectus for its
initial public offering, 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
67
<PAGE>
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 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.
68
<PAGE>
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.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
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, Portal will have 77,440,381 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of options and warrants after July 31, 1999.
Of these shares, the 5,000,000 shares sold in this offering and the 4,000,000
sold in connection with Portal's initial public 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 68,440,381 shares of common stock are "Restricted Securities"
as that term is defined in Rule 144. Of these shares, approximately 29,169,064
shares will be available for sale in the public market following the expiration
of the ninety (90) day lock-up agreement described below, approximately
38,138,176 shares, which are currently subject to lockup agreements in
connection with Portal's initial public offering, will be available for sale in
the public market on November 2, 1999 ( of which are eligible for resale
under Rule 144(k) and of which are eligible for resale under Rule 144
subject to volume limitations as described below including 18,138,756 shares
held by entities affiliated with Accel Partners). If Accel Partners distributes
any of its shares to its limited partners, any shares distributed will not be
subject to the volume limitations under Rule 144 and may be sold under Rule
144(k). In addition, 3,380,184 shares will be available for sale to the public
following the expiration of the one-year lockup period under the stock purchase
agreements entered into in connection with the private placement entered into
in connection with Portal's initial public offering, subject in each case to
restrictions on these sales. In addition, the holders of warrants for 230,097
shares of common stock can exercise these warrants at any time, but these
shares cannot be sold until November 2, 1999. Beginning six months after the
date of the initial public offering prospectus the holders of 33,552,132
restricted shares and the holders of warrants for 230,097 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 could have a material adverse effect on the market price of
the common stock.
In connection with this offering, 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 90 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
70
<PAGE>
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
90-day lock-up period, approximately 29,169,064 shares of common stock will be
available for sale in the public market subject to compliance with Rule 144 or
Rule 701.
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 774,404 shares after giving effect to this
offering) 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.
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 12,683 shares
of Portal's common stock. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Shearman & Sterling, Menlo Park,
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.
71
<PAGE>
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.
We are subject to the informational requirements of the Exchange Act and,
files reports, proxy statements and other information with the SEC. These
reports, proxy statements and other information filed by us can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the SEC's regional
offices located at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036. Copies of this material can also be obtained from the Public Reference
Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also makes electronic filings
publicly available on the Internet within 24 hours of acceptance. Our common
stock is quoted on the Nasdaq National Market. Reports, proxy and information
statements and other information concerning Portal may be inspected at the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
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.
72
<PAGE>
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 first and second paragraphs of Note 6,
as to which the date is April 29, 1999
F-2
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
January 31,
------------------ July 31,
1998 1999 1999
-------- -------- -----------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 14,646 $ 11,809 $ 71,044
Short-term investments........................ -- -- 37,609
Accounts receivable, net of allowance for
doubtful accounts of $50 and $940 at January
31, 1998 and 1999 and $988 at July 31, 1999.. 5,697 14,474 12,705
Restricted short-term investments............. -- -- 750
Other current assets.......................... 100 1,440 5,016
-------- -------- --------
Total current assets......................... 20,443 27,723 127,124
Property and equipment, net.................... 2,537 4,417 7,053
Restricted long-term investments............... -- -- 2,259
Other assets................................... 145 204 3,462
-------- -------- --------
$ 23,125 $ 32,344 $139,898
======== ======== ========
Liabilities and Stockholders' Equity (Net
Capital Deficiency)
Current liabilities:
Accounts payable.............................. $ 1,542 $ 2,567 $ 4,377
Accrued compensation.......................... 903 1,147 4,997
Other accrued liabilities..................... 1,076 5,214 5,120
Current portion of long-term debt............. 1,500 4,122 --
Current portion of capital lease obligations.. -- 479 479
Deferred revenue.............................. 8,841 23,344 27,304
-------- -------- --------
Total current liabilities.................... 13,862 36,873 42,277
Long-term debt................................. 1,500 -- --
Long-term portion of capital lease
obligations................................... -- 2,022 2,119
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; 5,000 shares authorized at July 31,
1999, $0.001 par value, none issued at July
31, 1999; aggregate liquidation preference of
$18,423 at January 31, 1999.................. 18,117 18,482 --
Common stock, no par value, 35,000 shares
authorized at January 31, 1998 and 1999
(250,000 shares, $0.001 par value per share
at July 31, 1999); 39,184, 42,594 and 79,323
shares issued and 38,172, 39,183 and 75,440
shares outstanding at January 31, 1998, 1999
and July 31, 1999............................ 177 927 75
Additional paid-in capital.................... -- 16,753 139,546
Net unrealized loss on investments and other.. -- -- (66)
Notes receivable from stockholders............ -- (318) (359)
Deferred stock compensation................... -- (14,456) (9,445)
Accumulated deficit........................... (10,531) (27,939) (34,249)
-------- -------- --------
Stockholders' equity (net capital
deficiency)................................. 7,763 (6,551) 95,502
-------- -------- --------
$ 23,125 $ 32,344 $139,898
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended January 31, July 31,
-------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees................... $ 3,944 $ 6,892 $ 13,536 $ 4,061 $21,715
Services....................... 1,101 2,524 13,133 4,292 14,260
------- ------- -------- ------- -------
Total revenues................ 5,045 9,416 26,669 8,353 35,975
------- ------- -------- ------- -------
Costs and expenses:
Cost of license fees........... 62 970 458 146 506
Cost of services............... 518 2,152 9,425 2,874 8,990
Research and development....... 2,527 5,628 11,252 4,667 10,456
Sales and marketing............ 2,371 5,436 14,112 5,141 16,157
General and administrative..... 1,821 2,616 6,253 1,987 5,154
Amortization of deferred stock
compensation.................. -- -- 2,297 330 5,011
------- ------- -------- ------- -------
Total costs and expenses...... 7,299 16,802 43,797 15,145 46,274
------- ------- -------- ------- -------
Loss from operations............ (2,254) (7,386) (17,128) (6,792) (10,299)
Interest and other income, net.. 20 39 540 336 1,284
Gain on sale of investment...... -- -- 311 -- --
One-time gain upon expiration of
unexercised put option on
common stock................... -- -- -- -- 3,810
Interest expense................ (40) (240) (416) (185) (289)
------- ------- -------- ------- -------
Loss before income taxes........ (2,274) (7,587) (16,693) (6,641) (5,494)
Provision for income taxes...... -- -- (715) (15) (816)
------- ------- -------- ------- -------
Net loss........................ $(2,274) $(7,587) $(17,408) $(6,656) $(6,310)
======= ======= ======== ======= =======
Basic and diluted net loss per
share.......................... $ (0.18) $ (0.37) $ (0.59) $ (0.24) $ (0.13)
======= ======= ======== ======= =======
Shares used in computing basic
and diluted net loss per
share.......................... 12,432 20,786 29,531 27,234 50,244
======= ======= ======== ======= =======
Pro forma basic and diluted net
loss per share (unaudited)..... $ (0.30) $ (0.12) $ (0.10)
======== ======= =======
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)..... 58,084 55,687 66,244
======== ======= =======
</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>
Net
Convertible Unrealized Notes
Preferred Stock Common Stock Additional Loss on Receivable Deferred
--------------------- ------------------ Paid-In Investments From Stock Accumulated
Shares Amount Shares Amount Capital and Other Stockholders Compensation Deficit
------------ -------- ---------- ------ ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 31,
1996............ -- $ -- 26,322,105 $ 19 $ -- $ -- $ -- $ -- $ (670)
Issuance of
Series A
preferred stock
for cash and
note
receivable...... 11,520,000 1,920 -- -- -- -- (20) -- --
Conversion of
convertible
promissory notes
and accrued
interest into
Series A
preferred
stock........... 3,616,590 603 -- -- -- -- -- -- --
Issuance of
Series A
preferred stock
upon exercise of
warrants........ 3,075,000 512 -- -- -- -- -- -- --
Issuance of
common stock
upon exercise of
stock options... -- -- 226,500 4 -- -- -- -- --
Issuance of
common stock for
cash, net of
repurchases..... -- -- 1,616,511 17 -- -- -- -- --
Issuance of
common stock
upon exercise of
warrants........ -- -- 1,500,000 1 -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (2,274)
------------ -------- ---------- ---- -------- ----- ----- ------- --------
Balances at
January 31,
1997............ 18,211,590 3,035 29,665,116 41 -- -- (20) -- (2,944)
Payment received
on notes
receivable...... -- -- -- -- -- -- 20 -- --
Issuance of
Series A
preferred stock
upon exercise of
warrants........ 100,050 17 -- -- -- -- -- -- --
Issuance of
Series B
preferred stock
net of issuance
costs of $39.... 9,999,999 14,961 -- -- -- -- -- -- --
Issuance of
common stock
upon exercise of
options, net of
repurchases..... -- -- 8,297,670 136 -- -- -- -- --
Issuance of
Series B
preferred stock
warrants in
connection with
long-term debt.. -- 104 -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (7,587)
------------ -------- ---------- ---- -------- ----- ----- ------- --------
Balances at
January 31,
1998............ 28,311,639 18,117 37,962,786 177 -- -- -- -- (10,531)
Issuance of
Series A
preferred stock
upon exercise of
warrants........ 104,550 17 -- -- -- -- -- -- --
Issuance of
Series B
preferred
stock........... 235,998 348 -- -- -- -- -- -- --
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 1,201,896 749 -- -- (318) -- --
Issuance of
common stock
upon exercise of
warrants........ -- -- 18,861 1 -- -- -- -- --
Deferred stock
compensation.... -- -- -- -- 16,753 -- -- (16,753) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 2,297 --
Net loss........ -- -- -- -- -- -- -- -- (17,408)
------------ -------- ---------- ---- -------- ----- ----- ------- --------
Balances at
January 31,
1999............ 28,652,187 18,482 39,183,543 927 16,753 -- (318) (14,456) (27,939)
Issuance of
Series A
preferred stock
upon exercise of
warrants
(unaudited)..... 341,100 58 -- -- -- -- -- -- --
Conversion of
preferred stock
to common stock
upon completion
of initial
public offering
(unaudited)..... (28,993,287) (18,540) 28,993,287 29 18,511 -- -- -- --
Issuance of
common stock
upon initial
public offering
and private
placement
(unaudited)..... -- -- 7,980,599 8 102,360 -- -- -- --
Reincorporation
to Delaware
(unaudited)..... -- -- -- (888) 888 -- -- -- --
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... -- -- (802,506) (1) 916 -- (41) -- --
Issuance of
common stock for
cash
(unaudited)..... -- -- 72,957 -- 118 -- -- -- --
Issuance of
common stock
upon exercise of
warrants
(unaudited)..... -- -- 12,501 -- -- -- -- -- --
Net unrealized
loss on
investments
(unaudited)..... -- -- -- -- -- (105) -- -- --
Translation
adjustment and
other
(unaudited)..... -- -- -- -- -- 39 -- -- --
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- 5,011 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (6,310)
============ ======== ========== ==== ======== ===== ===== ======= ========
Balances at July
31, 1999
(unaudited)..... -- $ -- 75,440,381 $ 75 $139,546 $ (66) $(359) $(9,445) $(34,249)
============ ======== ========== ==== ======== ===== ===== ======= ========
<CAPTION>
Total
Stockholders'
Equity
(Net Capital
Deficiency)
-------------
<S> <C>
Balances at
January 31,
1996............ $ (651)
Issuance of
Series A
preferred stock
for cash and
note
receivable...... 1,900
Conversion of
convertible
promissory notes
and accrued
interest into
Series A
preferred
stock........... 603
Issuance of
Series A
preferred stock
upon exercise of
warrants........ 512
Issuance of
common stock
upon exercise of
stock options... 4
Issuance of
common stock for
cash, net of
repurchases..... 17
Issuance of
common stock
upon exercise of
warrants........ 1
Net loss........ (2,274)
-------------
Balances at
January 31,
1997............ 112
Payment received
on notes
receivable...... 20
Issuance of
Series A
preferred stock
upon exercise of
warrants........ 17
Issuance of
Series B
preferred stock
net of issuance
costs of $39.... 14,961
Issuance of
common stock
upon exercise of
options, net of
repurchases..... 136
Issuance of
Series B
preferred stock
warrants in
connection with
long-term debt.. 104
Net loss........ (7,587)
-------------
Balances at
January 31,
1998............ 7,763
Issuance of
Series A
preferred stock
upon exercise of
warrants........ 17
Issuance of
Series B
preferred
stock........... 348
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... 431
Issuance of
common stock
upon exercise of
warrants........ 1
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 2,297
Net loss........ (17,408)
-------------
Balances at
January 31,
1999............ (6,551)
Issuance of
Series A
preferred stock
upon exercise of
warrants
(unaudited)..... 58
Conversion of
preferred stock
to common stock
upon completion
of initial
public offering
(unaudited)..... --
Issuance of
common stock
upon initial
public offering
and private
placement
(unaudited)..... 102,368
Reincorporation
to Delaware
(unaudited)..... --
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... 874
Issuance of
common stock for
cash
(unaudited)..... 118
Issuance of
common stock
upon exercise of
warrants
(unaudited)..... --
Net unrealized
loss on
investments
(unaudited)..... (105)
Translation
adjustment and
other
(unaudited)..... 39
Amortization of
deferred stock
compensation
(unaudited)..... 5,011
Net loss
(unaudited)..... (6,310)
=============
Balances at July
31, 1999
(unaudited)..... $95,502
=============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended January 31, July 31,
-------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss...................... $(2,274) $(7,587) $(17,408) $ (6,656) $ (6,310)
Adjustments to reconcile net
loss to net cash provided by
(used in)
operating activities:
Depreciation and
amortization................. 236 525 940 399 1,029
Amortization of deferred
stock compensation........... -- -- 2,297 330 5,011
Issuance of preferred stock
upon conversion of interest
payable...................... 56 -- -- -- --
One-time gain upon expiration
of unexercised put option on
common stock................. -- -- -- -- (3,810)
Changes in operating assets
and liabilities:
Accounts receivable, net..... (682) (4,966) (8,777) (1,844) 1,769
Other current assets......... (35) (52) (1,340) (85) (1,921)
Other assets................. (10) (39) (59) 90 (211)
Accounts payable............. 193 1,222 1,025 (234) 1,810
Accrued compensation......... (1) 569 244 233 3,849
Other accrued liabilities.... 724 232 4,138 2,979 (90)
Deferred revenue............. 1,420 7,421 15,625 (282) 3,959
------- ------- -------- -------- --------
Net cash provided by (used
in) operating activities... (373) (2,675) (3,315) (5,070) 5,085
------- ------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of short-term
investments.................. -- -- -- -- (38,732)
Purchases of long-term
investments.................. -- -- -- -- (2,299)
Purchases of property and
equipment.................... (943) (1,855) -- -- (3,354)
------- ------- -------- -------- --------
Net cash provided by (used
in) investing activities... (943) (1,855) -- -- (44,385)
------- ------- -------- -------- --------
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) -- -- (4,122)
Proceeds from line of credit.. -- -- -- -- 1,000
Repayment of line of credit... -- -- -- -- (1,000)
Principal payments under
capital lease obligations,
net of proceeds.............. -- -- (319) 79 (239)
Proceeds from issuance of
common stock, net of
repurchases.................. 22 136 432 106 102,850
Proceeds from issuance of
preferred stock.............. 2,412 14,978 365 128 --
------- ------- -------- -------- --------
Net cash from financing
activities................. 2,528 17,636 478 313 98,489
------- ------- -------- -------- --------
Effect of exchange rate on cash
and cash equivalents.......... -- -- -- -- 46
------- ------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents.......... 1,212 13,106 (2,837) (4,757) 59,235
Cash and cash equivalents at
beginning of period .......... 328 1,540 14,646 14,646 11,809
------- ------- -------- -------- --------
Cash and cash equivalents at
end of period ................ $ 1,540 $14,646 $ 11,809 $ 9,889 $ 71,044
======= ======= ======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid during the period
for interest................. $ 40 $ 43 $ 361 $ 165 $ 190
======= ======= ======== ======== ========
Supplemental disclosures of
non-cash 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 $ 1,311 $ 336
======= ======= ======== ======== ========
Deferred stock compensation
related to options granted... $ -- $ -- $ 16,753 $ 1,963 $ --
======= ======= ======== ======== ========
Issuance of common stock for
stockholder notes
receivable................... $ -- $ -- $ 318 $ -- $ 41
======= ======= ======== ======== ========
Conversion of Series A and
Series B preferred stock to
common stock................. $ -- $ -- $ -- $ -- $18,482
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(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 July 31, 1999, had an
accumulated deficit of $34.2 million. Portal's activities have been primarily
financed through private placements and public offerings 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)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(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 does not
expect the final adoption of SOP 98-9 to have a material impact on its future
revenues or 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 July 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 and the six months ended July 31, 1999,
Portal added approximately $50,000, $1.4 million and $0.1 million to its
allowance for doubtful accounts. Write-offs of uncollectible accounts totaled
$0.5 million for the year ended January 31, 1999 and $0.1 million for the six
months ended July 31, 1999 (none for the year ended January 31, 1998). There
were no bad debt charges or credits during the year ended January 31, 1997.
One customer accounted for 36% of total revenue during the year ended January
31, 1997, and a different customer accounted for 47% of total revenue during
the year ended January 31, 1998. No individual customer accounted for greater
than 10% of total revenue for the year ended January 31, 1999 or the six months
ended July 31, 1998 or 1999.
F-8
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(1) Significant Accounting Policies (continued)
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, 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 and 15% and 31% for the six months
ended July 31, 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 primarily in the Asia-Pacific region. Total export
revenues for the six months ended July 31, 1998 and 1999 were $0.8 million and
$8.6 million to customers in Europe and $0.4 million and $2.5 million to
customers primarily 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, Cash Equivalents, Short-Term and Long-Term Investments
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. Through January 31, 1999, Portal maintained cash and cash
equivalents in money market accounts with major financial institutions for
which the carrying amount approximated its fair value. Upon the completion of
the initial public offering in May 1999 (see Note 6), Portal received
additional cash which is available for investment. At July 31, 1999, cash
equivalents and short-term investments consist primarily of commercial paper,
other debt instruments and money market funds. All short-term investments have
maturity dates from three to 24 months.
Portal classifies, at the date of acquisition, its cash equivalents and
short-term investments as available-for-sale in accordance with the provisions
of the FASB's Statement of Financial Accounting
F-9
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(1) Significant Accounting Policies (continued)
Cash, Cash Equivalents, Short-Term and Long-Term Investments (continued)
Standards No.115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). 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 gains
and losses were not material at January 31, 1998 and 1999. At July 31, 1999,
unrealized losses were $105,000. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
both of which are included in interest income. Realized gains and losses are
recorded using the specific identification method.
The following schedule summarizes the estimated fair value of our cash, cash
equivalents and short-term investments (in thousands):
<TABLE>
<CAPTION>
January 31, January 31, July 31,
1998 1999 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash...................................... $ 433 $ 4,359 $ 6,072
Money market funds........................ 14,213 7,450 7,226
Commercial paper.......................... -- -- 2,996
U.S. Government securities................ -- -- 54,750
------- ------- -------
$14,646 $11,809 $71,044
======= ======= =======
</TABLE>
Short-term investments at July 31, 1999 (unaudited):
<TABLE>
<CAPTION>
Gross Unrealized
----------------------------
Fair
Cost Gain Loss Value
------- ---- ----- -------
<S> <C> <C> <C> <C>
Commercial paper................................. $ 7,504 $-- $ (3) $ 7,501
Corporate notes.................................. 26,960 -- (92) 26,868
Municipal bonds.................................. 4,000 -- (10) 3,990
Restricted investments........................... (750) -- -- (750)
------- --- ----- -------
$37,714 $-- $(105) $37,609
======= === ===== =======
</TABLE>
The estimated fair value of cash, cash equivalents and short-term investments
classified by date of maturity is as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 31, July 31,
1998 1999 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Due within one year......................... $14,646 $11,809 $ 89,886
Due within two years........................ -- -- 19,517
Restricted short-term investments........... -- -- (750)
------- ------- --------
$14,646 $11,809 $108,653
======= ======= ========
</TABLE>
In accordance with FAS 115, Portal classifies all non-restricted short-term
investments as available-for-sale since these securities are available to
support current operations. Restricted short-term investments of $750,000
represent collateral for a surety bond required by a customer contract
F-10
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(1) Significant Accounting Policies (continued)
Cash, Cash Equivalents, Short-Term and Long-Term Investments (continued)
that expires in January of 2000. The restricted short-term investments are not
available to support current operations and consequently classified as held-to-
maturity. As a result, unrealized gains and losses are not recorded. At July
31, 1999, amortized cost approximated fair value.
Restricted long-term investments of $2,259,000 represent collateral for a
$2,250,000 letter of credit issued in lieu of a security deposit for a new
facility lease and consist of corporate bonds maturing over a period of one to
three years. The restricted long-term investments are classified as held-to-
maturity. As a result, unrealized gains and losses are not recorded. At July
31, 1999, amortized cost approximated fair value.
Realized gains and losses from sales of each type of security were immaterial
for all 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 four 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.
Other Assets
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
January
31, July 31,
1998 1999 1999
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Prepaid services--long term portion (see Note 4)......... $ -- $ -- $3,048
Deposits and other....................................... 145 204 414
---- ---- ------
$145 $204 $3,462
==== ==== ======
</TABLE>
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.
Unaudited Interim Financial Information
In the opinion of management, the unaudited interim financial statements as
of July 31, 1999 and for the six month periods ended July 31, 1998 and 1999
have been prepared on the same basis as the annual financial statements and
reflect all adjustments that are necessary for the fair presentation of results
for the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any interim period.
F-11
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(1) Significant Accounting Policies (continued)
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
and the six months ended July 31, 1998 and 1999 as described above, and also
gives effect to the conversion of the convertible preferred stock (using the
if-converted method) from the original date of issuance.
F-12
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(1) Significant Accounting Policies (continued)
Net Loss Per Common Share (continued)
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>
Six months
Year ended January 31, ended July 31,
-------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss......................... $(2,274) $(7,587) $(17,408) $(6,656) $(6,310)
======= ======= ======== ======= =======
Basic and diluted:
Weighted-average shares of
common stock outstanding...... 27,587 34,087 38,902 38,268 55,187
Less: Weighted-average shares
subject to repurchase......... (15,155) (13,301) (9,371) (11,034) (4,963)
------- ------- -------- ------- -------
Weighted-average shares used in
computing basic and diluted
net loss per share............ 12,432 20,786 29,531 27,234 50,224
======= ======= ======== ======= =======
Basic and diluted net loss per
share........................... $ (0.18) $ (0.37) $ (0.59) $ (0.24) $ (0.13)
======= ======= ======== ======= =======
Pro forma:
Net loss....................... $(17,408) $(6,656) $(6,310)
======== ======= =======
Shares used above.............. 29,531 27,234 50,224
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible
preferred stock (unaudited)... 28,553 28,453 16,020
-------- ------- -------
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited).... 58,084 55,687 66,244
======== ======= =======
Pro forma basic and diluted net
loss per share (unaudited).... $ (0.30) $ (0.12) $ (0.10)
======== ======= =======
</TABLE>
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 net per 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
and 41,205,217 and 12,265,850 for the six months ended July 31, 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.
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.
F-13
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(1) Significant Accounting Policies (continued)
Comprehensive Loss
As of January 1, 1998, Portal adopted SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive net income and its components. However, it has no impact on our
net loss or stockholders' equity as presented in our financial statements. SFAS
130 requires foreign currency translation adjustments and changes in the fair
value of available for sale securities to be included in comprehensive net
loss.
The components of comprehensive net loss are as follows (in thousands):
<TABLE>
<CAPTION>
Six months
Year ended ended July 31,
January 31, ----------------
1999 1998 1999
----------- ------- -------
(unaudited)
<S> <C> <C> <C>
Net loss...................................... $(17,408) $(6,656) $(6,310)
Unrealized loss on marketable securities...... -- -- (105)
Change in cumulative translation adjustment... 12 5 39
-------- ------- -------
Comprehensive net loss........................ $(17,396) $(6,651) $(6,376)
======== ======= =======
</TABLE>
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, 2002.
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.
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. Portal adopted SOP No. 98-1 on
February 1, 1999 with no material impact on its financial position 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 adopted SOP
No. 98-5 on February 1, 1999 with no material impact on its financial position
or results of operations.
F-14
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(2) Property and Equipment
Property and equipment is recorded at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
January 31,
------------- July 31,
1998 1999 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Office and computer equipment..................... $2,947 $4,970 $7,929
Furniture......................................... 576 1,237 1,766
Leasehold improvements............................ 212 348 561
------ ------ ------
3,735 6,555 10,256
Less accumulated depreciation and amortization.... 1,198 2,138 3,203
------ ------ ------
Property and equipment, net....................... $2,537 $4,417 $7,053
====== ====== ======
</TABLE>
Included in property and equipment at January 31, 1998 and 1999 and July 31,
1999 were assets acquired under capital lease obligations with a cost of
approximately $25,000, $2.8 million and $3.0 million. Accumulated depreciation
related to the assets acquired under capital lease totaled $3,000, $0.3 million
and $0.7 million at January 31, 1998, January 31, 1999 and July 31, 1999.
(3) Long-Term Debt, Convertible Promissory Notes and Line of credit
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). The note
payable was paid on schedule. As of July 31, 1999, the entire loan had been
repaid.
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 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, was due on November 30, 1999. The entire balance on the
note was repaid in July 1999.
On April 15, 1999, Portal entered into a line of credit with a bank under
which Portal may borrow up to $5 million. Amounts borrowed under this line of
credit bear interest at a rate of the bank's prime rate plus 0.5% and mature on
April 13, 2000. On April 22, 1999, Portal borrowed $1.0 million under the line
of credit to repay the final installment of the term loan that matured in April
1999. The entire balance on the line of credit was repaid in May 1999. This
line of credit arrangement prohibits the payment of dividends without the
bank's consent.
F-15
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(4) Agreement with Andersen Consulting LLC (unaudited)
On April 12, 1999, Portal agreed to enter into a strategic alliance with
Andersen Consulting LLC under which Andersen Consulting LLC 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 LLC agreed to
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 agreed to pay Andersen Consulting LLC 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 LLC. This put
guaranteed a closing value of $6.0 million at the end of the first day of
trading for 200,000 shares common sold to Andersen and required Portal to pay
Andersen Consulting LLC in cash for any differences between the closing value
of these shares and $6.0 million. Upon the date of the arrangement, Portal
recorded the fair value of the put of approximately $3.8 million. 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 was to 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 was to be reported as a gain or loss in the respective
periods.
Upon completion of the initial public offering (see Note 6), the put option
was settled. Based on the closing price of Portal's common stock at the end of
the first day of trading, the net cash settlement of the put was computed at a
value of zero. As a result, a gain upon remeasurement of the liability of $3.8
million was recorded as other income in the six months ended July 31, 1999.
At July 31, 1999, the initial fair value of the put, approximately $3.8
million, has been 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. Upon signing of the definitive agreement,
the service fee of $2.8 million will also be capitalized and amortized
systematically over the same period.
(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
and $573,000 and $1,653,000 for the six months ended July 31, 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>
F-16
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(5) Commitments (continued)
Operating Leases (continued)
In June 1999, Portal entered into a lease for its worldwide headquarters
which will expire in December 2010. In connection with the lease, Portal will
make payments of $589,000, $4,490,000, $4,625,000, $4,764,000 and $4,906,000 in
the years ending January 31, 2000, 2001, 2002, 2003 and 2004, respectively, and
$37,693,000 thereafter. In connection with this lease, Portal issued a letter
credit for $2,250,000 (see Note 1) as a deposit for the facilities. The terms
of the lease agreement allow the letter of credit to be reduced down to
$1,100,000 if certain covenants regarding sales and cash flow are met.
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>
(6) Stockholders' Equity
Reincorporation and Stock Split
During February 1999, Portal's board of directors authorized the
reincorporation of the Company in the state of Delaware. This reincorporation
received shareholder approval on April 29, 1999. Portal is 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 has 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.
Initial Public Offering
On May 11, 1999, Portal completed an initial public offering of its Common
Stock. All 4.6 million shares covered by Portal's Registration Statement on
Form S-1, including shares covered by an overallotment option that was
exercised, were sold by Portal at a price of $14.00 per share, less an
F-17
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(6) Stockholders' Equity (continued)
Initial Public Offering (continued)
underwriting discount of $0.98 per share. In addition, on May 11, 1999, the
Company issued 380,184 shares of Common Stock to Andersen Consulting and 3.0
million shares of Common Stock to Cisco Systems, Inc. for $13.02 per share or
an aggregate purchase price of approximately $44.0 million. Net proceeds to the
Company from all shares sold were approximately $102.4 million. Upon the
consummation of Portal's initial public offering on May 11, 1999, all of the
then outstanding Series A Preferred Stock and Series B Preferred Stock
automatically converted into Common Stock.
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. In
connection with the initial public offering, all outstanding shares of
preferred stock were converted to common stock and 5,000,000 shares of
preferred stock were authorized.
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 and July 31, 1999, approximately
14,713,647, 6,510,846 and 3,832,355 shares were subject to repurchase. Of the
shares subject to repurchase, 8,428,914, 5,947,011 and 3,694,706 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 July 31, 1999, common stock was reserved for issuance as follows
(unaudited):
<TABLE>
<S> <C>
Exercise of outstanding stock options........................... 9,332,733
Shares of common stock available for grant under the 1995 Stock
Option/Stock Issuance Plan and 1999 Stock Issuance Plan........ 4,028,872
Shares of common stock available for issuance under the 1999
Employee Stock Purchase Plan................................... 1,800,000
Exercise of common stock warrants outstanding................... 230,097
----------
15,391,702
==========
</TABLE>
F-18
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(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.
During the year ended January 31, 1999 and the six months ended July 31, 1999,
18,861 and 12,501 shares were exercised. 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 and the six months ended July 31, 1999, 3,075,000, 100,050, 104,550
and 341,100 shares were exercised. 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. Upon completion of
the Company's initial public offering, the outstanding warrants to purchase
230,097 shares of Series B preferred stock were automatically converted into
warrants to purchase 230,097 shares of common stock at the same exercise price.
None of these warrants have been exercised and all shares were outstanding at
July 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 and the six months ended July 31, 1999, $38,310 and $23,796 of
the additional interest expense was amortized.
Stock Options
Pursuant to the 1995 Stock Option/Stock Issuance Plan and the 1999 Stock
Incentive Plan (together, the "Plans"), the board of directors or one of its
designated committees are authorized to grant incentive stock options or
nonqualified stock options to employees, officers, and directors of Portal. The
Plans allow 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 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 or one of its designated committees.
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 Plans are not assumed, the options will accelerate and vest in full
and existing repurchase rights will lapse.
F-19
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(6) Stockholders' Equity (continued)
Stock Options (continued)
A summary of Portal's stock option activity under all Plans and related
information follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999 July 31, 1999
--------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 1,667,268 $0.01 891,684 $0.02 5,596,200 $ 1.53
Options granted......... 9,270,915 $0.02 6,891,000 $1.39 4,836,710 $12.68
Options exercised....... (9,211,974) $0.02 (2,036,484) $0.43 (436,275) $ 0.71
Options canceled........ (834,525) $0.02 (150,000) $1.28 (663,902) $ 8.15
---------- ----- ---------- ----- --------- ------
Outstanding at end of
period................. 891,684 $0.02 5,596,200 $1.53 9,332,733 $ 7.23
========== ----- ========== ----- ========= ------
Exercisable at end of
period................. 891,684 $0.02 5,596,200 $1.53 785,472 $ 2.68
========== ----- ========== ----- ========= ------
Weighted-average fair
value of options
granted................ $0.01 $0.36 $ 2.02
===== ===== ======
</TABLE>
At January 31, 1998 and 1999 and July 31, 1999, 8,428,914, 5,947,011 and
3,694,706 shares which had been issued upon exercise of options were subject to
repurchase. At January 31, 1998 and 1999 and July 31, 1999, options to acquire
50,193, 139,473 and 785,472 shares were vested but not exercised.
Exercise prices for options outstanding as of January 31, 1999 and July 31,
1999 and the weighted-average remaining contractual life are as follows:
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
---------------------------------
Weighted-
Number Average
Outstanding Remaining Weighted-
Range of 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>
F-20
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(6) Stockholders' Equity (continued)
Stock Options (continued)
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
---------------------------------
Weighted-
Number Average
Outstanding Remaining Weighted-
Range of at Contractual Average
Exercise July 31, Life Exercise
Prices 1999 (In years) Price
- -------- ----------- ----------- ---------
(unaudited)
<S> <C> <C> <C>
$0.00-$0.02................................... 71,700 8.3 $ 0.02
$0.03-$0.67................................... 1,588,950 8.8 $ 0.60
$0.68-$1.67................................... 1,010,673 9.1 $ 1.45
$1.68-$2.67................................... 1,708,050 9.3 $ 2.67
$2.68-$4.00................................... 521,550 9.5 $ 4.00
$4.01-$12.00.................................. 2,489,730 9.6 $10.00
$12.01-$20.00................................. 1,712,980 9.7 $14.00
$20.01-$42.00................................. 229,100 9.9 $41.81
---------
9,332,733
=========
</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 and the six months ended July 31, 1998 and 1999,
Portal recorded amortization of deferred stock compensation expense of
approximately $2.3 million, $0.3 million and $5.0 million. At July 31, 1999,
Portal had a total of approximately $9.5 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.
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. Purchases occur on the last day of each November
and May of each offering period. 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 each employee's applicable enrollment date (May 5, 1999 for all
participating employees as of that date) or on the last day of the respective
purchase period. The initial offering period commenced on the effectiveness of
the initial public offering and will end on the last business day of May, 2001.
F-21
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(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. Portal's provision for income taxes of
approximately $0.8 million for the six months ended July 31, 1999 consists of
foreign withholding taxes on revenue and tax on earnings generated from foreign
operations in certain foreign jurisdictions. The reconciliation of income tax
expense (benefit) attributable to continuing operations computed at the U.S.
federal statutory rates to income tax
F-22
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(7) Income Taxes (continued)
expense (benefit) for the fiscal years ended January 31, 1997, 1998, and 1999
and the six months ended July 31, 1998 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended January Six Months
31, Ended July 31,
----------------------- ----------------
1997 1998 1999 1998 1999
----- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Tax provision (benefit) at U.S.
statutory rate................. $(773) $(2,579) $(5,676) $(2,263) $(1,868)
Loss for which no tax benefit is
currently recognizable ........ 773 2,579 5,676 2,263 3,163
Alternative minimum tax......... -- -- 500 -- --
One-time gain upon expiration of
unexercised put option on com-
mon stock...................... -- -- -- -- (1,295)
Foreign income and withholding
taxes.......................... -- -- 215 -- 816
----- ------- ------- ------- -------
Total........................... $ -- $ -- $ 715 $ -- $ 816
===== ======= ======= ======= =======
</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,
----------------- July 31,
1998 1999 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 1,275 $ -- $ --
Tax credit carryforwards.................. 396 1,053 2,194
Deferred revenue.......................... 2,437 8,980 10,220
Deferred compensation..................... -- 782 2,778
Accruals and reserves not currently
deductible............................... 292 1,679 1,297
Other, net................................ -- 66 61
------- -------- --------
Total deferred tax assets................... 4,400 12,560 16,550
Valuation allowance......................... (4,400) (12,560) (16,550)
------- -------- --------
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 and July 31, 1999, 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 and $4.0 million for the six months ended July 31, 1999.
F-23
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of July 31, 1999 and
for the six month periods ended July 31, 1998 and 1999 is unaudited)
(7) Income Taxes (continued)
As of July 31, 1999, Portal had federal research and development tax credit
carryforwards of approximately $0.9 million, which will expire at various dates
from 2012 through 2020, if not utilized. In addition, Portal had a foreign tax
credit carry forward of approximately $0.8 million, which will expire in 2005,
if not utilized, and 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-24
<PAGE>
UNDERWRITING
Portal, the selling stockholders 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., BancBoston Robertson Stephens Inc., Credit Suisse First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht
& Quist LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. ..............................................
BancBoston Robertson Stephens Inc..................................
Credit Suisse First Boston Corporation.............................
Donaldson, Lufkin & Jenrette Securities Corporation................
Hambrecht & Quist LLC..............................................
------
Total............................................................
======
</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 750,000
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 and the selling
stockholders. 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............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public 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 $ per share from the initial price to public. 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 $ per share from the
initial price to public. If all the shares are not sold at the initial price to
public, the representatives may change the offering price and the other selling
terms.
Portal and the selling stockholders have 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 90 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>
The common stock is quoted 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.
As permitted by Rule 103 under the Exchange Act, certain Underwriters and
selling group members that are market makers ("passive market makers") in the
common stock may make bids for or purchases of the common stock in the Nasdaq
National Market until a stabilizing bid has been made. Rule 103 generally
provides that
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calender months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which the prospectus forms a part,
. a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers, and
. bids made by passive market makers must be identified by such.
Portal will pay the expenses of the offering on behalf of the selling
stockholders, excluding underwriting discounts and commissions. The expenses of
the offering are estimated to be approximately $ million.
Portal and the selling stockholders have 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
Price Range of Common Stock.............................................. 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................................................................. 36
Management............................................................... 52
Certain Transactions..................................................... 62
Principal and Selling Stockholders....................................... 64
Description of Capital Stock............................................. 66
Shares Eligible for Future Sale.......................................... 70
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 72
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 Shares
Portal Software, Inc.
Common Stock
---------------
[LOGO OF PORTAL SOFTWARE, INC. APPEARS HERE]
---------------
Goldman, Sachs & Co.
BancBoston
Robertson Stephens
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
Hambrecht & Quist
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Portal in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 82,023
NASD Filing Fee.................................................... $ 30,005
Nasdaq National Market Listing Fee................................. $ 17,500
Printing and Engraving Expenses.................................... $
Legal Fees and Expenses............................................ $150,000
Accounting Fees and Expenses....................................... $
Blue Sky Fees and Expenses......................................... $
Transfer Agent Fees................................................ $
Miscellaneous...................................................... $
Total............................................................ $
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of Portal's Amended
and Restated Bylaws provides for mandatory indemnification of its directors and
officers and permissible indemnification of employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. Portal's
Second Amended and Restated Certificate of Incorporation provides that, subject
to Delaware law, its directors shall not be personally liable for monetary
damages for breach of the directors' fiduciary duty as directors to Portal and
its stockholders. This provision in the Second Amended and Restated Certificate
of Incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to Portal or its stockholders for acts or omissions
not in good faith or involving intentional misconduct, for knowing violations
of law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws. Portal has entered into
indemnification agreements with its officers and directors, a form of which was
previously filed with the Securities and Exchange Commission as an Exhibit to
the Registrant's Registration Statement on Form S-1 (No. 333-72999) (the
"Indemnification Agreements"). The Indemnification Agreements provide Portal's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is also made to
Section 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of Portal against certain liabilities, and
Section 1.10 of the Amended and Restated Investor Rights Agreement contained in
Exhibit 4.2 and 4.3 hereto, indemnifying certain of Portal's stockholders,
including controlling stockholders, against certain liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below.
(a) The Registrant issued and sold 11,529,456 shares of its Common Stock
to employees and consultants for an aggregate purchase price of $1,099,128
pursuant to direct stock issuances and the exercise of options under its
1995 Stock Option/Stock Issuance Plan.
(b) From March 1996 through January 1997, the Registrant issued and sold
an aggregate of 15,136,590 shares of Series A Preferred Stock at a per
share price of $0.17, for an aggregate of $2,522,765 to several investors.
(c) In June 1996, the Registrant issued and sold 2,534,500 shares of its
Common Stock at a per share price of $0.007 for an aggregate purchase price
of $16,890 to an officer of the Registrant.
(d) In April 1996, the Registrant issued warrants to purchase 546,600
shares of Series A Preferred Stock at a per share price of $0.17 to several
investors.
(e) In October 1996, the Registrant issued and sold 1,500,000 shares of
Common Stock to entities affiliated with Accel Partners upon exercise of
warrants for an aggregate purchase price of $1,000.
(f) In January 1997, the Registrant issued and sold 3,075,000 shares of
Series A Preferred Stock to entities affiliated with Accel Partners upon
exercise of warrants for an aggregate purchase price of $512,500.
(g) In April 1997, the Registrant issued 100,050 shares of Series A
Preferred Stock to an investor upon exercise of warrants for an aggregate
purchase price of $16,825.
(h) In September 1997, in connection with an equipment leasing
transaction, the Registrant issued warrants to purchase 130,098 shares of
its Series B Preferred Stock, at an exercise price of $1.50 per share, to
Lighthouse Capital.
(i) In September 1997, in connection with a line of credit, the
Registrant issued a warrant to purchase 12,501 shares of its Common Stock,
at an exercise price of $1.02 per share, to Imperial Bank.
(j) In November 1997, in connection with a bridge loan, the Registrant
issued warrants to purchase 18,861 shares of its Common Stock, at an
exercise price of $1.02 per share, to entities affiliated with Accel
Partners.
(k) In January 1998, in connection with an equipment leasing transaction,
the Registrant issued warrants to purchase 99,999 shares of its Series B
Preferred Stock, at an exercise price of $1.50 per share, to Comdisco, Inc.
(l) From January through August 1998, the Registrant issued and sold an
aggregate of 10,235,997 shares of Series B Preferred Stock at a per share
price of $1.50, for an aggregate of $15,353,996 to several investors, which
includes 6,666 shares and 5,334 shares of Series B Preferred Stock issued
to two members of the Registrant's outside counsel, Brobeck, Phleger &
Harrison LLP at a per share price of $1.50 for an aggregate purchase price
of $9,999 and $8,001, respectively.
(m) In May 1998, the Registrant issued 104,550 shares of Series A
Preferred Stock to an investor upon exercise of warrants for an aggregate
purchase price of $17,425.
(n) In June 1998, the Registrant issued and sold 18,861 shares of Common
Stock to entities affiliated with Accel Partners upon exercise of warrants
for an aggregate purchase price of $314.
(o) In April 1999, the Registrant issued and sold 341,100 shares of
Series A Preferred Stock to an investor upon exercise of a warrant for an
aggregate purchase price of $56,850.
II-2
<PAGE>
(p) In May 1999, Imperial Bank exercised a warrant to purchase 12,501
shares of Portal Common Stock.
(q) In May 1999, the Registrant issued and sold a total of 3,380,184
shares of Common Stock to Cisco Systems, Inc. and Anderson Consulting LLP
for an aggregate purchase price of $44,089,996.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
these transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant or otherwise,
to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the Exhibit Index as filed as part of this
Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement among the Registrant, Goldman Sachs &
Co., BancBoston Robertson Stephens Inc., Credit Suisse First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and
Hambrecht & Quist LLC.
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Bylaws.
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Investors' Rights Agreement, among the
Registrant and the investors and founders named therein, dated
January 29, 1998.
4.3(1) Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement, dated March 3, 1998.
4.4(1) Reference is made to Exhibits 3.1 and 3.2.
5.1 Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.
10.1(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at Stevens Creek Office Center,
Cupertino, California, dated November 4, 1991, as amended.
10.2(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at 20833 Stevens Creek Boulevard,
Cupertino, California, dated as of September 8, 1998.
10.3(1) Loan and Security Agreement by and between Registrant and Lighthouse
Capital Partners, L.P., dated as of July 24, 1997, as amended.
10.4(1) Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits.
10.5(1) Registrant's 1999 Stock Incentive Plan.
10.6(1) Registrant's 1999 Employee Stock Purchase Plan.
10.7(1) Form of Directors' and Officers' Indemnification Agreement.
10.8(1) Form of Registrant's Software License and Support Agreement.
10.9(1) Form of Registrant's Business Alliance Agreement.
10.10(1) Stock Purchase Agreement with Cisco Systems, Inc., dated April 13,
1999.
10.11(1) Stock Purchase Agreement with Andersen Consulting LLP, dated April
12, 1999.
10.12(1) Loan Agreement and General Security Agreement between Portal
Software, Inc. and Imperial Bank, dated April 15, 1999.
10.13 Lease agreement dated June 25, 1999 by and between Registrant and TST
Cupertino, L.L.C. for office facilities at Cupertino City Center V,
10200 South De Anza Boulevard, Cupertino, California.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-5.
27.1 Financial Data Schedule (In EDGAR format only).
</TABLE>
- --------
* To be filed by amendment.
(1) Incorporated herein by reference from Registration Statement on Form S-1
(No. 333-72999)
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required
to be set therein is not applicable or is shown in the financial statements or
notes thereto.
Item 17. Undertakings
Portal hereby undertakes to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Portal pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Portal, Indemnification Agreements entered into
between Portal and its officers and directors, the Underwriting Agreement, or
otherwise, Portal has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Portal of
expenses incurred or paid by a director, officer, or controlling person of
Portal in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Portal will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by Portal pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cupertino,
State of California, on this 30th day of August, 1999.
PORTAL SOFTWARE, INC.
John E. Little
By: /s/ _____________________________
John E. Little,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, John E. Little, Jack L.
Acosta and Mitchell Gaynor, and each one of them, his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming that each of said attorneys-in-fact and agents or any of them,
or his or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John E. Little President, Chief Executive August 30, 1999
____________________________________ Officer (Principal
John E. Little Executive Officer)
/s/ Jack L. Acosta Chief Financial Officer, August 30, 1999
____________________________________ Vice President, Finance
Jack L. Acosta (Principal Financial and
Accounting Officer)
/s/ Edward J. Zander Director August 30, 1999
____________________________________
Edward J. Zander
/s/ David C. Peterschmidt Director August 30, 1999
____________________________________
David C. Peterschmidt
/s/ William T. Coleman III Director August 30, 1999
____________________________________
William T. Coleman III
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement among the Registrant, Goldman Sachs &
Co., BancBoston Robertson Stephens Inc., Credit Suisse First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and
Hambrecht & Quist LLC.
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Bylaws.
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Investors' Rights Agreement, among the
Registrant and the investors and founders named therein, dated
January 29, 1998.
4.3(1) Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement, dated March 3, 1998.
4.4(1) Reference is made to Exhibits 3.1 and 3.2.
5.1 Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.
10.1(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at Stevens Creek Office Center,
Cupertino, California, dated November 4, 1991, as amended.
10.2(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at 20833 Stevens Creek Boulevard,
Cupertino, California, dated as of September 8, 1998.
10.3(1) Loan and Security Agreement by and between Registrant and Lighthouse
Capital Partners, L.P., dated as of July 24, 1997, as amended.
10.4(1) Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits.
10.5(1) Registrant's 1999 Stock Incentive Plan.
10.6(1) Registrant's 1999 Employee Stock Purchase Plan.
10.7(1) Form of Directors' and Officers' Indemnification Agreement.
10.8(1) Form of Registrant's Software License and Support Agreement.
10.9(1) Form of Registrant's Business Alliance Agreement.
10.10(1) Stock Purchase Agreement with Cisco Systems, Inc., dated April 13,
1999.
10.11(1) Stock Purchase Agreement with Andersen Consulting LLP, dated April
12, 1999.
10.12(1) Loan Agreement and General Security Agreement between Portal
Software, Inc. and Imperial Bank, dated April 15, 1999.
10.13 Lease agreement dated June 25, 1999 by and between Registrant and TST
Cupertino, L.L.C. for office facilities at Cupertino City Center V,
10200 South De Anza Boulevard, Cupertino, California.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-5.
27.1 Financial Data Schedule (In EDGAR format only).
</TABLE>
- --------
* To be filed by amendment.
(1) Incorporated herein by reference from Registration Statement on Form S-1
(No. 333-72999)
<PAGE>
EXHIBIT 5.1
August 30, 1999
Goldman, Sachs & Co.
BancBoston Robertson Stephens Inc.
Credit Suisse First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrech & Quist LLC
As Representatives of the
Several Underwriters
c/o Goldman, Sachs & Co.
Ladies and Gentelmen:
We have examined the Registration Statement on Form S-1 originally
filed by Portal Software, Inc. (the "Company") with the Securities and
Exchange Commission (the "Commission") on August 30, 1999, as thereafter
amended or supplemented (the "Registration Statement"), in connection with
the registration under the Securities Act of 1933, as amended, of 5,750,000
shares of the Company's Common Stock (the "Shares"), which includes 3,000,000
shares to be sold by the Selling Stockholders. The Shares include an over-
allotment option granted by the Company to the Underwriters to purchase
750,000 additional Shares and are to be sold to the Underwriters as described
in such Registration Statement for resale to the public. As your counsel in
connection with the transaction, we have examined the proceedings taken and
are familiar with the proceedings proposed to be taken by you in connection
with the sale and issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, the Shares, when issued and sold in the manner described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this Opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus
constituting a part thereof, and in any amendment thereto.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.13
LEASE
TST CUPERTINO, L.L.C.,
a Delaware limited liability company,
Landlord
and
PORTAL SOFTWARE, INC.,
a Delaware corporation,
Tenant
for
Cupertino City Center V
10200 South De Anza Boulevard
Cupertino, California
June 25, 1999
<PAGE>
LEASE
THIS LEASE is made as of the 25th day of June, 1999 ("Effective
Date"), between TST Cupertino, L.L.C. ("Landlord"), a Delaware limited liability
company, having an office c/o Tishman Speyer Properties, L.P. 520 Madison
Avenue, New York, New York 10022 and Portal Software, Inc., ("Tenant"), a
Delaware corporation, having an office at 20883 Stevens Creek Boulevard,
Cupertino, CA 95014
Landlord and Tenant hereby covenant and agree as follows:
ARTICLE 1
BASIC LEASE PROVISIONS
PREMISES The first (1st), second (2nd), third (3rd), and fourth
(4th) floors of the Building, as more particularly shown
on Exhibits A-1 through A-4, inclusive.
BUILDING The building, fixtures, equipment and other improvements
and appurtenances now located or hereafter erected,
located or placed upon the land known as Cupertino City
Center V located at 10200 South De Anza Boulevard in
Cupertino, California.
REAL PROPERTY The Building, together with the plot of land upon which it
stands.
SCHEDULED December 17, 1999
COMMENCEMENT DATE
EXPIRATION DATE The date which is the last day of the month in which the
eleventh (11th) anniversary of the date the last Floor
comprising the Premises is tendered to Tenant in its Ready
for Occupancy condition (provided that if more than thirty
(30) days separates the dates of tender of the first such
Floor and the last such Floor, then the Expiration Date
shall be the last day of the one hundred thirty-third
(133rd) calendar month following the Commencement Date),
or the last day of any renewal or extended term, if the
Term of this Lease shall have been extended in accordance
with any express provision hereof.
TERM The period commencing on the Commencement Date and ending
on the Expiration Date.
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PERMITTED USES Executive and general office use for the transaction of
Tenant's business, related training, software research and
development activities and storage or distribution of
materials incidental thereto, but excluding any Prohibited
Use (as hereinafter defined).
TENANT'S One hundred percent (100%).
PROPORTIONATE SHARE
AGREED AREA OF 142,651 rentable square feet.
BUILDING
AGREED AREA OF 142,651 rentable square feet allocated as follows:
PREMISES
Floor 1 - 33,114 rentable square feet
Floor 2 - 37,425 rentable square feet
Floor 3 - 38,342 rentable square feet
Floor 4 - 33,770 rentable square feet
FIXED RENT (i) $4,467,829.32 per annum ($372,319.11 per month)
($2.610 per rentable square foot of the Premises ("RSF")
per month) for the period commencing on the Commencement
Date and ending on the day preceding the first anniversary
of the Commencement Date, both dates inclusive; (ii)
$4,601,864.16 per annum ($383,488.68 per month) ($2.688
per RSF per month) for the period commencing on the first
(1st) anniversary of the Commencement Date and ending on
the day preceding the second (2nd) anniversary of the
Commencement Date, both dates inclusive; (iii)
$4,739,920.08 per annum ($394,993.34 per month) ($2.769
per RSF per month) for the period commencing on the second
(2nd) anniversary of the Commencement Date and ending on
the day preceding the third (3rd) anniversary of the
Commencement Date, both dates inclusive; (iv)
$4,882,117.68 per annum ($406,843.14 per month) ($2.852
per RSF per month) for the period commencing on the third
(3rd) anniversary of the Commencement Date and ending on
the day preceding the fourth (4th) anniversary of the
Commencement Date, both dates inclusive; (v) $5,028,581.16
per annum ($419,048.43 per month) ($2.938 per RSF per
month) for the period commencing on the fourth (4th)
anniversary of the Commencement Date and ending on the day
preceding the fifth (5th) anniversary of the Commencement
Date, both dates inclusive; (vi) $5,179,438.56 per annum
($431,619.88 per month) ($3.026 per RSF per month) for the
period commencing on the fifth (5th) anniversary of the
Commencement Date and ending on the day preceding the
sixth (6th) anniversary of the Commencement Date, both
dates
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inclusive; (vii) $5,334,821.76 per annum ($444,568.48 per
month) ($3.116 per RSF per month) for the period
commencing on the sixth (6th) anniversary of the
Commencement Date and ending on the day preceding the
seventh (7th) anniversary of the Commencement Date, both
dates inclusive; (viii) $5,494,866.36 per annum
($457,905.53 per month) ($3.210 per RSF per month) for the
period commencing on the seventh (7th) anniversary of the
Commencement Date and ending on the day preceding the
eighth (8th) anniversary of the Commencement Date, both
dates inclusive; (ix) $5,659,712.40 per annum ($471,642.70
per month) ($3.306 per RSF per month) for the period
commencing on the eighth (8th) anniversary of the
Commencement Date and ending on the day preceding the
ninth (9th) anniversary of the Commencement Date; (x)
$5,829,503.76 per annum ($485,791.98 per month) ($3.406
per RSF per month) for the period commencing on the ninth
(9th) anniversary of the Commencement Date and ending on
the day preceding the tenth (10th) anniversary of the
Commencement Date, both dates inclusive, and (xi)
$6,004,388.87 per annum ($500,365.75 per month) ($3.508
per RSF per month) for the period commencing on the tenth
(10th) anniversary of the Commencement Date and ending on
the Expiration Date, both dates inclusive.
ADDITIONAL RENT All sums other than Fixed Rent payable by Tenant to
Landlord under this Lease, including Tenant's Tax Payment,
Tenant's Operating Payment, late charges, overtime or
excess service charges, and interest and other costs
related to Tenant's failure to perform any of its
obligations under this Lease.
RENT Fixed Rent and Additional Rent, collectively.
INTEREST RATE The lesser of (i) two percent (2%) per annum above the
then current Base Rate charged by Citibank, N.A. or its
successor, or (ii) the maximum rate permitted by
applicable law.
SECURITY DEPOSIT $2,250,000.00, as adjusted pursuant to Article 33 below.
LANDLORD'S BROKER Cornish & Carey Commercial
TENANT'S BROKER C.B. Richard Ellis, Inc.
LANDLORD'S AGENT Tishman Speyer Properties, L.P. or any other person
designated at any time and from time to time by Landlord
as Landlord's Agent and their successors and assigns.
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All capitalized terms used in the Lease text without definition are
defined in Exhibit B.
ARTICLE 2
PREMISES, TERM, RENT
Section 2.1 Lease of Premises. Subject to the terms of this Lease,
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Landlord leases to Tenant and Tenant leases from Landlord the Premises for the
Term. In addition, Landlord grants to Tenant the right to use, on a non-
exclusive basis (i) together, to the extent required by any Requirements or any
easement agreements affecting the Building as of the Effective Date, with the
general public, Landlord and Landlord's agents, contractors and employees, the
Building ground floor lobby area, the Parking Facility (as hereinafter defined)
and certain other related common facilities including, without limitation, the
Parking Facility elevator and stairwell affording access to the Parking Facility
and (ii) together with Landlord and Landlord's agents, contractors and
employees, other Building common elements and common facilities including,
without limitation, the Building elevators and roof (such areas in (i) and (ii)
collectively, the "Common Areas"). No member of the general public shall be
afforded any rights of use or access to the Common Areas described in clause
(ii) above.
Section 2.2 Commencement Date. Upon the Effective Date, the terms and
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provisions hereof shall be fully binding on Landlord and Tenant prior to the
occurrence of the Commencement Date (as hereinafter defined). The Term of this
Lease shall commence on that date (the "Commencement Date") which is the later
of the (i) "Scheduled Commencement Date" specified in Article 1, or (ii) date
any portion of the Premises comprising at least a full floor is deemed Ready for
Occupancy (as such term is defined in the Workletter Agreement (as hereinafter
defined)). Unless sooner terminated as hereinafter provided, the Term shall end
on the "Expiration Date" specified in Article 1. Landlord shall use its
commercially reasonable efforts to tender all four (4) of the floors comprising
the Premises within thirty (30) days following the Term Commencement Date.
Tenant's obligation to pay Fixed Rent and Operating Expenses and Taxes shall
commence on a Floor by Floor basis as each such Floor is tendered to Tenant in
its Ready for Occupancy condition. If Landlord does not tender possession of all
or any portion of the Premises to Tenant on or before the Scheduled Commencement
Date in its Ready for Occupancy condition for any reason whatsoever, Landlord
shall not be liable for any damage thereby, this Lease shall not be void or
voidable thereby, and Tenant shall not be liable for any Rent or any other sums
payable by Tenant hereunder with respect to any nontendered portion of the
Premises (except for (1) any special services provided by Landlord at Tenant's
request with the understanding that Tenant's obligation to pay therefor is not
conditioned upon delivery of the Premises and which are not customarily provided
to tenants of buildings comparable to the Building except at additional cost and
(2) any damages or claims under any indemnities by Tenant set forth in this
Lease) until Landlord tenders possession of such portion of the Premises to
Tenant in its Ready for Occupancy condition, unless the delay in tendering
possession of the Premises to Tenant is caused by "Tenant Delays" as defined in
the Workletter Agreement. If any such delay in Landlord's tendering possession
of the Premises to Tenant is caused by Tenant Delays, then Tenant shall be
liable for Rent commencing on the date Landlord would have been able to tender
possession of the Premises to Tenant with the Premises in its
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Ready for Occupancy condition had there not occurred Tenant Delays. No failure
to tender possession of the Premises to Tenant on or before the Scheduled
Commencement Date shall in any way affect any other obligations of Tenant
hereunder; provided, however, that if Landlord fails to tender possession of the
Premises in their Ready for Occupancy condition by December 31, 2000 (the
"Termination Date"), which Termination Date shall be extended one (1) day for
each day of Tenant Delays, then Tenant shall have the right, upon prior written
notice to Landlord, to terminate this Lease, unless, prior to the Termination
Date specified in Tenant's Termination Notice, Landlord tenders possession of
the Premises to Tenant in their Ready for Occupancy condition. If Tenant elects
to so terminate this Lease, Landlord shall not be obligated to reimburse Tenant
for the costs of the planning, design or construction of the Improvements (as
hereinafter defined) paid for by Tenant prior to the effective date of
termination. Once all four (4) floors of the Premises have been delivered and
the Commencement Date has been determined, Landlord and Tenant shall execute an
amendment to this Lease stating the Commencement Date, the Expiration Date and
the dates Fixed Rent commenced for each of the four (4) floors comprising the
Premises, but any failure to execute such an amendment shall not affect the
determination of such dates hereunder. Tenant shall have the right, prior to the
Commencement Date, to enter the Premises for purposes of planning, constructing
and installing Tenant's furnishings and equipment in the Premises, including,
without limitation, Tenant's installation of telecommunications and computer
cables, provided that in connection with any such early entry (a) Landlord
reasonably determines that such entry would not unreasonably impede or interfere
with Landlord's construction of the Improvements and (b) Tenant's entry shall be
subject to such safety procedures and restrictions as Landlord's contractor may
reasonably impose. To the fullest extent permitted by law but excluding the
gross negligence or willful misconduct of Landlord or its employees, agents or
contractors, Tenant hereby assumes the entire risk of damage of, or injury to,
any of Tenant's furniture, furniture systems or equipment installed or placed in
any portion of the Premises by Tenant prior to the Commencement Date.
Section 2.3 Payment of Rent. Tenant shall pay to Landlord, without
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notice or demand, and without any set-off, counterclaim, abatement or deduction
whatsoever, except as may be expressly set forth in this Lease, in lawful money
of the United States by wire transfer of funds to Landlord's account, as
designated by Landlord, or by check drawn upon a bank approved by Landlord, (i)
Fixed Rent in equal monthly installments, in advance, on the first (1st) day of
each calendar month during the Term, commencing on the Commencement Date, and
(ii) Additional Rent, at the times and in the manner set forth in this Lease.
Landlord hereby approves the Bank of Boston as Tenant's commercial bank.
Section 2.4 Credit. Notwithstanding anything to the contrary
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contained in Section 2.3, Tenant shall be entitled to a credit against the Fixed
Rent payable hereunder, provided that no Event of Default has occurred and is
continuing hereunder unless, with respect to any such continuing Event of
Default, Tenant has commenced and is diligently pursuing any cure rights
provided hereunder, in an amount equal to Two Hundred Fifty-Nine Thousand Two
Hundred Eighty-Two and 62/100ths Dollars ($259,282.62) (such amount, the "Rent
Credit"), to be applied ratably against each of the first three (3) full monthly
installments of Fixed Rent accruing hereunder commencing on the first (1st) day
of the first (1st) calendar month following the Commencement Date in order of
payment. In addition, to the extent that portions of the Premises are not
initially occupied by Tenant, Operating Expenses shall not include the amount
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of any variable expenses with respect to such unoccupied portions of the
Premises which are not so incurred by Landlord during such period. In no event
shall the Rent Credit be subject to subsequent recapture or recovery by Landlord
pursuant to any claims by Landlord pursuant to Article 19 below.
Section 2.5 First Month's Rent. [Intentionally Deleted]
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Section 2.6 Interest. If Tenant shall fail to pay any installment or
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other payment of Rent within five (5) days following the date when due, interest
shall accrue on such installment or payment as a late charge, from the date such
installment or payment became due until the date paid at the Interest Rate. In
addition to such interest, if any amount is not paid within ten (10) days after
same is due, a late charge equal to two percent (2%) of such amount shall be
assessed (provided, however, that no interest shall accrue on any such late
charge), which late charge Tenant hereby agrees is a reasonable estimate of the
damages Landlord shall suffer as a result of Tenant's late payment, which
damages include Landlord's additional administrative and other costs associated
with such late payment. The parties agree that it would be impracticable and
extremely difficult to fix Landlord's actual damages in such event. Such
interest and late charges are separate and cumulative and are in addition to and
shall not diminish or represent a substitute for any or all of Landlord's rights
or remedies under any other provision of this Lease. Notwithstanding the
foregoing, on the first two (2) occasions during each twelve (12) consecutive
months during the Term, Landlord shall give Tenant written notice of any amount
not received when due and Tenant shall have five (5) Business Days after receipt
of such notice within which to pay the delinquent amount and thereby avoid
imposition of any late charge or interest with respect to such delinquency.
Section 2.7 Right of First Refusal - Torre Building. From the
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Effective Date through September 30, 1999, inclusive, (the "Refusal Period"),
Tenant shall have a one-time right of first refusal to lease that portion (any
such portion, a "First Refusal Space") identified in the applicable Availability
Notice (as hereinafter defined) of that certain building located at 10201 Torre
Avenue, Cupertino, California ("Torre Building"); provided, however, that the
effectiveness of any New Lease (as hereinafter defined) shall be subject to, and
conditioned upon, Landlord's acquisition of such Torre Building, which
acquisition shall occur, if at all, at Landlord's sole and absolute discretion,
and further subject to the prior right of Landlord to offer for lease any space
consisting of all or any portion of any floor (but not more than one floor)
within the Torre Building to Advantis Corporation or any affiliate thereof
("Advantis"). If, during the Refusal Period, Landlord receives a Third Party
Offer (as hereinafter defined) for any First Refusal Space and prior to leasing
such First Refusal Space to any third party, Landlord shall first deliver to
Tenant a redacted copy of such Third Party Offer identifying such third-party
prospective tenant (any such prospective tenant or any affiliate or successor
thereof, a "Prospective WHQ Tenant") and specifying the material business terms
and conditions (including, without limitation, the proposed shell condition of
such First Refusal Space including any upgrades thereto and to the Torre
Building by Landlord, the aggregate of the fixed rent and other amounts that
would be payable by such Prospective WHQ Tenant with respect to such First
Refusal Space (including the value of any rental waivers or other concessions),
the amount of any proposed tenant improvement allowance to be furnished by
Landlord and/or the amount and proposed terms of any tenant improvement loan to
be furnished by Landlord, the proposed lease term and any options to extend such
term or any rights to terminate such lease term early) upon
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which such Prospective WHQ Tenant has proposed to lease such First Refusal Space
and which Landlord is willing to accept (the "Availability Notice"). Tenant
shall then have five (5) Business Days after its receipt of the Availability
Notice in which Tenant may give Landlord written notice of Tenant's acceptance
of such First Refusal Space on the terms and conditions (including the term of
the lease for such First Refusal Space as set forth in the Availability Notice)
specified in the Availability Notice (the "Acceptance Notice"). Prior to giving
the Availability Notice to Tenant and for five (5) Business Days thereafter,
Landlord shall not enter into any lease of such First Refusal Space with any
other person. If, during such five-(5-) Business Day period, Tenant gives
Landlord an Acceptance Notice, Landlord and Tenant shall then promptly enter
into a new lease ("New Lease") for such First Refusal Space substantially on the
terms and conditions of this Lease (taking into consideration such changes as
may be necessary to reflect the multi-tenant character of the Torre Building (if
applicable) or other physical or functional differences), including, without
limitation, the posting of a cash security deposit or, in lieu thereof, the
delivery of a Letter of Credit (as hereinafter defined) in an amount equal to
the sum of (x) fifty percent (50%) of any tenant improvement allowance and/or
tenant improvement loan provided by Landlord pursuant to such New Lease and (y)
an amount equal to the aggregate fixed rental obligation of Tenant under such
New Lease during the first six (6) full months of the term thereof (excluding
any free rent period or the effect of any rent credit), and the construction of
any tenant improvements to be constructed in any such First Refusal Space
pursuant to the procedures set forth in the Workletter Agreement; provided,
however, that the amount of any tenant improvement allowance or improvement loan
respecting any such First Refusal Space will be consistent with the Availability
Notice or such notice of proposed lease, as applicable, and as modified by the
Availability Notice or such notice of proposed lease, as applicable. After
expiration of such five-(5-) Business Day period, if Tenant has not given
Landlord a timely Acceptance Notice, then Landlord shall be free to lease such
First Refusal Space to such Prospective WHQ Tenant on any terms and conditions
which are not materially less favorable (in the aggregate) to Landlord than
those set forth in the Availability Notice. Landlord shall not lease such First
Refusal Space to such Prospective WHQ Tenant on basic economic terms that are
materially less favorable to Landlord (in the aggregate) without first giving
Tenant at least five (5) Business Days prior written notice of such proposed
lease and the opportunity (during such five-(5-) Business Day period by delivery
of written notice to Landlord) to agree to lease such First Refusal Space on the
same terms and conditions as those of such proposed lease. Tenant's rights under
this Section 2.7 shall apply to each and every First Refusal Space for which
Landlord receives a Third Party Offer during the Refusal Period; provided,
however, that if Landlord receives a Third Party Offer respecting a First
Refusal Space that consists of less than all of the Torre Building and Tenant
does not exercise its right to lease such First Refusal Space in accordance with
this Section 2.7, then Tenant shall have no further rights hereunder with
respect to any other First Refusal Space and Tenant shall promptly execute a
statement confirming such termination of Tenant's rights hereunder. For the
purposes of this Section 2.7, the term "Third Party Offer" means a bona fide
offer to lease all or any part of the First Refusal Space received by Landlord
(including any term sheets or letters of intent) from an unaffiliated third
party on terms which are acceptable to Landlord. If, upon Tenant's delivery of
an Acceptance Notice or, following such delivery and prior to the full execution
of the related New Lease, an Event of Default shall have occurred and be
continuing, then, at Landlord's election exercised, if at all, by Landlord's
written notice to Tenant within ten (10) Business Days following the later of
(1) the occurrence of such Event of Default or (2) Landlord's receipt of
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such Acceptance Notice, such Acceptance Notice shall be of no force or effect,
Tenant shall have no further rights under this Section 2.7 and Tenant shall
promptly execute a statement confirming such termination of Tenant's rights
hereunder. For the purposes of this Section 2.7 only, the phrase "terms and
conditions which are not materially less favorable to Landlord" means (1) basic
economic terms (including base rent and tenant improvement allowances) which, in
aggregate, are at least ninety-seven and fifty hundredths percent (97.50%) of
the amount of such aggregate basic economic terms as set forth in the applicable
Third Party Offer or (2) the size of the First Refusal Space changes (either
smaller or larger) by an amount equal to the greater of five percent (5%) of the
size of the space offered to Tenant and five thousand (5,000) rentable square
feet. For purposes of this Section 2.7, "Landlord" shall mean any entity which
controls Landlord, is controlled by Landlord or is under common control with
Landlord, and any entity which is controlled by Tishman Speyer Properties, L.P.
Section 2.8 Right of Second Offer. Subject to and conditioned upon
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Landlord's acquisition of the Torre Building, and further subject to the prior
right of Landlord to offer for lease any space consisting of all or any portion
of any floor (but not more than one floor) within the Torre Building to
Advantis, which prior right shall terminate upon the earlier of (i) the date of
execution by Advantis and Landlord of any lease respecting any such space within
the Torre Building and (ii) the two hundred tenth (210th) calendar day following
the Effective Date, then from and after October 1, 1999, and ending on the date
upon which the final portion of the initially-vacant space within the Torre
Building is first leased (such period, the "Offer Period"), Tenant shall have a
right of second offer to lease that portion of such initially-vacant space in
the Torre Building which is identified by Landlord in an Offer Space
Availability Notice (as hereinafter defined) (any such space, an "Offer Space");
provided, however, that if Tenant in fact leases at least one (1) floor of space
within the Torre Building, then such lease shall provide that Tenant shall have
a continuing right of first offer to lease the balance of the Torre Building as
space therein becomes available for lease by Landlord. Tenant's rights under
this Section 2.8 shall apply to any and all Offer Spaces which Landlord has
available for lease during the Offer Period or, to the extent provided for in
the preceding sentence, during the Term of this Lease, and shall include any
space initially occupied by Advantis and subsequently vacated. From time to time
during the Offer Period, Landlord shall deliver to Tenant written notice (each,
an "Offer Space Availability Notice") stating the location, configuration and
rentable area of any Offer Space, the proposed shell condition of such Offer
Space including any proposed upgrades thereto and to the Torre Building by
Landlord, and the terms and conditions upon which Landlord proposes to lease
such Offer Space. Tenant shall have ten (10) Business Days after delivery of any
Offer Space Availability Notice to deliver to Landlord either written notice
(each, an "Offer Space Exercise Notice") exercising Tenant's option with respect
to such Offer Space or written notice of a counteroffer by Tenant for the lease
of the Offer Space (the "Counteroffer Notice"). If Tenant gives Landlord a
Counteroffer Notice, Landlord shall then give Tenant written notice either (I)
accepting such counteroffer or (II) rejecting such counteroffer. Failure by
Tenant to deliver its Offer Space Exercise Notice or Counteroffer Notice within
such ten-(10-) Business Day period shall be deemed failure of Tenant to exercise
the option herein granted with respect to such specific unit of Offer Space (but
does not terminate Tenant's rights pursuant to this Section 2.8 for other space
within the Torre Building which has not been previously offered to Tenant or
Tenant's right (as expressly provided above) to lease the Offer Space referenced
in the Offer Space Availability Notice to the extent it
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becomes available for lease during the Term of this Lease). If Tenant does not
timely deliver to Landlord an Offer Space Exercise Notice or if Landlord rejects
Tenant's Counteroffer Notice, then Landlord shall thereafter be free to lease
such entire Offer Space, but not only a portion thereof, to another tenant on
terms and conditions which are not materially less favorable to Landlord than
those set forth in the applicable Offer Space Availability Notice or
Counteroffer Notice (if applicable) and Tenant shall promptly execute a
statement confirming such termination of Tenant's rights hereunder.
Notwithstanding the foregoing, if Landlord does not execute a lease for such
Offer Space within twelve (12) months following the date of such Offer Notice,
then upon such anniversary date Tenant's rights under this Section 2.8 shall be
reinstated with respect to such Offer Space. Landlord shall not lease such Offer
Space to any other person or entity on basic economic terms that are materially
less favorable to Landlord (in aggregate), or lease only a portion thereof,
without first giving Tenant at least five (5) Business Days' prior written
notice of such proposed lease and the opportunity (during such five-(5-)
Business Day period by delivery of written notice to Landlord) to agree to lease
such Offer Space, or the applicable portion thereof, on the same terms and
conditions as those of such proposed lease. If Tenant exercises its right with
respect to any Offer Space, or the applicable portion thereof, Landlord and
Tenant shall then promptly enter into a new lease ("Offer Space Lease") for the
Offer Space, or the applicable portion thereof, substantially on the terms and
conditions of this Lease (taking into consideration such changes as may be
necessary to reflect the multi-tenant character of the Torre Building (if
applicable) or other physical or functional differences), including, without
limitation, the posting of a cash security deposit or, in lieu thereof, the
delivery of a Letter of Credit, in an amount equal to the sum of (x) fifty
percent (50%) of any tenant improvement allowance and/or tenant improvement loan
provided by Landlord pursuant to such Offer Space Lease and (y) an amount equal
to the aggregate fixed rental obligation of Tenant under such Offer Space Lease
during the first six (6) full months of the term thereof (excluding any free
rent period or the effect of any rent credit), and the construction of any
tenant improvements to be constructed in any such Offer Space pursuant to the
procedures set forth in the Workletter Agreement; provided, however, that (A)
the amount of any tenant improvement allowance respecting any such Offer Space
will be consistent with the Offer Space Availability Notice or such notice of
proposed lease, as applicable, and be contributed by Landlord in the same
proportion that Tenant's funds are released to pay the Total Construction Costs
(as defined in the Workletter Agreement) and (B) the term of any such Offer
Space shall be for a period equal to the greater of the period specified in the
Offer Space Availability Notice or the period coterminous with the initial Term,
and as such terms and conditions of this Lease are modified by the Offer Space
Availability Notice or such notice of proposed lease, as applicable. In
addition, if the term of the Offer Space Lease is coterminous with the Term of
this Lease, the Offer Space Lease shall contain one (1) five (5) year renewal
option at one hundred percent of fair market rental substantially in the form of
Article 34 of this Lease. Notwithstanding the foregoing, if an Event of Default
has occurred and is continuing on the date of Tenant's delivery of the Offer
Space Exercise Notice or occurs following such delivery and prior to the full
execution of the related Offer Space Lease, then, at Landlord's election
exercised, if at all, by Landlord's written notice to Tenant within ten (10)
Business Days following the later of (A) the occurrence of such Event of Default
and (B) Landlord's receipt of such Offer Space Exercise Notice, Tenant shall
have no right to lease such Offer Space, Tenant shall have no further rights
under this Section 2.8 and Tenant shall promptly execute a statement confirming
such termination of Tenant's rights hereunder. For purposes of this Section 2.8
only, the phrase
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"terms and conditions which are not materially less favorable to Landlord" means
(1) basic economic terms (including base rent and tenant improvement allowances)
which, in aggregate, are at least ninety-five percent (95%) of the amount of
such aggregate basic economic terms as set forth in the applicable Offer Space
Availability Notice, or (2) the size of the Offer Space changes (either smaller
or larger) by an amount equal to the greater of five percent (5%) of the size of
the space offered to Tenant and five thousand (5,000) rentable square feet. For
purposes of this Section 2.8, "Landlord" shall mean any entity which controls
Landlord, is controlled by Landlord or is under common control with Landlord,
and any entity which is controlled by Tishman Speyer Properties, L.P.
Section 2.9 Parking. Tenant shall be allocated for use by Tenant and
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by Tenant's employees, customers, service suppliers or other invitees
(collectively, "Tenant's Invitees") within the parking area located beneath the
Building ("Parking Facility"), three (3) parking spaces per one thousand (1,000)
RSF that Tenant occupies in the Premises, on a non-exclusive basis without fee
or charge to Tenant, except for Tenant's share of any Operating Expenses and
Taxes (each as hereinafter defined) with respect to such Parking Facility, which
share shall be reasonably determined by Landlord to allocate an equitable
portion of such Operating Expenses and Taxes to Tenant's Parking Facility use
rights provided under this Section 2.9. The Parking Facility contains a total of
approximately seven hundred fifty-three (753) automobile parking spaces
(inclusive of handicapped spaces), of which four hundred twenty-nine (429)
spaces are allocated to Tenant, two hundred fifty-five (255) spaces are
allocated to those certain office buildings commonly known as CCC3 and CCC4,
twelve (12) spaces are allocated to the neighboring apartment project and fifty-
seven (57) spaces are allocated to the Torre Building. Landlord covenants and
agrees to grant no further rights to park within the Parking Facility. As of the
Effective Date, Landlord has instituted a signage program within the Parking
Facility, which directs all authorized users of the Parking Facility (other than
those users possessing the right to park in handicap spaces or who are short-
term visitors) who are not tenants of the Building to park in the lower two (2)
levels. In addition, Landlord covenants and agrees that it shall not impose any
access control measures for the Parking Facility unless Landlord reasonably
determines, based on specific incidents, government notices or complaints, that
the imposition of such measures is required either to ensure the security of the
Building and/or the safety of its occupants or in order to comply with any
Requirements or any easement agreements affecting the Parking Facility. Any such
system so imposed by Landlord shall be designed and implemented in a manner
reasonably calculated to accomplish the foregoing objective in a manner so as to
reasonably minimize any restrictions on Tenant and to reasonably allow Tenant's
use on a twenty-four (24) hour per day seven (7) day per week basis of all of
the parking rights granted hereunder. Should Landlord determine that a change is
required by any Requirements or easements, it agrees first to implement a method
of marking the parking spaces available for each such building authorized to
park therein. The parties acknowledge that a system pursuant to which Tenant is
allocated only four hundred twenty-nine (429) access cards or stickers would be
the most restrictive approach, because such a method may result in less than all
of Tenant's spaces being used at any given time. Within that portion of the
Parking Facility Landlord designates as available for Tenant's exclusive use,
Tenant may designate up to fifty (50) parking spaces as being "reserved".
Nothing contained herein shall be deemed to impose any liability upon Landlord
for personal injury or theft, for damage to any motor vehicle, or for loss of
property from within any motor vehicle, which is suffered by Tenant or any of
Tenant's Invitees in connection with their use of such Parking Facility except
when
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caused by Landlord's gross negligence or willful misconduct. To assure the
proper and efficient operation and maintenance of the Parking Facility, Tenant
agrees to comply with the Parking Rules and Regulations attached hereto as
Exhibit C as such may be reasonably amended from time to time, and shall use
diligent efforts to cause each of Tenant's Invitees to comply with such Parking
Rules and Regulations. The rights of Tenant and Tenant's Invitees shall at all
times be subject to the rights of Landlord and other parties permitted to use
the Parking Facility to use the same in common with Tenant and Tenant's
Invitees. Landlord shall enforce all Parking Rules and Regulations in a
reasonable and nondiscriminatory manner, and consistent with the manner in which
owners of other comparable office buildings in Cupertino, California enforce
similar parking rules and regulations.
ARTICLE 3
USE AND OCCUPANCY
Section 3.1 (a) Permitted Uses. Tenant shall use and occupy the
--------------
Premises for the Permitted Uses and for no other purpose. Tenant shall not use
or occupy or permit the use or occupancy of any part of the Premises in a manner
constituting a Prohibited Use. If Tenant uses the Premises for a purpose which
constitutes a Prohibited Use or violates any Requirement, or which causes the
Building to be in violation of any Requirement, then Tenant shall promptly
discontinue such use upon notice of such violation. Tenant's failure to
discontinue such use as soon as commercially reasonably possible shall be a
material default hereunder and Landlord shall have the right, without Tenant
having any further period in which to cure, (i) to terminate this Lease
immediately, and (ii) to exercise any and all rights and remedies available to
Landlord at law or in equity.
(b) Licenses and Permits. Tenant, at its expense, shall procure
--------------------
and at all times maintain and comply with the terms and conditions of all
licenses and permits required for the lawful conduct of the Permitted Uses in
the Premises. Landlord shall procure and maintain any licenses and permits
required for the lawful operation of the Building Systems or the Parking
Facility, the cost of which shall be included in Operating Expenses.
ARTICLE 4
CONDITION OF THE PREMISES
Section 4.1 Condition. Tenant has inspected the Premises and agrees
---------
(a) subject to completion of the Improvements (as defined in the Workletter
Agreement) in accordance with the Workletter Agreement and the terms and
provisions of this Lease, to accept possession of the Premises in its "as is"
condition existing on the Commencement Date, (b) that neither Landlord nor
Landlord's agents have made any representations or warranties with respect to
the Premises or the Building except as expressly set forth in this Lease
(including the exhibits hereto), and (c) except for the construction of the
Improvements, Landlord has no obligation to perform any work, supply any
materials, incur any expense or make any alterations or improvements to the
Premises to prepare the Premises for Tenant's occupancy. The terms and
conditions of the construction of the Improvements are set forth in the
Workletter Agreement
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attached hereto as Exhibit D (the "Workletter Agreement"). Tenant's occupancy of
the Premises when required by this Lease shall be deemed to be acceptance of
Landlord's tender of possession thereof and shall be conclusive evidence, as
against Tenant, that Landlord has tendered the Improvements Ready for Occupancy
(as defined in the Workletter Agreement) and, at the time such possession was
taken, the Premises and the Building were in a good and satisfactory condition
as required by this Lease, subject to correction of any deficiencies and
corrective work specified on any punch-list created pursuant to the Workletter
Agreement. Without affecting such acceptance of possession of the Premises by
Tenant on the date the Improvements are Ready for Occupancy, Landlord shall
correct, or cause to be corrected, at no cost or expense to Tenant, any latent
defects in the nonstructural components of the Improvements not visually
discoverable by Tenant upon a reasonably diligent inspection and which are
identified in writing within twelve (12) months following the Commencement Date.
In addition, in accordance with the terms and provisions of Section 7.1 below,
Landlord shall be responsible for the correction of any latent or patent defects
in the Landlord Repair Areas (as hereinafter defined) at any time during this
Term of the Lease or any extension thereof. Following such twelve-(12-) month
period, any component of the Improvements, whether nonstructural or a Landlord
Repair Areas, requiring repair shall be repaired in accordance with Article 7
below; provided, however, that Landlord agrees to exercise commercially
reasonable efforts to enforce any and all construction, design and materials
warranties obtained by Landlord with respect to both the base core and shell of
the Building and for the Improvements ("Construction Warranties"). No provision
of this Section 4.1 shall diminish Landlord's obligations under Section 7.1
below.
ARTICLE 5
ALTERATIONS
Section 5.1 Tenant's Alterations. (a) Tenant shall not make any
--------------------
alterations, additions or other physical changes in or about the Premises
(collectively, "Alterations") (other than decorative Alterations such as
painting, wall coverings and floor coverings and the installation of voice
and/or data cabling (collectively, "Decorative Alterations")) without Landlord's
prior consent, which consent shall not be unreasonably withheld or delayed.
Provided that the cost of performing such Alterations (exclusive of Decorative
Alterations) is less than Fifty Thousand Dollars ($50,000.00) per incident and
not more than One Hundred Thousand Dollars ($100,000.00) per year in the
aggregate, Tenant may make such Alterations without Landlord's prior consent;
provided such Alterations (i) are non-structural and do not affect any Building
System, (ii) are performed only by Landlord's designated contractors or by
contractors or mechanics approved by Landlord to perform such Alterations, (iii)
affect only the Premises and are not visible from outside of the Premises, (iv)
do not affect the certificate of occupancy issued for the Building or the
Premises, (v) do not adversely affect any service furnished by Landlord to
Tenant or to any other tenant of the Building and (vi) do not violate any
Requirement or cause the Premises or the Building to be non-compliant with any
Requirement.
(b) Plans and Specifications. Prior to making any Alterations which
------------------------
require Landlord's consent, Tenant, at its expense, shall (i) submit to Landlord
for its written approval, detailed plans and specifications (including layout,
architectural, mechanical,
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electrical, plumbing, sprinkler and structural drawings) of each proposed
Alteration, and with respect to any Alteration affecting any Building System,
Tenant shall submit proof that the Alteration has been designed by, or reviewed
and approved by, Landlord's designated engineer for the affected Building
System, (ii) obtain all permits, approvals and certificates required by any
Governmental Authorities, (iii) furnish to Landlord duplicate original policies
or certificates of worker's compensation (covering all persons to be employed by
Tenant, and Tenant's contractors and subcontractors in connection with such
Alteration) and comprehensive public liability (including property damage
coverage) insurance and Builder's Risk coverage (issued on a completed value
basis) all in such form, with such companies, for such periods and in such
amounts as Landlord may reasonably require, naming Landlord, Landlord's managing
agent, and their respective employees and agents, any Lessor and any Mortgagee
as additional insureds and (iv) with respect to any Alterations individually
costing at least Five Hundred Thousand Dollars ($500,000.00), furnish to
Landlord such other evidence of Tenant's ability to complete and to fully pay
for such Alterations (which may include a requirement that Tenant obtain payment
and performance bonds) as is reasonably satisfactory to Landlord. In no event
shall Tenant be required to post any payment or performance bonds in connection
with the performance of any Decorative Alterations. If Landlord does not respond
in writing within ten (10) Business Days of receipt of Tenant's plans and
specifications, stating with specificity its reasons therefor, Tenant shall
deliver a second notice to Landlord, stating in bold type on the first page
thereof "URGENT - DELAY NOTICE," which notice may be delivered by facsimile to
Landlord at 650-969-3873 and at 212-935-8235 and as otherwise set forth in
Article 27, and if Landlord fails to respond within five (5) days thereafter,
Landlord's consent shall be deemed given. Upon Tenant's request, Landlord shall
reasonably cooperate with Tenant in obtaining any permits, approvals or
certificates required to be obtained by Tenant in connection with any permitted
Alteration (if the provisions of the applicable Requirement require that
Landlord join in such application), provided Landlord shall incur no cost,
expense or liability in connection therewith.
(c) Governmental Approvals. Upon completion of any Alterations,
----------------------
Tenant, at its expense, shall promptly obtain certificates of final approval of
such Alterations required by any Governmental Authority and shall furnish
Landlord with copies thereof, together with "as-built" plans and specifications
for such Alterations.
Section 5.2 Manner and Quality of Alterations. All Alterations shall
---------------------------------
be performed (a) in a good and workmanlike manner and free from defects, (b) in
accordance with the plans and specifications, and by contractors approved by
Landlord, (c) under the supervision of a licensed architect reasonably
satisfactory to Landlord, and (d) in compliance with all Requirements, the terms
of this Lease, all procedures and regulations then prescribed by Landlord for
coordinating all work performed in the Building and the Rules and Regulations.
All materials and equipment to be used in the Premises shall be of first quality
and at least equal to the applicable standards for the Building then established
by Landlord, and no such materials or equipment (other than Tenant's Property)
shall be subject to any lien or other encumbrance.
Section 5.3 Removal of Tenant's Property. Tenant's Property shall be
----------------------------
and remain the property of Tenant and Tenant may remove the same at any time on
or before the Expiration Date. On or prior to the Expiration Date, Tenant shall,
unless otherwise directed by Landlord, at Tenant's expense, remove any Specialty
Alteration designated in writing by Landlord to be removed at the time consent
thereto was granted and close up any slab
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penetrations in the Premises. At least ten (10) Business Days prior to
commencing the closing of any such slab penetrations, Tenant shall notify
Landlord of its intention to effect such closings. Tenant shall repair and
restore, in a good and workmanlike manner, any damage to the Premises or the
Building caused by Tenant's removal of any Specialty Alterations or Tenant's
Property or by the closing of any slab penetrations, and upon default thereof
after the expiration of applicable notice and cure periods, Tenant shall
reimburse Landlord, on demand, for Landlord's cost of repairing and restoring
such damage. Any Specialty Alterations or Tenant's Property which Tenant is
required by the terms of this Lease to remove and is not so removed by the
Expiration Date or the earlier termination of this Lease shall be deemed
abandoned and Landlord may remove and dispose of same, and repair and restore
any damage caused thereby, at Tenant's cost and without accountability to
Tenant. Tenant shall not be required to remove any of the Improvements or any
subsequent Alterations unless, in either case, the same constitute Specialty
Alterations which Landlord advises Tenant must be removed at the time consent
thereto was granted. In no event shall Tenant be required to remove any
telephone or data cabling. If requested by Tenant prior to the installation of
any component of the Improvements or of any Alterations, Landlord will notify
Tenant whether (i) any such component of the Improvements or any such
Alterations, or any material component thereof (including, without limitation,
any oversized or exposed conduit) not expressly included within the definition
of Specialty Alterations is considered by Landlord to be such and (ii) Landlord
will waive any requirement that Tenant remove the same upon the expiration or
earlier termination of this Lease. This Section 5.3 shall survive the expiration
or earlier termination of this Lease.
Section 5.4 Mechanic's Liens. Tenant, at its expense, shall discharge
----------------
any lien or charge filed against the Premises or the Real Property in connection
with any work claimed or determined in good faith by Landlord to have been done
by or on behalf of, or materials claimed or determined in good faith by Landlord
to have been furnished to, Tenant, within ten (10) days after Tenant's receipt
of notice thereof by payment, filing the bond required by law or otherwise in
accordance with law.
Section 5.5 Labor Relations. Tenant shall not employ, or permit the
---------------
employment of, any contractor, mechanic or laborer, or permit any materials to
be delivered to or used in the Premises if Landlord reasonably determines that
any such employment, delivery or use causes or is reasonably anticipated to
cause material and adverse interference or labor conflict with other
contractors, mechanics or laborers engaged in the construction, maintenance or
operation of the Building by Landlord, Tenant or, if Tenant is not then the sole
occupant of the Building, others. In the event of such interference or conflict,
upon Landlord's request, Tenant shall cause all contractors, mechanics or
laborers causing such interference or conflict to leave the Building
immediately.
Section 5.6 Tenant's Costs. Tenant shall pay promptly to Landlord or
--------------
its designee, upon demand, with respect to any Alterations individually costing
less than Fifty Thousand Dollars ($50,000.00) and/or which are not performed at
Tenant's request by Landlord, all out-of-pocket costs actually and reasonably
incurred by Landlord in connection with Tenant's Alterations, including costs
incurred in connection with (i) Landlord's review of the Alterations (including
review of requests for approval thereof) and (ii) the provision of Building
personnel during the performance of any Alteration required by trade union
policy or otherwise, to operate elevators or otherwise to facilitate Tenant's
Alterations and as requested by Tenant. In addition,
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if Tenant's Alterations shall cost more than Fifty Thousand Dollars ($50,000.00)
and which will be performed by Landlord at Tenant's request, Tenant shall pay to
Landlord or its designee, upon demand, an administrative fee in respect of the
performance of such Alterations and the scheduling of Building equipment,
facilities and personnel in connection therewith in an amount equal to three
percent (3%) of the total "hard costs" of any such Alterations, where "hard
costs" means all costs of constructing such Alterations excluding architectural
and engineering fees, inspection and testing costs, legal and accounting costs,
permit fees and premiums for any builder's risk insurance. The terms and
provisions of this Section 5.6 shall not apply to the Improvements. Tenant's
reimbursement and payment obligations concerning the Improvements are set forth
in the Workletter Agreement.
Section 5.7 Tenant's Equipment. Tenant shall not move any heavy
------------------
machinery, heavy equipment, freight, bulky matter or fixtures (collectively,
"Equipment") into or out of the Building without Landlord's prior consent and
payment to Landlord of any costs incurred by Landlord in connection therewith.
If such Equipment requires special handling, Tenant agrees (a) to employ only
persons holding a Master Rigger's License to perform such work, (b) all work
performed in connection therewith shall comply with all applicable Requirements
and (c) such work shall be done only during hours designated by Landlord. Tenant
shall indemnify and hold Landlord harmless from and against all damages
sustained by persons or property and all monies paid out by Landlord in
settlement of any claims or judgments (including all expenses and attorneys'
fees incurred in connection therewith) and all costs incurred in repairing any
damage to the Building or appurtenances. The agreements set forth in this
Section 5.7 shall survive the expiration or earlier termination of this Lease.
Section 5.8 Legal Compliance. The approval of plans or
----------------
specifications, or consent by Landlord to the making of any Alterations, does
not constitute Landlord's agreement or representation that such plans,
specifications or Alterations comply with any Requirements or the certificate of
occupancy issued for the Building. Landlord shall have no liability to Tenant or
any other party in connection with Landlord's approval of any plans and
specifications for any Alterations, or Landlord's consent to Tenant's performing
any Alterations. If as the result of any Alterations made by or on behalf of
Tenant, Landlord is required to make any alterations or improvements to any part
of the Building in order to comply with any Requirements, whether or not in or
near the Premises, Tenant shall pay all costs and expenses incurred by Landlord
in connection with such alterations or improvements.
ARTICLE 6
FLOOR LOAD
Section 6.1 Floor Load. Tenant shall not place a load upon any floor
----------
of the Premises that exceeds fifty (50) pounds per square foot "live load"
without Landlord's prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed with respect to any proposed load
not exceeding eighty (80) pounds per square foot "live load", but otherwise may
be withheld in Landlord's sole and absolute discretion. Landlord reserves the
right to reasonably designate the position of all Equipment which Tenant wishes
to place within the Premises, and to place limitations on the weight thereof.
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ARTICLE 7
REPAIRS
Section 7.1 Landlord's Repair and Maintenance. Landlord shall
---------------------------------
operate, maintain and, except as provided in Section 7.2 hereof, make all
necessary repairs (both structural and nonstructural) to (i) the Building
Systems, (ii) the Common Areas, (iii) structural elements of Building floors,
exterior walls and interior load-bearing walls, and (iv) exterior window glass,
all in conformance with standards generally applicable to office buildings of
comparable age and quality in Cupertino, California, and (v) to the Premises if
caused by the active negligence or willful misconduct of Landlord or its
employees, agents or contractors. Those elements of the Building as described in
clauses (i) through (iv) above are collectively referred to as the "Landlord
Repair Areas".
Section 7.2 Tenant's Repair and Maintenance. Subject to the
-------------------------------
provisions of Article 13 hereof, Tenant shall promptly, at its expense and in
compliance with Article 5 of this Lease, (a) make all nonstructural repairs to
the Premises and the fixtures, equipment and appurtenances therein as and when
needed to preserve the Premises in good working order and condition, except for
reasonable wear and tear and damage for which Tenant is not responsible, and (b)
replace scratched or damaged doors, signs and glass (other than exterior window
glass) in and about the Premises. Without limiting the foregoing, all damage to
the Premises or to any other part of the Building (including exterior window
glass), or to any fixtures, equipment, sprinkler system and/or appurtenances
thereof, whether requiring structural or nonstructural repairs, caused by or
resulting from any act, omission, neglect or improper conduct of, or Alterations
made by, or the moving of Tenant's fixtures, furniture or equipment into, within
or out of the Premises by, Tenant or Tenant's agents, contractors,
subcontractors, employees, invitees or licensees (collectively, a "Tenant
Party"), and all damage to any portion of the Building's Systems existing in the
Premises, shall be repaired at Tenant's expense; provided, however, that Tenant
shall not be charged for any damage to the Building to the extent that (A) the
cost of repairing such damage is covered by the "all-risk" insurance maintained
by Landlord pursuant to Section 12.3 below or is recovered by Landlord through
Tenant's Operating Payment (as hereinafter defined) or (B) such damage is caused
by the active negligence or willful misconduct of Landlord or Landlord's agents,
contractors or employees. Such repairs shall be made by (i) Tenant, at Tenant's
expense, if the required repairs are nonstructural in nature and do not affect
any Building System and/or if any damaged portion of the sprinkler system is
contained within the Premises, or (ii) Landlord, at Tenant's expense, if the
required repairs are structural in nature, involve replacement of exterior
window glass (if such damage is so caused by any Tenant Party) or affect any
Building System or any portion of the sprinkler system not contained within the
Premises. All Tenant repairs shall be of a quality at least equal to the
original work or construction utilizing new construction materials and shall be
made in accordance with this Lease. Tenant shall give Landlord prompt notice of
any defective condition of which Tenant is aware in any Building System located
in, servicing or passing through the Premises. If Tenant fails after ten (10)
days' notice (or such shorter period as may be required in an emergency) to
proceed with due diligence to make any repairs required to be made by Tenant,
Landlord may make such repairs and all costs and expenses incurred by Landlord
on account thereof, plus interest thereon at the Interest Rate, shall be paid by
Tenant within ten (10) days after Landlord delivers to Tenant an invoice
therefor. Tenant hereby waives any and all rights
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under and benefits of Subsection 1 of Section 1931, and Sections 1941 and 1942,
of the California Civil Code and any similar law, statute or ordinance now or
hereafter in effect.
Section 7.3 Vermin. Tenant shall, at its expense, cause the Premises
------
to be exterminated, from time to time as Landlord may reasonably direct or
whenever there is evidence of infestation to Landlord's reasonable satisfaction,
by licensed exterminators approved by Landlord.
Section 7.4 Interruptions Due to Repairs. Landlord reserves the right
----------------------------
to make all changes, alterations, additions, improvements, repairs or
replacements to the Building, including the Building Systems which provide
services to Tenant, as Landlord deems necessary or desirable, provided that in
no event shall the level of any building service decrease in any material
respect from the level required of Landlord in this Lease as a result thereof
(other than temporary changes in the level of such services during the
performance of any such work by Landlord). Landlord shall use reasonable efforts
to minimize interference with Tenant's use and occupancy of the Premises during
the making of such repairs, alterations, additions, improvements, repairs or
replacements, provided that Landlord shall have no obligation to employ
contractors or labor at overtime or other premium pay rates or to incur any
other overtime costs or additional expenses whatsoever. Except as otherwise
provided in this Lease, there shall be no Rent abatement or allowance to Tenant
for a diminution of rental value, no actual or constructive eviction of Tenant,
in whole or in part, no relief from any of Tenant's other obligations under this
Lease, and no liability on the part of Landlord by reason of inconvenience,
annoyance or injury to business arising from Landlord, Tenant or others making,
or failing to make, any repairs, alterations, additions or improvements in or to
any portion of the Building or the Premises, or in or to fixtures, appurtenances
or equipment therein. Notwithstanding any contrary provision of this Lease, if
Tenant is prevented from using for the conduct of its business, and does not use
for the conduct of its business, the Premises or any material portion thereof,
for ten (10) consecutive Business Days (the "Eligibility Period") as a result of
(i) any construction, repair, maintenance or alteration performed by Landlord
after the Commencement Date and not necessitated by the negligence or willful
misconduct of any Tenant Party, or (ii) the failure in any material respect of
Landlord or its agents or contractors to provide to the Premises any of the
utilities and services required to be provided under this Lease (including
Articles 11 and 16 below) and not caused by the negligence or willful misconduct
of any Tenant Party or otherwise due to the occurrence of a casualty or
condemnation, (iii) any failure to provide access to the Premises and not caused
by the negligence or willful misconduct of any Tenant Party or otherwise due to
the occurrence of a casualty or condemnation, or (iv) because of the presence of
Hazardous Materials in, on or around the Building, the Premises or the Real
Property which were not caused or introduced by any Tenant Party and which
Hazardous Materials pose a material and significant health risk to occupants of
the Premises, then, in any and all such events, Tenant's obligation to pay Fixed
Rent, Tenant's Operating Payment and Tenant's Tax Payment shall be abated or
reduced, as the case may be, from and after the first (1st) day following the
last day of the Eligibility Period and continuing for such time that Tenant
continues to be so prevented from using for the conduct of its business, and
does not so use for the conduct of its business, the Premises or a material
portion thereof, in the proportion that the rentable square feet of the portion
of the Premises that Tenant is prevented from using, and does not so use, bears
to the total rentable square feet of the Premises. For purposes of this Section
7.4, Tenant shall not be deemed to have used the Premises for the conduct of its
business as a result of the
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presence of limited numbers of employees of Tenant who are present within the
Premises performing activities such as securing the Premises, removing files and
computers and engaging in other limited commercial activities.
ARTICLE 8
TAXES AND OPERATING EXPENSES
Section 8.1 Definitions. For the purposes of this Article 8, the
-----------
following terms shall have the meanings set forth belo w:
(a) "Assessed Valuation" shall mean the amount for which the Real
Property is assessed by the County Assessor of Santa Clara for the purpose of
imposition of Taxes.
(b) "Operating Expenses" shall mean the aggregate of all costs and
expenses (and taxes, if any, thereon) paid or incurred by or on behalf of
Landlord (whether directly or through independent contractors) in connection
with the operation, repair, maintenance and administration of the Building and
the Real Property, such as: (i) insurance premiums, (ii) the cost of
electricity, gas, water, air conditioning and other fuel and utilities, (iii)
attorneys' fees and disbursements and auditing, management and other
professional fees and expenses, (iv) the cost to implement any Transportation
Demand Management measures required by the City of Cupertino, and (v) any
capital improvement as described in items (1) or (2) below which shall be
installed by Landlord in the Building. Such improvements shall be amortized on a
straight-line basis over the useful life thereof as reasonably determined by
Landlord in accordance with GAAP (as hereinafter defined) (with interest
accruing on the unamortized portion thereof at the Base Rate in effect at the
time such improvements are substantially completed per annum), and the amount
included in Operating Expenses in any calendar year of the Term (until such
improvement has been fully amortized) shall be equal to the annual amortized
amount. A capital improvement shall be included in Operating Expenses only if it
either (1) results in a reduction in Operating Expenses (as for example, a
labor-saving improvement), provided, the amount included in Operating Expenses
in any calendar year of the Term shall not exceed an amount equal to the savings
resulting from the installation and operation of such improvement, and/or (2) is
made during any calendar year of the Term in compliance with Requirements (but
excluding compliance with the terms and provisions of any Requirement in effect
on the Commencement Date, it being understood that Landlord's cost of complying
with any such existing Requirement (but not the cost of complying with any
material modifications of any such existing Requirement occurring after the
Commencement Date) is not to be included in Operating Expenses). Operating
Expenses shall not include any Excluded Expenses.
(c) "Statement" shall mean a statement setting forth (1) the Taxes
payable for the preceding calendar year, or (2) the Operating Expenses payable
for the preceding calendar year.
(d) "Taxes" shall mean (i) all real estate taxes, assessments,
sewer and water rents, rates and charges and other governmental levies,
impositions or charges, whether
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general, special, ordinary, extraordinary, foreseen or unforeseen, which may be
assessed, levied or imposed upon all or any part of the Real Property, and (ii)
all expenses (including reasonable attorneys' fees and disbursements and
experts' and other witnesses' fees) incurred in contesting any of the foregoing
or the Assessed Valuation of all or any part of the Real Property to the extent
the prosecution of such contest was commercially reasonable. Taxes shall not
include (x) interest or penalties incurred by Landlord as a result of Landlord's
late payment of Taxes, except for interest payable in connection with the
installment payment of assessments pursuant to the next sentence, (y) any
franchise, net income, excess profits, gift, capital stock, inheritance,
succession or estate taxes imposed upon Landlord or (2) any surcharges imposed
by any Governmental Authority upon the Real Property respecting cleanup or
remediation of Hazardous Materials and characterized as a tax. If Landlord
elects to prepay any assessment or to pay any assessment in fewer annual
installments than the maximum number permitted by law, then for the purposes of
this Article 8, (i) such assessment shall be deemed to have been divided and to
be payable in the maximum number of installments permitted by law, and (ii)
there shall be deemed included in Taxes for each calendar year of the Term the
installments of such assessment that would have become payable during such
calendar year, together with interest that would have become payable during such
calendar year on such installments and on all such installments thereafter, as
provided by law, all as if such assessment had been so divided. If at any time
the methods of taxation prevailing on the date hereof shall be altered so that
in lieu of or as an addition to the whole or any part of Taxes, there shall be
assessed, levied or imposed (1) a tax, assessment, levy, imposition or charge
based on the income or rents received from the Real Property whether or not
wholly or partially as a capital levy or otherwise, (2) a tax, assessment, levy,
imposition or charge measured by or based in whole or in part upon all or any
part of the Real Property and imposed upon Landlord, (3) a license fee measured
by the rents, or (4) any other tax, assessment, levy, imposition, charge or
license fee however described or imposed, then all such taxes, assessments,
levies, impositions, charges or license fees or the part thereof so measured or
based shall be deemed to be Taxes, provided that any tax, assessment, levy,
imposition or charge imposed on income from the Real Property shall be
calculated as if the Real Property were the only asset of Landlord.
Section 8.2 (a) Tenant's Tax Payment. During each calendar year of the
--------------------
Term, or portion thereof, Tenant shall pay to Landlord Tenant's Proportionate
Share of the amount of Taxes payable or incurred by Landlord during such
calendar year ("Tenant's Tax Payment"). On or about the start of each calendar
year of the Term, Landlord shall furnish to Tenant a Statement of the Taxes.
Tenant shall pay Tenant's Tax Payment to Landlord, in monthly installments, on
the first day of each month during each calendar year, an amount equal to one
twelfth of Tenant's Tax Payment due for each calendar year. If there is any
increase or decrease in Taxes payable for any calendar year, whether levied
during or after such calendar year, Landlord may furnish a revised Statement for
such calendar year, Tenant's Tax Payment for such calendar year shall be
adjusted and, within ten (10) Business Days after Tenant's receipt of such
revised Statement (a) with respect to any increase in Taxes payable for such
calendar year, Tenant shall pay such increase in Tenant's Tax Payment to
Landlord, or (b) with respect to any decrease in Taxes payable for such calendar
year, Landlord shall credit such decrease in Tenant's Tax Payment against the
next installment of Rent payable by Tenant or, to the extent any such credit is
determined and/or received by Landlord following the expiration or earlier
termination of the Term for reasons other than following an Event of Default,
the amount thereof shall be paid to Tenant. If, during the Term, Landlord elects
to collect Tenant's Tax Payments,
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in full or in installments on any date or dates other than as presently
required, then following Landlord's notice to Tenant, Tenant's Tax Payments
shall be correspondingly revised. Any rebates, discounts or like items actually
received by Landlord shall be credited to reduce the amount of the Taxes.
(b) If the applicable real estate tax fiscal year is changed,
Taxes for such fiscal year shall be apportioned on the basis of the number of
days in such fiscal year included in the particular calendar year for the
purpose of making the computations under this Section.
(c) Only Landlord shall be eligible to institute proceedings to
reduce the Assessed Valuation of the Real Property and the filing of any such
proceeding by Tenant without Landlord's prior written consent shall constitute
an Event of Default. Upon Tenant's request and provided it is commercially
reasonable to do so, Landlord shall institute all appropriate proceedings to
seek a reduction of the Assessed Valuation of the Real Property and to otherwise
contest the amount, validity or applicability of any Taxes. In any such case, or
if any such proceedings are prosecuted at other than Tenant's request, Tenant's
Tax Payment shall include Tenant's Proportionate Share of the cost reasonably
incurred by Landlord in initiating and prosecuting such proceedings in good
faith, to the extent such costs have not been recovered by Landlord through
Tenant's Operating Payment. If Landlord receives a refund of Taxes for any
calendar year of the Term, Landlord shall, at its election, either pay to
Tenant, or credit against subsequent payments of Rent due hereunder, an amount
equal to Tenant's Proportionate Share of the refund, net of any expenses
incurred by Landlord in achieving such refund, which amount shall not exceed
Tenant's Tax Payment paid for such calendar year; provided, however, that
Landlord shall pay to Tenant the portion of Tenant's Proportionate Share of any
such refund that exceeds the amount of the then monthly installment of Fixed
Rent hereunder. Except as otherwise expressly provided in this Lease, Landlord
shall not be obligated to file any application or institute any proceeding
seeking a reduction in Taxes or the Assessed Valuation.
(d) Tenant shall be obligated to make Tenant's Tax Payment
regardless of whether Tenant may be exempt from the payment of any taxes by
reason of Tenant's diplomatic or other tax exempt status.
(e) If the Commencement Date is a date other than January 1,
then the amount of Taxes payable by Tenant during the month and year in which
the Term of this Lease commences shall be apportioned on the basis of the number
of days in the period from the Commencement Date to December 31 shall bear to
the total number of days in such calendar year. If the Expiration Date shall
occur on a date other than December 31, any Additional Rent payable by Tenant to
Landlord under this Section 8.2 for the calendar year in which such Expiration
Date occurs shall be apportioned on the basis of the number of days in the
period from January 1 to the Expiration Date shall bear to the total number of
days in such calendar year. In the event of the expiration or earlier
termination of this Lease, any Additional Rent under this Section 8.2 shall be
paid or adjusted within thirty (30) days after submission of the Statement. The
rights and obligations of Landlord and Tenant under the provisions of this
Section 8.2 with respect to any Additional Rent shall survive the expiration or
earlier termination of this Lease.
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(f) Tenant shall be responsible for any applicable occupancy or
rent tax now in effect or hereafter enacted and, if payable by Landlord, Tenant
shall promptly pay such amounts to Landlord, upon Landlord's demand, as
Additional Rent.
Section 8.3 Tenant's Operating Payment. (a) Tenant shall pay to
--------------------------
Landlord Tenant's Proportionate Share of Operating Expenses paid or incurred by
Landlord during each calendar year of the Term ("Tenant's Operating Payment").
For each calendar year of the Term, Landlord shall furnish to Tenant a written
statement setting forth Landlord's good faith reasonable estimate of Tenant's
Operating Payment for such calendar year, based upon such year's budget. Tenant
shall pay to Landlord on the first day of each month during such calendar year
an amount equal to one-twelfth of Landlord's estimate of Tenant's Operating
Payment for such calendar year. If, however, Landlord shall furnish any such
estimate for a calendar year subsequent to the commencement thereof, then (a)
until the first day of the month following the month in which such estimate is
furnished to Tenant, Tenant shall pay to Landlord on the first day of each month
an amount equal to the monthly sum payable by Tenant to Landlord under this
Section 8.3 during the last month of the preceding calendar year, (b) promptly
after such estimate is furnished to Tenant or together therewith, Landlord shall
give notice to Tenant stating whether the installments of Tenant's Operating
Payment previously made for such calendar year were greater or less than the
installments of Tenant's Operating Payment to be made for such calendar year in
accordance with such estimate, and (i) if there shall be a deficiency, Tenant
shall pay the amount thereof within ten (10) Business Days after demand
therefor, or (ii) if there shall have been an overpayment, Landlord shall credit
the amount thereof against subsequent payments of Rent due hereunder or, to the
extent any such credit is determined following the expiration or earlier
termination of the Term for reasons other than following an Event of Default,
the amount thereof shall be paid to Tenant, and (c) on the first day of the
month following the month in which such estimate is furnished to Tenant, and on
the first day of each month thereafter throughout the remainder of such calendar
year, Tenant shall pay to Landlord an amount equal to one-twelfth of Tenant's
Operating Payment shown on such estimate.
(b) On or before May 1st of each calendar year of the Term,
Landlord shall furnish to Tenant a Statement for the immediately preceding
calendar year. Each such Statement shall be accompanied by a computation of
Operating Expenses for the Building prepared by Landlord's managing agent. If
the Statement shall show that the sums paid by Tenant under Section 8.3(a)
exceeded the actual amount of Tenant's Operating Payment for such calendar year,
Landlord shall credit the amount of such excess against subsequent payments of
Rent due hereunder. If the Statement for such calendar year shall show that the
sums so paid by Tenant were less than Tenant's Operating Payment for such
calendar year, Tenant shall pay the amount of such deficiency within ten (10)
Business Days after Tenant's receipt of the Statement.
(c) If the Commencement Date is a date other than January 1,
then the amount of Operating Expenses payable by Tenant during the month and
year in which the Term of this Lease commences shall be apportioned on the basis
of the number of days in the period from the Commencement Date to December 31
shall bear to the total number of days in such calendar year. If the Expiration
Date shall occur on a date other than December 31, any Additional Rent under
this Section 8.3 for the calendar year in which such Expiration Date shall occur
shall be apportioned on the basis of the number of days in the period from
January 1 to the Expiration Date. Upon the expiration or earlier termination of
this Lease, any Additional Rent
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under this Article 8 shall be paid or adjusted within thirty (30) days after
submission of the Statement. The rights and obligations of Landlord and Tenant
under the provisions of this Section 8.3 with respect to any Additional Rent
shall survive the expiration or earlier termination of this Lease.
Section 8.4 Accounting Methods. The determination by Landlord of the
------------------
amount of Operating Expenses and Taxes incurred by Landlord shall be made on an
accrual basis, consistently applied.
Section 8.5 Non-Waiver; Disputes. (a) Landlord's failure to render
--------------------
any Statement on a timely basis with respect to any calendar year shall not
prejudice Landlord's right to thereafter render a Statement with respect to such
calendar year or any subsequent calendar year, nor shall the rendering of a
Statement prejudice Landlord's right to thereafter render a corrected Statement
for that calendar year.
(b) Each Statement sent to Tenant shall be conclusively binding
upon Tenant unless Tenant shall (i) within thirty (30) days after such Statement
is sent, pay to Landlord the amount set forth in such Statement, without
prejudice to Tenant's right to dispute such Statement, and (ii) within ninety
(90) days after such Statement is sent, send a written notice to Landlord
objecting to such Statement and specifying the reasons that such Statement is
claimed to be incorrect. Tenant agrees that Tenant will not employ, in
connection with any dispute under this Lease, any person who is to be
compensated in whole or in part, on a contingency fee basis. If the parties are
unable to resolve any dispute as to the correctness of such Statement within 30
days following such notice of objection, either party may refer the issues
raised to an independent firm of certified public accountants which is a so-
called "Big-Five" public accounting firm selected by Landlord and reasonably
acceptable to Tenant, and the decision of such accountants shall be conclusively
binding upon Landlord and Tenant. Landlord shall not unreasonably withhold its
consent to a proposal received from Tenant that such audit be performed by a
regional accounting firm with demonstrable experience in the appropriate
accounting procedures and practices respecting the operation, maintenance,
repair and administration of commercial office buildings. In connection
therewith, Tenant and such accountants shall execute and deliver to Landlord a
confidentiality agreement, in form and substance reasonably satisfactory to
Landlord, whereby such parties agree not to disclose to any third party any of
the information obtained in connection with such review. Tenant shall pay the
fees and expenses relating to such procedure, unless such accountants shall
determine that Landlord overstated Operating Expenses by more than three percent
(3%) for such Comparison Year, as finally determined, in which case Landlord
shall pay such fees and expenses. If such audit reveals that Landlord has over-
charged or under-charged Tenant, then within thirty (30) days after the results
of such audit are made available to Landlord, Landlord or Tenant, as applicable,
shall reimburse to the other party the amount of such over-charge or under-
charge, as the case may be, together with interest thereon at the Base Rate
calculated from the end of the year to which such Statement relates until the
date of such reimbursement.
Section 8.6 Net Lease. This Lease is designed as a "net lease," and
---------
the provisions in this Lease for payment by Tenant of its share of Operating
Expenses and Taxes are intended to pass on to Tenant and reimburse Landlord for
Tenant's Proportionate Share of all
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costs and expenses incurred in connection with the management, operation,
maintenance or repair of the Building except as otherwise expressly herein
provided.
ARTICLE 9
REQUIREMENTS OF LAW
Section 9.1 (a) Tenant's Compliance. Except as otherwise provided in
-------------------
this Lease, Tenant, at its expense, shall comply (or cause to be complied) with
all Requirements applicable to the Premises, regardless of whether imposed by
their terms upon Landlord or Tenant. All repairs and alterations to the
Premises, whether structural or nonstructural, ordinary or extraordinary,
required to be made to cause the Premises to comply with any Requirements and
which arise as a result of (i) the specific manner and nature of Tenant's use or
occupancy of the Premises, as distinct from general office use, (ii) Alterations
made by Tenant in the Premises or (iii) a breach by Tenant of any provisions of
this Lease, shall be made by Tenant, at Tenant's expense and in compliance with
Article 5, if such repairs or alterations are nonstructural and do not affect
any Building System, or by Landlord, at Tenant's expense, if such repairs or
alterations are structural or affect any Building System. If Tenant obtains
knowledge of any failure to comply with any Requirements applicable to the
Premises, Tenant shall give Landlord prompt written notice thereof.
(b) Hazardous Materials. Tenant shall not cause, nor permit any
-------------------
other Tenant Party to cause, (i) any Hazardous Materials to be brought into the
Building, (ii) the storage or use of Hazardous Materials in any manner not
permitted by any Requirements, or (iii) the escape, disposal or release of any
Hazardous Materials within or in the vicinity of the Building. Nothing herein
shall be deemed to prevent Tenant's use of any Hazardous Materials customarily
used in the ordinary course of office work, provided such use is in accordance
with all Requirements. Tenant shall be responsible, at its expense, for all
matters directly or indirectly based on, arising or resulting from the actual or
alleged presence of Hazardous Materials in the Premises or in the Building which
is caused by any Tenant Party. Tenant shall provide to Landlord copies of all
communications received by Tenant with respect to any Requirements relating to
Hazardous Materials, and/or any claims made in connection therewith. Landlord or
its agents may perform environmental inspections of the Premises at any time
subject to the provisions of Article 17 hereof. The covenants contained in this
Subsection shall survive the expiration or earlier termination of this Lease.
(c) Landlord's Compliance. Landlord shall comply with (or cause to
---------------------
be complied with) all Requirements applicable to the Building (including the
Premises) which are not the obligation of Tenant, to the extent that non-
compliance would materially impair Tenant's use and occupancy of the Premises
and Tenant's ability to conduct its business in the Premises for office use;
and, except with respect to Requirements which are in effect as of the
Commencement Date (but not excepting any subsequent material modifications
thereto), the cost thereof shall be included in Operating Expenses pursuant to
Section 8.1(e) of this Lease.
(d) Landlord's Insurance. Tenant shall not cause, nor shall Tenant
--------------------
permit any other Tenant Party to cause, any action or condition that would (i)
violate applicable rules, regulations and guidelines of the Fire Department,
Fire Insurance Rating Organization or
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any other authority having jurisdiction over the Building, (ii) cause an
increase in the premiums of fire insurance then covering the Building over that
payable with respect to comparable first-class office buildings or (iii) result
in insurance companies of good standing refusing to insure the Building or any
property therein in amounts and against risks as reasonably determined by
Landlord. If the fire insurance premiums increase as a result of Tenant's
failure to comply with the provisions of this Article 9, Tenant shall promptly
cure such failure and shall reimburse Landlord, as Additional Rent, for the
increased fire insurance premiums paid by Landlord as a result of such failure
by Tenant. In any action or proceeding to which Landlord and Tenant are parties,
a schedule or "make up" of rates for the Building or the Premises issued by the
appropriate Fire Insurance Rating Organization, or other body fixing such fire
insurance rates, shall be conclusive evidence of the fire insurance rates then
applicable to the Building.
Section 9.2 Fire Alarm System; Sprinklers. Tenant shall extend, add
-----------------------------
to and modify the fire-alarm and life-safety and sprinkler systems in the
Premises, utilizing Landlord-approved contractors, in accordance with this
Lease, the Rules and Regulations and all Requirements, if and to the extent such
system has not been installed in the Premises prior to the Commencement Date. If
the Fire Insurance Rating Organization or any Governmental Authority or any of
Landlord's insurers requires or recommends any modifications and/or Alterations
be made or any additional equipment be supplied in connection with the sprinkler
system or fire alarm and life-safety system serving the Building or the Premises
by reason of Tenant's business, or the location of the partitions, trade
fixtures, or other contents of the Premises, Landlord (to the extent outside of
the Premises) or Tenant (to the extent within the Premises) shall make such
modifications and/or Alterations, and supply such additional equipment, in
either case at Tenant's expense.
ARTICLE 10
SUBORDINATION
Section 10.1 Subordination and Attornment. (a) Landlord represents
----------------------------
that, as of the Effective Date, there are no existing Superior Leases and no
existing Mortgages. Provided any such Mortgagee or Lessor has executed and
delivered a Nondisturbance Agreement (as hereinafter defined), this Lease shall
be subject and subordinate to any Mortgages and Superior Leases hereafter
entered into by Landlord, and, at the request of any Mortgagee or Lessor, Tenant
shall attorn to such Mortgagee or Lessor, its successors in interest or any
purchaser in a foreclosure sale.
(b) If a Lessor or Mortgagee or any other person or entity shall
succeed to the rights of Landlord under this Lease, whether through possession
or foreclosure action or the delivery of a new lease or deed, then at the
request of the successor landlord and upon such successor landlord's written
agreement to accept Tenant's attornment and to recognize Tenant's interest under
this Lease, Tenant shall be deemed to have attorned to and recognized such
successor landlord as Landlord under this Lease. The provisions of this Article
are self-operative and require no further instruments to give effect hereto;
provided, however, that Tenant shall promptly execute and deliver any instrument
that such successor landlord may reasonably request (i) evidencing such
attornment, (ii) setting forth the terms and conditions of Tenant's tenancy, and
(iii) containing such other terms and conditions as may be required by such
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Mortgagee or Lessor, provided such terms and conditions do not materially
increase Tenant's obligations or materially and adversely affect the rights of
Tenant under this Lease. Upon such attornment this Lease shall continue in full
force and effect as a direct lease between such successor landlord and Tenant
upon all of the terms, conditions and covenants set forth in this Lease except
that such successor landlord shall not be:
(i) liable for any act or omission of Landlord
(except to the extent such act or omission continues beyond the date when such
successor landlord succeeds to Landlord's interest and Tenant gives notice of
such act or omission);
(ii) subject to any defense, claim, counterclaim,
set-off or offsets which Tenant may have against Landlord;
(iii) bound by any prepayment of more than one
month's Rent to any prior landlord;
(iv) bound by any obligation to make any payment to
Tenant which was required to be made prior to the time such successor landlord
succeeded to Landlord's interest;
(v) bound by any obligation to perform any work or
to make improvements to the Premises except for (x) repairs and maintenance
required to be made by Landlord under this Lease, and (y) repairs to the
Premises as a result of damage by fire or other casualty or a partial
condemnation pursuant to the provisions of this Lease, but only to the extent
that such repairs can reasonably be made from the net proceeds of any insurance
or condemnation awards, respectively, actually made available to such successor
landlord;
(vi) bound by any modification, amendment or renewal
of this Lease made without successor landlord's consent;
(vii) liable for the repayment of any security
deposit or surrender of any letter of credit, unless and until such security
deposit actually is paid or such letter of credit is actually delivered to such
successor landlord; or
(viii) liable for the payment of any unfunded tenant
improvement allowance, refurbishment allowance or similar obligation.
Section 10.2 Mortgage or Superior Lease Defaults. Tenant shall not
-----------------------------------
cause a default under any Superior Lease or Mortgage, or omit to do anything
that Tenant is obligated to do under the terms of this Lease so as to cause
Landlord to be in default thereunder. Any Mortgagee may elect that this Lease
shall have priority over the Mortgage that it holds and, upon notification to
Tenant by such Mortgagee, this Lease shall be deemed to have priority over such
Mortgage, regardless of the date of this Lease. In connection with any financing
of the Real Property, the Building or of the interest of the lessee under any
Superior Lease, Tenant shall consent to any reasonable modifications of this
Lease requested by any lending institution, provided such modifications do not
materially increase the obligations, or materially and adversely affect the
rights, of Tenant under this Lease.
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Section 10.3 Tenant's Termination Right. As long as any Superior
--------------------------
Lease or Mortgage shall exist, Tenant shall not seek to terminate this Lease by
reason of any act or omission of Landlord (a) until Tenant shall have given
notice of such act or omission to all Lessors and/or Mortgagees, and (b) until a
reasonable period of time (not to exceed an additional thirty (30) days beyond
the grace period otherwise afforded Landlord) shall have elapsed following the
giving of notice of such default and the expiration of any applicable notice or
grace periods (unless such act or omission is not capable of being remedied
within a reasonable period of time), during which period such Lessors and/or
Mortgagees shall have the right, but not the obligation, to remedy such act or
omission and thereafter diligently proceed to so remedy such act or obligation.
If any Lessor or Mortgagee elects to remedy such act or omission of Landlord,
Tenant shall not seek to terminate this Lease so long as such Lessor or
Mortgagee is proceeding with reasonable diligence to effect such remedy.
Section 10.4 Provisions. The provisions of this Article shall (a)
----------
inure to the benefit of Landlord, any future owner of the Building or the Real
Property, Lessor or Mortgagee and any sublessor thereof and (b) apply
notwithstanding that, as a matter of law, this Lease may terminate upon the
termination of any such Superior Lease or Mortgage.
Section 10.5 Non-Disturbance Agreements. Notwithstanding any
--------------------------
contrary provision of this Article 10, a condition precedent to the
subordination of this Lease to any future Mortgage or Superior Lease is that
such future Mortgagee or Lessor shall execute and deliver to Tenant a then
commercially-reasonable non-disturbance and attornment agreement in the form
prescribed by such Mortgagee or Lessor ("Nondisturbance Agreement"). Any such
Nondisturbance Agreement shall provide that, so long as no Event of Default is
continuing under this Lease, no foreclosure of any such Mortgage and no
termination of any such Superior Lease shall disturb Tenant's right of
possession hereunder, and that such future Mortgagee or Lessor, or their
respective successors in interest (including, without limitation, foreclosure
sale purchasers) shall recognize and be bound by this Lease, subject only to the
limitations in Section 10.1(b)(i) through (viii).
ARTICLE 11
SERVICES
Section 11.1 Elevators. Landlord, at its expense, shall provide
---------
passenger and freight elevator service to the Premises at all times.
Section 11.2 Heating, Ventilation and Air Conditioning. (a) Landlord
-----------------------------------------
shall furnish to the Premises heating, ventilation and air-conditioning ("HVAC")
in accordance with the standards set forth in Exhibit E on all Business Days
from 8:00 a.m. to 6:00 p.m. and from 8:00 a.m. to 1:00 p.m. on Saturdays.
Landlord, at its expense, shall repair and maintain the HVAC System in good
working order, provided repairs required as a result of the negligence or
willful misconduct of Tenant, its agents or employees, shall be performed at
Tenant's expense. Landlord shall have access to all air-cooling, fan,
ventilating and machine rooms and electrical closets and all other mechanical
installations of Landlord (collectively, "Mechanical Installations"), and Tenant
shall not construct partitions or other obstructions which may interfere with
Landlord's access thereto or the moving of Landlord's equipment to and from the
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Mechanical Installations. Neither Tenant, nor its agents, employees or
contractors shall at any time enter the Mechanical Installations or tamper with,
adjust, or otherwise affect such Mechanical Installations.
(b) Landlord shall not be responsible if the normal operation of
the Building System providing HVAC to the Premises (the "HVAC System") shall
fail to provide cooled or heated air, as the case may be, in accordance with the
specifications set forth in Exhibit E (the "Design Standards") by reason of (i)
any machinery or equipment installed by or on behalf of Tenant or any person
claiming through or under Tenant, which shall have an electrical load in excess
of the average electrical load and human occupancy factors for the HVAC System
as designed, as the case may be, (ii) any rearrangement of partitioning or other
Alterations (including the Improvements) made or performed by or on behalf of
Tenant or any person claiming through or under Tenant or (iii) any failure by
Tenant to install, if missing, blinds or shades on all windows, which blinds and
shades are subject to Landlord's approval, or to keep all of the operable
windows in the Premises closed. In addition, Tenant acknowledges that the HVAC
System may be unable to conform to the Design Standards in circumstances where
Tenant and its employees fail to lower window blinds when necessary because of
the sun's position. Tenant at all times shall cooperate fully with Landlord and
shall abide by the rules and regulations which Landlord may reasonably prescribe
for the proper functioning and protection of the HVAC System.
Section 11.3 Overtime HVAC. The Rent does not reflect or include any
-------------
charge to Tenant for the furnishing of any HVAC to the Premises during any
periods other than for the hours and days set forth in Section 11.2 hereof
("Overtime Periods"). The Building contains an energy management system which
allows those employees of Tenant furnished with the required access codes to
activate HVAC service during Overtime Periods on a "dial-up" basis. Subject to
Unavoidable Delays, Landlord shall use reasonable efforts to ensure that such
services are available during Overtime Periods. If HVAC is furnished to the
Premises during Overtime Periods, then in addition to the direct utility costs
incurred by Landlord thereby which shall be includable within Operating
Expenses, Tenant shall reimburse Landlord for the increased depreciation to the
HVAC System resulting thereby, which for purposes of this Lease the parties
agree is an amount equal to Eleven and 50/100 Dollars ($11.50) per hour per
floor or any fraction thereof.
Section 11.4 Cleaning. Landlord shall cause the Premises (excluding
--------
any portions thereof used for the storage, preparation, service or consumption
of food or beverages) to be cleaned, substantially in accordance with the
standards set forth in Exhibit F. Any areas of the Premises requiring additional
cleaning such as areas used for preparation or consumption of food, shall be
cleaned, at Tenant's expense, by Landlord's employees or Landlord's contractor,
at rates which shall be competitive with rates of other cleaning contractors
providing services to first-class office buildings in Cupertino, California.
Landlord and its cleaning contractor and their respective employees shall have
access to the Premises at all times except between 8:00 A.M. and 5:30 P.M. on
Business Days.
Section 11.5 Water. Landlord, at Landlord's expense, shall, subject
-----
to Unavoidable Delays, provide at all times to the Premises hot and cold water
for drinking, cleaning, break-room kitchen and lavatory purposes. If Tenant
requires or uses water or steam
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for any additional purposes, Landlord shall use its commercially reasonable
efforts (subject to any Requirements which may limit water use) to supply the
same. Tenant shall pay for the reasonable charges of Landlord for the water
furnished based upon actual cost. Tenant shall pay also to Landlord Landlord's
reasonable charge for any required pumping or heating thereof, and any sewer
rent, tax and/or charge now or hereafter assessed or imposed upon the Premises
or the Real Property pursuant to any Requirement.
Section 11.6 Refuse and Rubbish Removal. Landlord shall provide
--------------------------
refuse and rubbish removal services at the Premises for ordinary office refuse
and rubbish pursuant to regulations reasonably established by Landlord. Tenant
shall pay to Landlord, within 10 Business Days of receipt of an invoice
therefor, Landlord's reasonable charge for such removal to the extent that the
refuse generated by Tenant exceeds the refuse and rubbish customarily generated
by executive and general office tenants. Tenant shall not dispose of any refuse
and rubbish in the public areas of the Building, and if Tenant does so, Tenant
shall be liable for Landlord's reasonable charge for such removal. Tenant shall
cause its employees, agents, contractors and business visitors to observe such
additional rules and regulations regarding rubbish removal and/or recycling as
Landlord may, from time to time, reasonably impose.
Section 11.7 Service Interruptions. (a) Landlord reserves the right
---------------------
to suspend any service when necessary, by reason of Unavoidable Delays,
accidents or emergencies, or for repairs, alterations or improvements which, in
Landlord's reasonable judgment, are necessary or appropriate until such
Unavoidable Delay, accident or emergency shall cease or such repairs,
alterations or improvements are completed and Landlord shall not be liable for
any interruption, curtailment or failure to supply services. Landlord shall use
reasonable efforts to restore such service, remedy such situation and minimize
any interference with Tenant's business, provided that Landlord shall have no
obligation to employ contractors or labor at overtime or other premium pay
rates, or to incur any other overtime costs or additional expenses whatsoever.
The exercise of any such right or the exercise of any such right or the
occurrence of any such failure by Landlord shall not constitute an actual or
constructive eviction, in whole or in part, entitle Tenant to any compensation,
abatement or diminution of Rent, relieve Tenant from any of its obligations
under this Lease, or impose any liability upon Landlord or its agents by reason
of inconvenience to Tenant, or interruption of Tenant's business, or otherwise.
In case of any interruption in the services called for under this Article 11
which continues beyond the Eligibility Period, Tenant shall have the rights set
forth in Section 7.4 above.
Section 11.8 Non-essential Service Contractors. If Tenant reasonably
---------------------------------
believes that the contractor selected by Landlord for the provision of
landscaping, janitorial, refuse removal or security services for the Premises
(any such service, a "Non-essential Service") is not performing any such Non-
essential Service consistent with the standards of other first-class office
buildings comparable to the Building, or is providing such services at a cost
which exceeds that then being charged in Santa Clara County by other comparable
service providers performing comparable services,, or poses a threat to any
Tenant Party through suspected intentional misconduct or is reasonably suspected
by Tenant to have committed acts of theft or vandalism within the Premises, then
Tenant shall so notify Landlord in writing. If, after Landlord has been afforded
a reasonable opportunity to correct any such reported service deficiency, Tenant
reasonably believes that such deficiency has not been corrected, then Tenant
shall have the right, following thirty (30) days' written notice to Landlord, to
engage directly, at
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Tenant's sole cost and expense, an alternate service provider for such
purportedly deficient Non-essential Service. In any such event, Landlord shall
terminate the services of the contractor previously providing such Non-essential
Service and Operating Expenses shall, henceforth, exclude any charge respecting
such Non-essential Service; provided, however, that (a) Tenant shall promptly
provide to Landlord copies of all invoices from such alternate Non-essential
Service provider and (b) all such invoiced costs shall be included by Landlord
in "Operating Expenses" solely for the purpose of determining the amount of the
Management Fee (as defined in Exhibit B). In addition, provided that Portal
Software, Inc., or a Related Entity (as hereinafter defined) is the sole tenant
of the Building, Landlord shall reasonably consider any request by Tenant that
Landlord utilize the services of a different Non-essential Service provider.
Nothing set forth in this Section 11.8 shall be deemed to limit or abridge
Tenant's right to arrange for the provision of other auxiliary services to the
Premises such as the presence of day porters, maids, flower services or snack
suppliers.
ARTICLE 12
INSURANCE; PROPERTY LOSS OR DAMAGE; REIMBURSEMENT
Section 12.1 Tenant's Insurance. (a) Tenant, at its expense, shall
------------------
obtain and keep in full force and effect during the Term:
(i) a policy of commercial general liability
insurance on an occurrence basis against claims for personal injury, death
and/or property damage occurring in or about the Premises or the Building, under
which Tenant is named as the insured and Landlord, Landlord's managing agent and
any Lessors and any Mortgagees whose names shall have been furnished by Landlord
to Tenant from time to time are named as additional insureds, which insurance
shall provide primary coverage without contribution from any other insurance
carried by or for the benefit of Landlord, Landlord's managing agent or any
Lessors or Mortgagees named as additional insureds, and Tenant agrees to obtain
blanket broad-form contractual liability coverage to insure its indemnity
obligations set forth in Article 30 hereof. The minimum limits of liability
shall be a combined single limit with respect to each occurrence in an amount of
not less than Five Million Dollars ($5,000,000.00), provided, however, that
Landlord shall retain the right to require Tenant to increase such coverage on
no more than two (2) occasions during the initial Term of this Lease to that
amount of insurance which in Landlord's reasonable judgment is then being
customarily required by landlords for similar office space in first-class
buildings in Cupertino, California or is otherwise required by any Lessor or
Mortgagee. The deductible or self insured retention for such policy shall in no
event exceed Ten Thousand Dollars ($10,000.00) at any time. If the aggregate
limit applying to the Premises is reduced by the payment of a claim or
establishment of a reserve equal to or greater than 50% of the annual aggregate,
Tenant shall immediately arrange to have the aggregate limit restored by
endorsement to the existing policy or the purchase of an additional insurance
policy unless, in Landlord's reasonable judgment, Tenant maintains sufficient
excess liability insurance to satisfy the liability requirements of this Lease
without the reinstatement of the aggregate limit;
(ii) insurance against loss or damage by fire, and
such other risks and hazards as are insurable under then available standard
forms of "all risk" property insurance policies with extended coverage, insuring
Tenant's Property, and all Specialty
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Alterations for the full insurable value thereof or replacement cost value
thereof, having a deductible amount, if any, as reasonably determined by
Landlord;
(iii) during the performance of any Alteration, until
completion thereof, Builder's risk insurance on an "all risk" basis and on a
completed value form including a Permission to Complete and Occupy endorsement,
for full replacement value covering the interest of Landlord and Tenant (and
their respective contractors and subcontractors), any Mortgagee and any Lessor
in all work incorporated in the Building and all materials and equipment in or
about the Premises;
(iv) Workers' Compensation Insurance, as required by
law;
(v) such other insurance as is customarily required
to be carried by tenants in first-class office buildings in Cupertino,
California and in such amounts as Landlord, any Mortgagee and/or any Lessor may
reasonably require from time to time.
Tenant hereby acknowledges and agrees that, if Tenant elects not to carry
business interruption insurance, then, to the fullest extent permitted by law,
Tenant forever waives and releases Landlord from any claims or liability arising
from or in connection with damage or injury to Tenant's business, which damage
or injury would have been covered by business interruption insurance if such
policy had been obtained.
(b) All insurance required to be carried by Tenant pursuant to
the terms of this Lease (i) shall contain a provision that (x) other than those
customary exclusions found in customary forms of commercial general liability
policies, no act or omission of Tenant shall affect or limit the obligation of
the insurance company to pay the amount of any loss sustained, (y) the policy
shall be noncancellable and/or no material change in coverage shall be made
thereto unless Landlord, Lessors and Mortgagees shall have received 30 days'
prior notice of the same, by certified mail, return receipt requested, and (z)
Tenant shall be solely responsible for the payment of all premiums under such
policies and Landlord, Lessors and Mortgagees shall have no obligation for the
payment thereof, and (ii) shall be effected under valid and enforceable policies
issued by reputable and independent insurers permitted to do business in the
State of California and rated in Best's Insurance Guide, or any successor
thereto (or if there be none, an organization having a national reputation) as
having a "Best's Rating" of "A-" and a "Financial Size Category" of at least "X"
or, if such ratings are not then in effect, the equivalent thereof or such other
financial rating as Landlord may at any time consider appropriate.
(c) On or prior to the Commencement Date, Tenant shall deliver to
Landlord appropriate policies of insurance, including evidence of waivers of
subrogation required to be carried by each party pursuant to this Article 12.
Evidence of each renewal or replacement of a policy shall be delivered by Tenant
to Landlord at least 10 days prior to the expiration of such policy. In lieu of
the policy of insurance required to be delivered to Landlord pursuant to this
Article (the "Policy"), Tenant may deliver to Landlord a certification from
Tenant's insurance company (on the form currently designated "Acord 27", or the
equivalent, rather than on the form currently designated "Acord 25-S", or the
equivalent) which shall be binding on Tenant's insurance company, and which
shall expressly provide that such certification (i) conveys to Landlord and any
other named insured and/or additional insureds
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thereunder (the "Insured Parties") all the rights and privileges afforded under
the Policy as primary insurance, and (ii) contains an unconditional obligation
of the insurance company to advise all Insured Parties in writing by certified
mail, return receipt requested, at least 30 days in advance of any termination
or change to the Policy that would affect the interest of any of the Insured
Parties.
Section 12.2 Waiver of Subrogation. Landlord and Tenant shall each
---------------------
procure an appropriate clause in or endorsement to any property insurance
covering the Premises, the Building and personal property, fixtures and
equipment located therein, wherein the insurance companies shall waive
subrogation or consent to a waiver of right of recovery, and Landlord and Tenant
agree not to make any claim against, or seek to recover from, the other for any
loss or damage to its property or the property of others resulting from fire or
other hazards to the extent covered by such property insurance; provided,
however, that the release, discharge, exoneration and covenant not to sue
contained herein shall be limited by and coextensive with the terms and
provisions of the waiver of subrogation or waiver of right of recovery. Tenant
acknowledges that Landlord shall not carry insurance on, and shall not be
responsible for, (i) damage to any Specialty Alterations, (ii) Tenant's
Property, and (iii) any loss suffered by Tenant due to interruption of Tenant's
business.
Section 12.3 Landlord's Insurance. Landlord shall, from and after
--------------------
the Effective Date and until the Expiration Date, maintain in effect the
following insurance: (i) fire and "all risk" insurance providing coverage in the
event of fire, vandalism, malicious mischief and all other risks normally
covered by "all risk" policies in the area of the Building, covering the
Building (excluding the property required to be insured by Tenant pursuant to
Section 12.1) in an amount not less than ninety-five percent (95%) of the full
replacement value (less commercially reasonable deductibles which as of the
Effective Date is Twenty-Five Thousand Dollars ($25,000.00) but is subject to
periodic change over the Term) of the Building excluding foundations, footings
and other below-grade structural elements; and (ii) commercial general liability
insurance or the equivalent in the amount of at least Five Million Dollars
($5,000,000.00), against claims of bodily injury, personal injury or property
damage arising out of Landlord's operations, assumed liabilities, contractual
liabilities, or use of the Building and Common Areas. Such insurance may be
carried under blanket or umbrella insurance policies. Upon written request from
Tenant, but no more than one (1) time during any calendar year, Landlord shall
provide Tenant with evidence that Landlord is carrying the insurance Landlord is
required to maintain pursuant to this Section 12.3.
ARTICLE 13
DESTRUCTION - FIRE OR OTHER CAUSE
Section 13.1 Restoration. If the Premises are damaged by fire or
-----------
other casualty, or if the Building is damaged such that Tenant is deprived of
reasonable access to the Premises or Tenant's use of any portion of the Premises
is materially impaired, Tenant shall give prompt notice thereof to Landlord, and
the damage shall be repaired by Landlord, at its expense, to substantially the
condition of the Premises prior to the damage, subject to the provisions of any
Mortgage or Superior Lease, but Landlord shall have no obligation to repair or
restore (i) Tenant's Property or (ii) any Specialty Alterations. Until such time
as the restoration of the
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Premises is substantially completed, Fixed Rent, Tenant's Operating Payment and
Tenant's Tax Payment shall be reduced in the proportion by which the area of the
part of the Premises which is inaccessible, or the use of which has been so
impaired, and is not used by Tenant bears to the total area of the Premises.
Section 13.2 Landlord's Termination Right. Notwithstanding anything
----------------------------
to the contrary contained in Section 13.1, if (i) the Premises are totally
damaged or are rendered wholly untenantable, or if the Building shall be so
damaged that, in Landlord's opinion, substantial alteration, demolition, or
reconstruction of the Building shall be required (whether or not the Premises
are so damaged or rendered untenantable) and the estimated period for the repair
or restoration of the Premises or the Building set forth in the Restoration
Notice (as hereinafter defined) is more than twelve (12) months from the date of
such damage or (ii) under the provisions of any Mortgage or Superior Lease,
Landlord shall be unable so to restore the Premises or Tenant's reasonable
access to the Premises, then in either such event, Landlord may, not later than
sixty (60) days following the date of the damage, give Tenant a notice
terminating this Lease. If this Lease is so terminated, (a) the Term shall
expire upon the thirtieth (30th) day after such notice is given, (b) Tenant
shall vacate the Premises and surrender the same to Landlord, (c) Tenant's
liability for Rent shall cease as of the date of the damage, and (d) any prepaid
Rent for any period after the date of the damage shall be refunded by Landlord
to Tenant.
Section 13.3 Tenant's Termination Right. If the Premises are totally
--------------------------
damaged and are thereby rendered wholly untenantable, or if the Building shall
be so damaged that Tenant is deprived of reasonable access to the Premises, or
Tenant's use of any portion of the Premises is materially impaired, Landlord
shall, within sixty (60) days following the date of the damage, cause a
contractor or architect selected by Landlord to give notice (the "Restoration
Notice") to Tenant of the date by which such contractor or architect estimates
the restoration of the Premises or the Building, as applicable, shall be
Substantially Completed. If (i) such date, as set forth the Restoration Notice,
is more than twelve (12) months from the date of such damage and if Landlord has
not elected to terminate this Lease pursuant to Section 13.2, then Tenant shall
have the right to terminate this Lease by giving notice to Landlord not later
than thirty (30) days following Tenant's receipt of the Restoration Notice or
(ii) Landlord elects not to terminate this Lease pursuant to Section 13.2, but
fails to Substantially Complete the repair or restoration of the Premises or the
Building, as applicable, within twelve (12) months from the date of damage or
destruction, Tenant, upon not less than thirty (30) days' prior written notice,
may elect to terminate this Lease (either such notice in (i) or (ii), a
"Termination Notice"). If Tenant delivers to Landlord a Termination Notice,
unless, with respect to a Termination Notice delivered pursuant to clause (ii)
of the preceding sentence, Landlord within such thirty-(30-) day period
Substantially Completes such repair or restoration or delivers a letter from its
general contractor indicating that such work will be Substantially Completed
within (90) days of the date of such Termination Notice, this Lease shall be
deemed to have terminated as of the date of the giving of the Termination
Notice, in the manner set forth in the second sentence of Section 13.2. Upon any
such termination of this Lease, Tenant shall vacate the Premises and remove all
of its furniture, fixtures, equipment and personal property as quickly as
commercially reasonably possible.
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Section 13.4 Final 12 Months. Notwithstanding anything set forth to
---------------
the contrary in this Article 13, in the event that any damage rendering the
Premises wholly untenantable occurs during the final twelve (12) months of the
Term, either Landlord or Tenant may terminate this Lease by notice to the other
party within thirty (30) days after the occurrence of such damage and this Lease
shall expire on the thirtieth (30th) day after the date of such notice unless
Tenant has the then-exercisable right under Article 34 of this Lease to extend
the Term and exercises such right within thirty (30) days following the date of
such damage or destruction. For purposes of this Section 13.4, the Premises
shall be deemed wholly untenantable if due to such damage, Tenant shall be
precluded from using more than fifty percent (50%) of the Premises for the
conduct of its business and Tenant's inability to so use the Premises is
reasonably expected to continue until the Expiration Date.
Section 13.5 Waivers. Tenant hereby waives the provisions of Section
-------
1932, subdivision 2, and Landlord and Tenant hereby waive the provisions of
Section 1933, subdivision 4, of the California Civil Code, and any similar law,
statute or ordinance now or hereafter in effect.
Section 13.6 Inability to Collect. Notwithstanding any of the
--------------------
foregoing provisions of this Article 13, if and for so long as by reason of any
action or inaction by any Tenant Party, Landlord or any Mortgagee or Lessor is
unable to collect all of the insurance proceeds (including rent insurance
proceeds) applicable to damage or destruction of the Premises or the Building,
then, without prejudice to any other remedies that may be available against
Tenant, there shall be no abatement of Rent and Landlord shall have no
obligation to restore the Premises.
Section 13.7 Landlord's Liability. Any Building employee to whom any
--------------------
property shall be entrusted by or on behalf of Tenant shall be deemed to be
acting as Tenant's agent with respect to such property and neither Landlord nor
its agents shall be liable for any damage to such property, or for the loss of
or damage to any property of Tenant by theft or otherwise. None of Landlord, its
agents, any Mortgagee or Lessor shall liable for any injury or damage to persons
or property or interruption of Tenant's business resulting from fire or other
casualty, any damage caused by other tenants or persons in the Building or by
construction of any private, public or quasi-public work, or any latent defect
in the Premises or in the Building (except that Landlord shall be required to
repair the same to the extent provided in Article 5). No penalty shall accrue
for delays which may arise by reason of adjustment of fire insurance on the part
of Landlord or Tenant, or for delay on account of "labor troubles" or any other
cause beyond Landlord's control arising from any repair or restoration of any
portion of the Premises or of the Building, provided that Landlord shall use
reasonable efforts to minimize interference with Tenant's use and occupancy of
the Premises during the performance of any such repair or restoration, provided
further that Landlord shall have no obligation to employ contractors or labor at
overtime or other premium pay rates or to incur any other overtime costs or
additional expenses whatsoever. Nothing in this Section 13.7 shall affect any
right of Landlord to the indemnity from Tenant to which Landlord may be entitled
under Article 30 in order to recoup for payments made to compensate for losses
of third parties.
Section 13.8 Windows. If at any time any windows of the Premises are
-------
temporarily closed, darkened or covered over by reason of repairs, maintenance,
alterations or
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improvements to the Building, or any of such windows are permanently closed,
darkened or covered over due to any Requirement, Landlord shall not be liable
for any damage Tenant may sustain and Tenant shall not be entitled to any
compensation or abatement of any Rent, nor shall the same release Tenant from
its obligations hereunder or constitute an actual or constructive eviction.
Section 13.9 Insurance Shortfall. Notwithstanding any other
-------------------
provision of this Article 13, if Landlord is otherwise obligated to repair or
restore the Premises and/or the Building hereunder, but, for any reason
whatsoever, the estimated cost of such repair or restoration, as reasonably
determined by Landlord (the "Estimated Restoration Cost"), exceeds the insurance
proceeds available to Landlord for such repair or restoration (the "Shortfall")
then, unless Tenant undertakes to fund such entire Shortfall in accordance with
this Section 13.9, Landlord may terminate this Lease by notice to Tenant, which
termination shall be in the manner provided in the last sentence of Section
13.2. If Tenant elects to fund such Shortfall, then such Shortfall shall be
funded in the same manner as the Total Construction Cost (as defined in the
Workletter Agreement) is to be funded pursuant to the Workletter Agreement, and
shall be disbursed on a pro rata basis with such insurance proceeds to pay for
the actual costs of such repair or restoration ("Actual Restoration Cost").
Promptly following the determination of any variance between the Actual
Restoration Cost and the Estimated Restoration Cost or any revision to the
anticipated insurance proceeds, Tenant shall fund any additional Shortfall
caused thereby or be refunded any excess payments previously made by Tenant.
ARTICLE 14
EMINENT DOMAIN
Section 14.1 (a) Total Taking. If all or substantially all of the
------------
Real Property, the Building or the Premises shall be acquired or condemned for
any public or quasi-public purpose, this Lease shall terminate and the Term
shall end as of the date of the vesting of title, with the same effect as if
such date were the Expiration Date, and Rent shall be prorated and adjusted as
of such date.
(b) Partial Taking. If only a part of the Real Property, the
--------------
Building or the Premises shall be acquired or condemned then, except as
hereinafter provided in this Article 14, this Lease and the Term shall continue
in full force and effect, provided that from and after the date of the vesting
of title, the Rent and Tenant's Proportionate Share shall be modified to reflect
the reduction of the Premises and/or the Building as a result of such
acquisition or condemnation.
(c) Landlord's Termination Right. Landlord may give to Tenant,
----------------------------
within sixty (60) days following the date upon which Landlord receives notice
that all or a portion of the Real Property, the Building or the Premises has
been acquired or condemned, a notice of termination of this Lease with respect
to such portion of the Premises acquired or condemned.
(d) Tenant's Termination Right. If the part of the Real
--------------------------
Property so acquired or condemned consists of more than one (1) floor of the
Building, or if, by reason of
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such acquisition or condemnation, Tenant no longer has reasonable means of
access to the Premises, Tenant may terminate this Lease by notice to Landlord
given within thirty (30) days following the date upon which Tenant received
notice of such acquisition or condemnation. If Tenant so notifies Landlord, this
Lease shall end and expire upon the thirtieth (30th) day following the giving of
such notice. If a part of the Premises shall be so acquired or condemned and
this Lease and the Term shall not be terminated in accordance with this Section
14.1 Landlord, at Landlord's expense, but without requiring Landlord to spend
more than it collects as an award, shall, subject to the provisions of any
Mortgage or Superior Lease, restore that part of the Premises not so acquired or
condemned to a self-contained rental unit substantially equivalent (with respect
to character, quality, appearance and services) to that which existed
immediately prior to such acquisition or condemnation, excluding Tenant's
Property and/or Specialty Alterations.
(e) Apportionment of Rent. Upon any termination of this Lease
---------------------
pursuant to the provisions of this Article 14, Rent shall be apportioned as of,
and shall be paid or refunded up to and including, the date of such termination.
Section 14.2 Awards. Upon any acquisition or condemnation of all or
------
any part of the Real Property, Landlord shall receive the entire award for any
such acquisition or condemnation, and Tenant shall have no claim against
Landlord or the condemning authority for the value of any unexpired portion of
the Term, Tenant's Alterations or improvements; and Tenant hereby assigns to
Landlord all of its right in and to such award. Nothing contained in this
Article 14 shall be deemed to prevent Tenant from making a separate claim in any
condemnation proceedings for the then value of any Tenant's Property or
Specialty Alteration included in such taking and for any moving expenses,
provided any such award is in addition to, and does not result in a reduction
of, the award made to Landlord.
Section 14.3 Temporary Taking. If all or any part of the Premises is
----------------
acquired or condemned temporarily during the Term for any public or quasi-public
use or purpose, Tenant shall give prompt notice to Landlord and the Term shall
not be reduced or affected in any way and Tenant shall continue to pay all Rent
payable by Tenant without reduction or abatement and to perform all of its other
obligations under this Lease, except to the extent prevented from doing so by
the condemning authority, and Tenant shall be entitled to receive any award or
payment from the condemning authority for such use, which shall be received,
held and applied by Tenant as a trust fund for payment of the Rent falling due.
Section 14.4 Waiver. To the extent it is inconsistent with the
------
above, each party hereto hereby waives the provisions of Section 1265.130 of the
California Code of Civil Procedure allowing either party to petition a court to
terminate this Lease in the event of a partial taking of the Premises.
ARTICLE 15
ASSIGNMENT AND SUBLETTING
Section 15.1 (a) No Assignment or Subletting. Except as expressly
---------------------------
set forth herein, Tenant shall not assign, mortgage, pledge, encumber, or
otherwise transfer this Lease,
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whether by operation of law or otherwise, and shall not sublet (or underlet), or
permit, or suffer the Premises or any part thereof to be used or occupied by
others (whether for desk space, mailing privileges or otherwise), without
Landlord's prior consent in each instance. Any assignment, sublease, mortgage,
pledge, encumbrance or transfer in contravention of the provisions of this
Article 15 shall be void.
(b) Collection of Rent. If, without Landlord's consent when
------------------
required under this Article 15, this Lease is assigned, or any part of the
Premises is sublet or occupied by anyone other than Tenant or this Lease or the
Premises or any of Tenant's Property is encumbered (by operation of law or
otherwise), Landlord may collect rent from the assignee, subtenant or occupant,
and apply the net amount collected to the Rent herein reserved. No such
collection shall be deemed a waiver of the provisions of this Article 15, an
acceptance of the assignee, subtenant or occupant as tenant, or a release of
Tenant from the performance of Tenant's covenants hereunder. Tenant shall remain
fully liable for the obligations under this Lease.
(c) Further Assignment/Subletting. Landlord's consent to any
-----------------------------
assignment or subletting shall not relieve Tenant from the obligation to obtain
Landlord's express consent to any further assignment or subletting. Except for a
person or entity who acquired an interest in the Premises directly from the
initial Tenant named herein, no subtenant shall be permitted to assign or
encumber its sublease or further sublet any portion of its sublet space, or
otherwise suffer or permit any portion of the sublet space to be used or
occupied by others.
Section 15.2 Tenant's Notice. If Tenant desires to assign this Lease
---------------
or sublet all or any portion of the Premises in a transaction for which
Landlord's consent is required hereunder, Tenant shall give notice thereof to
Landlord, which shall be accompanied by (a) with respect to an assignment of
this Lease, the date Tenant desires the assignment to be effective, and (b) with
respect to a sublet of all or a part of the Premises, (i) the material business
terms on which Tenant would sublet such premises, and (ii) a description of the
portion of the Premises to be sublet. Such notice shall be deemed an offer from
Tenant to Landlord whereby Landlord (or Landlord's designee) shall be granted
the right, at Landlord's option, (1) with respect to a sublease for a term
expiring no earlier than six (6) months prior to the Expiration Date, to
terminate this Lease with respect to such space as Tenant proposes to sublease
(the "Partial Space"), upon the terms and conditions hereinafter set forth, or
(2) if the proposed transaction is an assignment of this Lease, to terminate
this Lease. Such option may be exercised by notice from Landlord to Tenant
within ten (10) Business Days after Landlord's receipt of Tenant's notice;
provided, however, that Landlord shall have no such option to terminate this
Lease with respect to any such proposed subletting unless on the date of such
proposed transaction Tenant is occupying less than fifty percent (50%) of the
rentable area of the Premises.
Section 15.3 Landlord's Termination. If Landlord exercises its
----------------------
option, if any, to terminate all or a portion of this Lease pursuant to Section
15.2, (a) this Lease shall end and expire with respect to all or a portion of
the Premises, as the case may be, on the date that such assignment or sublease
was to commence, (b) Rent shall be apportioned, paid or refunded as of such
date, (c) the then amount of the Security Deposit shall be reduced to an amount
equal to the product of (x) the then amount of the Security Deposit and (y) a
ratio, the numerator of which is
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the number of RSF in the remaining portion of the Premises and the denominator
of which is the number of RSF in the Premises immediately prior to Landlord's
exercise of such option, (d) Tenant, upon Landlord's request, shall enter into
an amendment of this Lease ratifying and confirming such total or partial
termination, and setting forth any appropriate modifications to the terms and
provisions hereof, and (e) Landlord shall be free to lease the Premises (or any
part thereof) to Tenant's prospective assignee or subtenant; provided, however,
that (i) in the event of any such total termination respecting a proposed
assignment, Landlord shall pay to Tenant a cancellation fee in an amount equal
to the amount Tenant would otherwise have been entitled to receive pursuant to
Section 15.7(a) hereof if such assignment transaction as described in such
Tenant notice had been completed and (ii) in the event of any such partial
termination respecting a proposed subletting, Landlord shall pay to Tenant an
amount equivalent the portion of net subleasing profits, determined in the
manner provided for in Section 15.7(b) hereof, that otherwise would have been
retained by Tenant if Landlord had not so exercised such option to terminate,
which payment shall be made by Landlord in the same manner that Tenant would
have been obligated to pay to Landlord Landlord's portion of such subleasing
profits pursuant to such Section 15.7(b).
Section 15.4 Conditions to Assignment/Subletting. (a) If Landlord
-----------------------------------
does not exercise any termination option available under Section 15.2, and
provided that no Event of Default then exists, Landlord's consent to the
proposed assignment or subletting shall not be unreasonably withheld or delayed.
Such consent shall be granted or declined, as the case may be, within ten (10)
Business Days after Landlord's receipt of (i) a true and complete statement
reasonably detailing the identity of the proposed assignee or subtenant, the
nature of its business and its proposed use of the Premises, (ii) current
financial information with respect to the proposed assignee or subtenant,
including its most recent financial statements, and (iii) any other information
Landlord may reasonably request, provided that:
(A) in Landlord's reasonable judgment, the
proposed assignee or subtenant is engaged in a business or activity, and
the Premises will be used in a manner, which (1) is in keeping with the
then standards of the Building, (2) limits the use of the Premises to
general and executive offices, and (3) does not violate any restrictions
set forth in this Lease, any Mortgage or Superior Lease;
(B) the proposed assignee or subtenant is a
reputable person or entity of good character with sufficient financial
means to perform all of its obligations under this Lease or the sublease,
as the case may be, and Landlord has been furnished with reasonable proof
thereof;
(C) the form of the proposed sublease or
instrument of assignment shall be reasonably satisfactory to Landlord and
shall comply with the provisions of this Article 15;
(D) there shall be not more than five (5)
subtenants in each floor of the Premises;
(E) the aggregate consideration to be paid by the
proposed subtenant under the terms of the proposed sublease shall not be
less than seventy-five
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percent (75%) of the then current market rent for the Premises (the "Market
Sub-rent") determined as though the Premises were vacant and taking into
account (x) the length of the term of the proposed sublease, (y) any rent
concessions granted to subtenant, and (z) the cost of any alterations being
performed for the sublessee; provided, however, the provisions of this
Subsection 15.4(a)(E) shall cease to apply if after a period of sixty (60)
days Tenant is unable to consummate a sublease transaction for an amount at
least equal to the Market Subrent;
(F) Tenant shall, upon demand, reimburse Landlord
for all expenses reasonably incurred by Landlord in connection with such
assignment or sublease, including any investigations as to the
acceptability of the proposed assignee or subtenant and all legal costs
reasonably incurred in connection with the granting of any requested
consent, which investigation and legal costs shall not exceed the aggregate
amount of Two Thousand Five Hundred Dollars ($2,500.00) ("Expense Limit");
provided, however, that such Expense Limit shall not apply to any
assignment or sublease in connection with the bankruptcy or reorganization
of Tenant or that involves an amendment to this Lease, and all costs
reasonably incurred in reviewing any plans and specifications for
Alterations proposed to be made in connection therewith;
(G) the proposed subtenant or assignee shall not
be entitled, directly or indirectly, to diplomatic or sovereign immunity,
regardless of whether the proposed assignee or subtenant agrees to waive
such diplomatic or sovereign immunity, and shall be subject to the service
of process in, and the jurisdiction of the courts of, the County of Santa
Clara and State of California; and
(H) in Landlord's reasonable judgment, the
proposed assignee or subtenant shall not be of a type or character, or
engaged in a business or activity, or owned or controlled by or identified
with any entity, which may result in protests or civil disorders or
commotions at, or other disruptions of the normal business activities in,
the Building.
(b) With respect to each and every subletting and/or assignment
authorized by Landlord under the provisions of this Lease, it is further agreed
that:
(i) the form of the proposed assignment or sublease
shall be reasonably satisfactory to Landlord and shall comply with the
provisions of this Article;
(ii) no sublease shall be for a term ending later than
one day prior to the Expiration Date of this Lease;
(iii) no sublease shall be delivered to any subtenant,
and no subtenant shall take possession of any part of the Premises, until an
executed counterpart of such sublease has been delivered to Landlord and
approved in writing by Landlord as provided in Section 15.4(a);
(iv) if an Event of Default shall occur at any time
prior to the effective date of such assignment or subletting and be continuing
and yet uncured on the date that would otherwise be such effective date, then
Landlord's consent thereto, if previously
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granted, shall be immediately deemed revoked without further notice to Tenant,
and any such deemed unconsented to assignment or subletting shall constitute a
further Event of Default hereunder; and
(v) each sublease shall be subject and subordinate to
this Lease and to the matters to which this Lease is or shall be subordinate, it
being the intention of Landlord and Tenant that Tenant shall assume and be
liable to Landlord for any and all acts and omissions of all subtenants and
anyone claiming under or through any subtenants which, if performed or omitted
by Tenant, would be a default under this Lease; and Tenant and each subtenant
shall be deemed to have agreed that upon the occurrence and during the
continuation of an Event of Default hereunder, Tenant has hereby assigned to
Landlord, and Landlord may, at its option, accept such assignment of, all right,
title and interest of Tenant as sublandlord under such sublease, together with
all modifications, extensions and renewals thereof then in effect and such
subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then
executory provisions of such sublease, except that Landlord shall not be (A)
liable for any previous act or omission of Tenant under such sublease, (B)
subject to any counterclaim, offset or defense not expressly provided in such
sublease, which theretofore accrued to such subtenant against Tenant, (C) bound
by any previous modification of such sublease not consented to by Landlord or by
any prepayment of more than one month's rent, (D) bound to return such
subtenant's security deposit, if any, except to the extent Landlord shall
receive actual possession of such deposit and such subtenant shall be entitled
to the return of all or any portion of such deposit under the terms of its
sublease, or (E) obligated to make any payment to or on behalf of such
subtenant, or to perform any work in the subleased space or the Building, or in
any way to prepare the subleased space for occupancy, beyond Landlord's
obligations under this Lease. The provisions of this Section 15.4(b)(v) shall be
self-operative, and no further instrument shall be required to give effect to
this provision, provided that the subtenant shall execute and deliver to
Landlord any instruments Landlord may reasonably request to evidence and confirm
such subordination and attornment.
Section 15.5 Binding on Tenant; Indemnification of Landlord. Each
----------------------------------------------
sublease pursuant to this Article 15 shall be subject to all of the covenants,
terms and conditions of this Lease. Notwithstanding any assignment or subletting
or any acceptance of Rent by Landlord from any assignee or subtenant, Tenant
shall remain fully liable for the payment of all Rent due and for the
performance of all the covenants, terms and conditions contained in this Lease
on Tenant's part to be observed and performed, and any default under any term,
covenant or condition of this Lease by any subtenant or assignee or anyone
claiming under or through any subtenant or assignee shall be deemed to be a
default under this Lease by Tenant. Tenant shall indemnify, defend, protect and
hold harmless Landlord from and against any and all losses, liabilities, damages
and expenses (including reasonable attorneys' fees and disbursements) resulting
from any claims that may be made against Landlord by the proposed assignee or
subtenant or anyone claiming under or through any subtenant or by any brokers or
other persons claiming a commission or similar compensation in connection with
the proposed assignment or sublease, irrespective of whether Landlord shall give
or decline to give its consent to any proposed assignment or sublease, or if
Landlord shall exercise any of its options under this Article 15.
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Section 15.6 Tenant's Failure to Complete. If Landlord consents to a
----------------------------
proposed assignment or sublease and Tenant fails to execute and deliver to
Landlord such assignment or sublease within ninety (90) days after the giving of
such consent, then Tenant shall again comply with all of the provisions and
conditions of Section 15.2 hereof before assigning this Lease or subletting all
or part of the Premises.
Section 15.7 Profits. If Tenant shall enter into any assignment or
-------
sublease permitted hereunder or consented to by Landlord, Tenant shall, within
sixty (60) days of Landlord's consent to such assignment or sublease, deliver to
Landlord a complete list of Tenant's reasonable third-party brokerage fees,
legal fees and architectural fees paid or to be paid in connection with such
transaction, together with a list of all of Tenant's Property to be transferred
to such assignee or sublessee. Tenant shall deliver to Landlord evidence of the
payment of such fees promptly after the same are paid. In consideration of such
assignment or subletting, Tenant shall pay to Landlord:
(a) In the case of an assignment, on the effective date of the
assignment, an amount equal to fifty percent (50%) of all sums and other
consideration paid to Tenant by the assignee for or by reason of such assignment
(including sums paid for the sale or rental of Tenant's Property, less, in the
case of a sale thereof, the then fair market value thereof, as reasonably
determined by Landlord) after first deducting Tenant's reasonable third-party
brokerage fees, legal fees and architectural fees and the reasonable costs of
any additional tenant improvements made by Tenant, all as incurred in connection
with such transaction and an amount equal to the unamortized balance of the
Agreed TI Costs (as hereinafter defined). For purposes of this Section 15.7, the
term "Agreed TI Costs" shall mean an amount equal to the lesser of (i) the cost
of the Improvements paid for by Tenant pursuant to the Workletter Agreement or
(ii) the product of (x) the number of RSF in the Premises and (y) Twenty-Seven
Dollars ($27.00), which amount shall be amortized over the remaining portion of
the Term (exclusive of any Renewal Term (as hereinafter defined)) with interest
thereon at a per annum rate equal to eight percent (8%); or
(b) in the case of a sublease, fifty percent (50%) of any
consideration payable under the sublease to Tenant by the subtenant which
exceeds on a per square foot basis the Fixed Rent and Additional Rent accruing
during the term of the sublease in respect of the subleased space (together with
any sums paid for the sale or rental of Tenant's Property, less, in the case of
the sale thereof, the then fair market value thereof, as reasonably determined
by Landlord) after first deducting Tenant's reasonable third-party brokerage
fees, legal fees and architectural fees and the reasonable costs of any
additional tenant improvements made by Tenant, all as incurred in connection
with such transaction, and an amount equal to the Agreed TI Costs, which amount
shall be allocated, if such sublease is for less than the entire Premises, on a
pro rata basis, to the rentable area of such subleased space and, if such
sublease is less than the entire Premises, the actual cost incurred by Tenant in
separately demising the subleased space (collectively, "Tenant's Costs"). The
sums payable under this clause shall be paid by Tenant to Landlord as and when
paid by the subtenant to Tenant commencing at such time as Tenant has first
recovered all of Tenant's Costs.
Section 15.8 (a) Transfers. If Tenant is a corporation, the
---------
transfer (by one or more transfers) of a majority of the stock of Tenant shall
be deemed a voluntary assignment of
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this Lease; provided, however, that the provisions of this Article 15 shall not
apply to the transfer of shares of stock of Tenant if and so long as Tenant is
publicly traded on a nationally recognized stock exchange including, without
limitation, the NASDAQ Stock Market. For purposes of this Section 15.8 the term
"transfers" shall be deemed to include the issuance of new stock which results
in a majority of the stock of Tenant being held by a person or entity which does
not hold a majority of the stock of Tenant on the date hereof. If Tenant is a
partnership, the transfer (by one or more transfers) of a majority interest in
the partnership shall be deemed a voluntary assignment of this Lease. If Tenant
is a limited liability company, trust, or any other legal entity, the transfer
(by one or more transfers) of a majority of the beneficial ownership interests
in such entity, however characterized, shall be deemed a voluntary assignment of
this Lease. The provisions of Section 15.1 shall not apply to transactions with
a corporation into or with which Tenant is merged or consolidated or to which
substantially all of Tenant's assets are transferred so long as (i) such
transfer was made for a legitimate independent business purpose and not for the
purpose of transferring this Lease, (ii) if at the time of any such transfer
either (A) the successor to Tenant has a net worth computed in accordance with
generally accepted accounting principles at least equal to the greater of (1)
the net worth of Tenant immediately prior to such merger, consolidation or
transfer, and (2) the net worth of the original Tenant on the date of this
Lease, or (B) the successor to Tenant has a total market capitalization of at
least Three Billion Three Hundred Million Dollars ($3,300,000,000.00), and (iii)
proof satisfactory to Landlord of such net worth is delivered to Landlord at
least ten (10) days prior to the effective date of any such transaction. Tenant
may also, upon prior notice to but without the necessity of the consent of
Landlord, permit any corporation or other business entity which controls, is
controlled by, or is under common control with the original Tenant (a "Related
Entity") to sublet all or part of the Premises for any Permitted Use, provided
the Related Entity is in Landlord's reasonable judgment of a character and
engaged in a business which is in keeping with the standards for the Building
and the occupancy thereof. Such sublease shall not be deemed to vest in any such
Related Entity any right or interest in this Lease or the Premises nor shall it
relieve, release, impair or discharge any of Tenant's obligations hereunder. For
the purposes hereof, "control" shall be deemed to mean ownership of not less
than fifty percent (50%) of all of the voting stock of such corporation or not
less than fifty percent (50%) of all of the legal and equitable interest in any
other business entity if Tenant is not a corporation.
(b) Applicability. The limitations set forth in this Section
-------------
15.8 shall apply to subtenant(s), assignee(s) and guarantor(s) of this Lease, if
any, and any transfer by any such entity in violation of this Section 15.8 shall
be a transfer in violation of Section 15.1.
(c) Modifications, Takeover Agreements. Any modification,
----------------------------------
amendment or extension of a sublease and/or any other agreement by which a
landlord of a building other than the Building agrees to assume the obligations
of Tenant under this Lease shall be deemed a sublease for the purposes of
Section 15.1 hereof.
Section 15.9 Assumption of Obligations. Any assignment or transfer,
-------------------------
whether made with Landlord's consent or without Landlord's consent, if and to
the extent permitted hereunder, shall not be effective unless and until the
assignee executes, acknowledges and delivers to Landlord an agreement in form
and substance satisfactory to Landlord whereby the assignee (a) assumes Tenant's
obligations under this Lease and (b) agrees that, notwithstanding
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such assignment or transfer, the provisions of Section 15.1 hereof shall be
binding upon it in respect of all future assignments and transfers.
Section 15.10 Tenant's Liability. The joint and several liability of
------------------
Tenant and any successors-in-interest of Tenant and the due performance of
Tenant's obligations under this Lease shall not be discharged, released or
impaired by any agreement or stipulation made by Landlord, or any grantee or
assignee of Landlord, extending the time, or modifying any of the terms and
provisions of this Lease, or by any waiver or failure of Landlord, or any
grantee or assignee of Landlord, to enforce any of the terms and provisions of
this Lease.
Section 15.11 Listings in Building Directory. The listing of any
------------------------------
name other than that of Tenant on the doors of the Premises, the Building
directory or elsewhere shall not vest any right or interest in this Lease or in
the Premises, nor be deemed to constitute Landlord's consent to any assignment
or transfer of this Lease or to any sublease of the Premises or to the use or
occupancy thereof by others. Any such listing shall constitute a privilege
revocable in Landlord's discretion by notice to Tenant.
Section 15.12 Lease Disaffirmance or Rejection. If at any time after
--------------------------------
an assignment by Tenant named herein, this Lease is not affirmed or rejected in
any proceeding of the types described in Section 18.1(f) hereof or any similar
proceeding, or upon a termination of this Lease due to any such proceeding,
Tenant named herein, upon request of Landlord given after such disaffirmance,
rejection or termination (and actual notice thereof to Landlord in the event of
a disaffirmance or rejection or in the event of termination other than by act of
Landlord), shall (a) pay to Landlord all Rent and other charges due and owing by
the assignee to Landlord under this Lease to and including the date of such
disaffirmance, rejection or termination, and (b) as "tenant," enter into a new
lease of the Premises with Landlord for a term commencing on the effective date
of such disaffirmance, rejection or termination and ending on the Expiration
Date, unless sooner terminated in accordance therewith, at the same Rent and
upon the then executory terms, covenants and conditions contained in this Lease,
except that (i) the rights of Tenant named herein under the new lease shall be
subject to the possessory rights of the assignee under this Lease and the
possessory rights of any persons claiming through or under such assignee or by
virtue of any statute or of any order of any court, (ii) such new lease shall
require all defaults existing under this Lease to be cured by Tenant named
herein with due diligence, and (iii) such new lease shall require Tenant named
herein to pay all Rent which, had this Lease not been so disaffirmed, rejected
or terminated, would have become due under the provisions of this Lease after
the date of such disaffirmance, rejection or termination with respect to any
period prior thereto. If Tenant named herein defaults in its obligations to
enter into such new lease for a period of ten (10) days after Landlord's
request, then, in addition to all other rights and remedies by reason of
default, either at law or in equity, Landlord shall have the same rights and
remedies against Tenant named herein as if it had entered into such new lease
and such new lease had thereafter been terminated as of the commencement date
thereof by reason of Tenant's default thereunder.
Section 15.13 Space Sharing Arrangements. Notwithstanding any
--------------------------
contrary provision of this Lease, Tenant may allow employees of companies to
whom Tenant is providing products or services, or with which Tenant is
collaborating in the development or provision of products or services, to work
in the Premises without Landlord's consent (but with
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contemporaneous written notice thereof to Landlord of the identities of such
persons working at the Premises) and without being deemed to have sublet any
portion of the Premises, so long as (A) such employees do not occupy more than
twenty-five percent (25%) of the rentable area of the Premises, in the
aggregate, at any one time, and such space is not separately demised from the
space occupied by Tenant and (B) the number of such employees does not exceed
twenty-five percent (25%) of the total number of persons regularly occupying the
Premises.
Section 15.14 Arbitration. If Tenant believes that Landlord has
-----------
unreasonably withheld its consent to any proposed assignment or subletting
hereunder, then Tenant may (but is not obligate to) submit such dispute to
expedited arbitration pursuant to Section 31.20 below.
ARTICLE 16
ELECTRICITY
Section 16.1 Electricity. Subject to any Requirements or any public
-----------
utility rules or regulations governing energy consumption, Landlord shall make
or cause to be made, customary arrangements with public utilities and/or public
agencies to furnish electric current to the Premises for Tenant's use in amounts
sufficient for normal lighting by overhead fluorescent fixtures and for normal
use of computers, workstations, photocopying machines in reasonable numbers,
facsimile machines, typewriters, electronic telecommunications and computer
network equipment customary for general office use and other office machines of
comparable electrical consumption, but not including electricity required for
special lighting or any other item of equipment which (singly) consumes more
than one and 50/100 (1.50) kilowatt per hour at rated capacity or requires a
voltage other than one hundred twenty (120) volts single phase ("High
Consumption Equipment"). If any tax is imposed upon Landlord's receipts from the
sale or resale of electricity to Tenant, the amount of such tax shall be paid by
Tenant if and to the extent permitted by law. The electricity to be provided to
the Premises under this Article 16 shall be furnished by a reputable supplier
selected by Landlord; provided, however, at Tenant's request, Landlord shall
consult with Tenant regarding switching to other electricity service providers
who provide electricity at lower rates, and also shall consult with Tenant
regarding the methods of contracting for such electricity to maximize savings
resulting from time-of-use metering or other variable pricing models to the
extent that it is technically feasible to do so. If Landlord, at Tenant's
request, changes energy suppliers, all fees, credits, discounts and rebates
received in connection therewith shall be applied against Operating Expenses.
Notwithstanding anything set forth in this Section 16.1 to the contrary, Tenant
shall have the right to install High Consumption Equipment which is within the
design criteria of the Building, as reasonably determined by Landlord.
Section 16.2 Excess Electricity. Tenant shall at all times comply
------------------
with the rules and regulations of the utility company supplying electricity to
the Building. Tenant shall not use any electrical equipment which, in Landlord's
reasonable judgment, would exceed the capacity of the electrical equipment
serving the Premises. If Landlord reasonably determines that Tenant's electrical
requirements necessitate installation of any additional risers, feeders or other
electrical distribution equipment (collectively, "Electrical Equipment") and,
promptly following Landlord's written notice to Tenant of any such
determination, Tenant fails to curtail its electrical requirements sufficiently
to prevent the necessity of Landlord's installing any such
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Electrical Equipment, or if Tenant provides Landlord with evidence reasonably
satisfactory to Landlord of Tenant's need for excess electricity and requests
that additional Electrical Equipment be installed, Landlord shall, at Tenant's
expense, install such additional Electrical Equipment, provided that Landlord,
in its sole judgment, considering the potential needs of present and future
Building tenants and of the Building itself, determines that (a) such
installation is practicable and necessary, (b) such additional Electrical
Equipment is permissible under applicable Requirements, and (c) the installation
of such Electrical Equipment will not cause permanent damage or injury to the
Building or the Premises, cause or create a dangerous or hazardous condition,
entail excessive or unreasonable alterations, or exceed the limits of the
switchgear or other facilities serving the Building, or require power in excess
of that available from the public utility serving the Building. Any costs
incurred by Landlord in connection therewith shall be paid by Tenant within ten
(10) days after the rendition of a bill therefor. Tenant shall not make or
perform, or permit the making or performance of, any Alterations to wiring
installations or other electrical facilities in or serving the Premises or make
any additions to the office equipment or other appliances in the Premises which
utilize electrical energy (other than ordinary small office equipment) without
the prior consent of Landlord, in each instance, and in compliance with this
Lease.
Section 16.3 Service Disruption. Except as otherwise provided in
------------------
Section 7.4, Landlord shall not be liable in any way to Tenant for any failure,
defect or interruption of, or change in the supply, character and/or quantity of
electric service furnished to the Premises for any reason except if attributable
to the gross negligence or willful misconduct of Landlord or the failure by
Landlord to pay any amounts owing to the utility company or other electrical
energy supplier, nor shall there be any allowance to Tenant for diminution of
rental value, nor shall the same constitute an actual or constructive eviction
of Tenant, in whole or part, or relieve Tenant from any of its Lease
obligations, and no liability shall arise on the part of Landlord by reason of
inconvenience, annoyance or injury to business whether electricity is provided
by public or private utility or by any electricity generation system owned and
operated by Landlord. Landlord shall use reasonable efforts to minimize
interference with Tenant's use and occupancy of the Premises as a result of any
such failure, defect or interruption of, or change in the supply, character
and/or quantity of, electric service, provided that Landlord shall have no
obligation to employ contractors or labor at overtime or other premium pay rates
or to incur any other overtime costs or additional expenses whatsoever.
Section 16.4 Discontinuance of Service. Provided that in all cases a
-------------------------
reasonable substitute energy supplier is available for Tenant to contract with
directly, Landlord reserves the right to discontinue furnishing electricity to
Tenant in the Premises on not less than fifteen (15) days notice to Tenant. If
Landlord exercises such right, or is compelled to discontinue furnishing
electricity to Tenant, this Lease shall continue in full force and effect and
shall be unaffected thereby, except that from and after the effective date of
such discontinuance, Landlord shall not be obligated to furnish electricity to
Tenant hereunder. If Landlord so discontinues furnishing electricity, Tenant
shall arrange to obtain electricity directly from any utility company and other
energy supplier serving the Premises to the extent that the same is available,
suitable and safe for such purposes. All equipment which may be required to
obtain electricity of substantially the same quantity, quality and character
shall be installed by Landlord at the sole cost and expense of (a) Landlord, if
Landlord voluntarily discontinues such service, or (b) Tenant, if Landlord is
compelled to discontinue such service by the public utility or pursuant to
applicable
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Requirements or if such discontinuance arises out of the acts or omissions or
otherwise at the request of Tenant. Landlord shall not voluntarily discontinue
furnishing electricity to Tenant until Tenant is able to receive electricity
directly from the public utility or other company servicing the Building, unless
the public utility or other company is not prepared to furnish electricity to
the Premises on the date required as a result of Tenant's delay or negligence in
arranging for service or Tenant's refusal to provide the utility company with a
deposit or other security requested by the utility company or Tenant's refusal
to take any other action requested by the utility company.
ARTICLE 17
ACCESS TO PREMISES
Section 17.1 Landlord's Access. (a) Tenant shall permit Landlord,
-----------------
Landlord's agents and public utility service providers servicing the Building to
erect, use and maintain concealed ducts, pipes and conduits in and through the
Premises provided such use does not cause the usable area of the Premises to be
reduced beyond a de minimis amount. Landlord shall promptly repair any damage to
the Premises or Tenant's Property caused by any work performed pursuant to this
Article 17.
(b) Landlord, any Lessor or Mortgagee and any other party
designated by Landlord and their respective agents shall have the right to enter
the Premises at all reasonable times, upon reasonable written notice except in
the case of emergency, to examine the Premises, to show the Premises to
prospective purchasers, Mortgagees or Lessors of the Building and their
respective agents and representatives or others, to make such repairs,
alterations or additions to the Premises or the Building conducted in a manner
so as to minimize disruption to Tenant's business (i) as Landlord may deem
necessary or appropriate, (ii) which Landlord may elect to perform following
Tenant's failure to perform, or (iii) to comply with any Requirements, and
Landlord shall be allowed to take all material into the Premises that may be
required for the performance of such work without the same constituting an
actual or constructive eviction of Tenant in whole or in part and without any
abatement of Rent.
(c) All parts (except surfaces facing the interior of the
Premises) of all walls, windows and doors bounding the Premises (including
exterior Building walls, exterior core corridor walls, and doors and entrances
other than doors and entrances solely connecting areas within the Premises), all
balconies, terraces and roofs adjacent to the Premises, all space in or adjacent
to the Premises used for shafts, stacks, stairways, mail chutes, conduits and
other mechanical facilities, Building Systems and Building facilities are not
part of the Premises, and Landlord shall have the use thereof and access thereto
through the Premises for the purposes of Building operation, maintenance,
alteration and repair.
Section 17.2 Final 12 Months. [Intentionally Deleted]
---------------
Section 17.3 Alterations to Building. Landlord has the right at any
-----------------------
time to (a) change the name, number or designation by which the Building is
commonly known, and (b) alter the Building to change the arrangement or location
of entrances or passageways, doors and doorways, and corridors, elevators,
stairs, toilets, or other public parts of the Building
46
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without any such acts constituting an actual or constructive eviction and
without incurring any liability to Tenant, so long as such changes do not
deprive Tenant of access to the Premises. So long as Tenant is in occupancy of
at least fifty percent (50%) of the rentable area of the Building, Landlord
shall not change the name of the Building to that of any competitor of Tenant.
If Landlord should change the name of the Building on one (1) or more occasions
during the Term, then Landlord shall reimburse Tenant for all out-of-pocket
stationery and printing costs reasonably incurred by Tenant in connection with
the second (2nd) and any subsequent such name changes.
ARTICLE 18
DEFAULT
Section 18.1 Tenant's Defaults. Each of the following events shall
-----------------
be an "Event of Default" hereunder:
(a) Tenant fails to pay when due any installment of Fixed Rent
and such default shall continue for five (5) Business Days after notice of such
default is given to Tenant, or failure to pay when due of any other item of Rent
and such default shall continue for seven (7) Business Days after notice of such
default is given to Tenant, except that if Landlord shall have given two (2)
such notices of default in the payment of any Rent in any twelve- (12-) month
period, Tenant shall not be entitled to any further notice of its delinquency in
the payment of any Rent or an extended period in which to make payment until
such time as twelve (12) consecutive months shall have elapsed without Tenant
having failed to make any such payment when due, and the occurrence of any
default in the payment of any Rent within such twelve- (12-) month period after
the giving of two (2) such notices shall constitute an Event of Default; or
(b) Tenant fails to observe or perform any other term, covenant
or condition of this Lease to be observed or performed by Tenant and if such
failure continues for more than twenty (20) days after notice by Landlord to
Tenant of such default, or if such default is of such a nature that it cannot be
completely remedied within twenty (20) days, failure by Tenant to commence to
remedy such failure within said twenty (20) days, and thereafter diligently
prosecute to completion all steps necessary to remedy such default, provided the
same is completed within ninety (90) days or as soon thereafter as is
commercially practicable unless Tenant's failure to cure such default within
such ninety-(90-) day period would constitute a default under any Mortgage or
Superior Lease; or
(c) [Intentionally deleted]; or
(d) Tenant's interest in this Lease shall devolve upon or pass
to any person, whether by operation of law or otherwise, except as expressly
permitted under Article 15 hereof; or
(e) Tenant generally does not, or is unable to, or admits in
writing its inability to, pay its debts as they become due; or
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(f) Tenant files a voluntary petition in bankruptcy or
insolvency, or is adjudicated a bankrupt or insolvent, or files any petition or
answer seeking any reorganization, liquidation, dissolution or similar relief
under any present or future federal bankruptcy act or any other present or
future applicable federal, state or other statute or law, or makes an assignment
for the benefit of creditors or seeks or consents to or acquiesces in the
appointment of any trustee, receiver, liquidator or other similar official for
Tenant or for all or any part of Tenant's property; or
(g) if, within sixty (60) days after the commencement of any
proceeding against Tenant, whether by the filing of a petition or otherwise,
seeking bankruptcy, insolvency, reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the present or
any future federal bankruptcy act or any other present or future applicable
federal, state or other statute or law, such proceeding shall not have been
dismissed, or if, within sixty (60) days after the appointment of any trustee,
receiver, liquidator or other similar official for Tenant or for all or any part
of Tenant's property, without the consent or acquiescence of Tenant, as the case
may be, such appointment shall not have been vacated or otherwise discharged, or
if any lien, execution or attachment or other similar filing shall be made or
issued against Tenant or any of Tenant's property pursuant to which the Premises
shall be taken or occupied or attempted to be taken or occupied by someone other
than Tenant.
Section 18.2 Tenant's Liability. If, at any time, (a) Tenant shall
------------------
be comprised of two or more persons, (b) Tenant's obligations under this Lease
shall have been guaranteed by any person other than Tenant, or (c) Tenant's
interest in this Lease shall have been assigned, the word "Tenant," as used in
Section 18.1 (e), (f) and (g), shall be deemed to mean any one or more of the
persons primarily or secondarily liable for Tenant's obligations under this
Lease. Any monies received by Landlord from or on behalf of Tenant during the
pendency of any proceeding of the types referred to in this Article shall be
deemed paid as compensation for the use and occupancy of the Premises and the
acceptance of any such compensation by Landlord shall not be deemed an
acceptance of Rent or a waiver on the part of Landlord of any rights under this
Lease.
ARTICLE 19
REMEDIES AND DAMAGES
Section 19.1 Landlord's Remedies. If any Event of Default occurs
-------------------
under this Lease as provided in Section 18.1, Landlord, at Landlord's option,
and without limiting Landlord in the exercise of any other right or remedy
Landlord may have on account of such Event of Default, and without any further
demand or notice, may terminate this Lease and/or, to the extent permitted by
law, remove all persons and property from the Premises, which property shall be
stored by Landlord at a warehouse or elsewhere at the risk, expense and for the
account of Tenant.
(a) If Landlord elects to terminate this Lease as provided in
Section 19.1, pursuant to Section 1951.2 of the California Civil Code, Landlord
shall be entitled to recover from Tenant the aggregate of:
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(i) The worth at the time of award of the unpaid
Rent and charges equivalent to Rent earned as of the date of the termination
hereof;
(ii) The worth at the time of award of the amount by
which the unpaid Rent and charges equivalent to Rent which would have been
earned after the date of termination hereof until the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided;
(iii) The worth at the time of award of the amount by
which the unpaid Rent and charges equivalent to Rent for the balance of the Term
after the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided;
(iv) Any other amount necessary to compensate
Landlord for the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which, in the ordinary course of things, would
be likely to result therefrom; and
(v) Any other amount which Landlord may hereafter be
permitted to recover from Tenant to compensate Landlord for the detriment caused
by Tenant's default.
For the purposes of this Section 19.1(a), the "time of award" shall mean the
date upon which the judgment in any action brought by Landlord against Tenant by
reason of such Event of Default is entered or such earlier date as the court may
determine; the "worth at the time of award" of the amounts referred to in
Sections 19.1(a)(i) and 19.1(a)(ii) shall be computed by allowing interest at
the Interest Rate, but not less than the legal rate; and the "worth at the time
of award" of the amount referred to in Section 19.1(a)(iii) shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%) per annum. Tenant agrees
that such charges shall be recoverable by Landlord under California Code of
Civil Procedure Section 1174(b) or any similar, successor or related provision
of law. Further, Tenant hereby waives the provisions of California Code of
Civil Procedure Section 1174(c) and California Civil Code Section 1951.7 or any
other similar, successor or related provision of law providing for Tenant's
right to satisfy any judgment in order to prevent a forfeiture of this Lease or
requiring Landlord to deliver written notice to Tenant of any reletting of the
Premises.
Section 19.2 (a) Notwithstanding anything to the contrary set forth
herein, Landlord's reentry to perform acts of maintenance or preservation of, or
in connection with efforts to relet, the Premises, or any portion thereof, or
the appointment of a receiver upon Landlord's initiative to protect Landlord's
interest under this Lease shall not terminate Tenant's right to possession of
the Premises or any portion thereof and, until Landlord does elect to terminate
this Lease, this Lease shall continue in full force and Landlord may pursue all
its remedies hereunder including, without limitation, the right to recover from
Tenant as they become due hereunder all Rent and other charges required to be
paid by Tenant under the terms of this Lease.
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(b) Nothing in this Article 19 shall be deemed to affect
Landlord's right to indemnification, under the indemnification clause or clauses
contained in this Lease, for claims or liability arising from events occurring
prior to the termination of this Lease.
(c) In the event of any Event of Default by Tenant as set forth
above, then in addition to any other remedies available to Landlord at law or in
equity or under this Lease, Landlord shall have the right to bring an action or
actions from time to time against Tenant, in any court of competent
jurisdiction, for all Rent and other sums due or becoming due under this Lease,
including all damages and costs proximately caused thereby, notwithstanding
Tenant's abandonment or vacation of the Premises or other acts of Tenant, as
permitted by Section 1951.4 of the California Civil Code or any successor,
related or similar provision of law. Such remedy may be exercised by Landlord
without prejudice to its right thereafter to terminate this Lease in accordance
with the other provisions contained in this Article 19.
Section 19.3 In the event of an Event of Default by Tenant and
Tenant's abandonment of the Premises or if Landlord shall elect to reenter or
shall take possession of the Premises pursuant to any legal proceeding or
pursuant to any notice provided by law, and, so long as an Event of Default is
continuing, until Landlord elects to terminate this Lease, Landlord may, from
time to time, without terminating this Lease, recover all Rent as it becomes due
pursuant to Section 19.2(a) and/or relet the Premises or any part thereof for
the account of and on behalf of Tenant, on any terms, for any term (whether or
not longer than the Term), and at any rental as Landlord in its reasonable
discretion may deem advisable, and Landlord may make any alterations and repairs
to the Premises in connection therewith. Tenant hereby irrevocably constitutes
and appoints Landlord as its attorney-in-fact, which appointment shall be deemed
coupled with an interest and shall be irrevocable, for purposes of reletting the
Premises pursuant to the immediately preceding sentence. In the event that
Landlord shall elect to so relet the Premises on behalf of Tenant, then rentals
received by Landlord from such reletting shall be applied:
(a) First, to reimburse Landlord for the costs and expenses of
such reletting (including, without limitation, costs and expenses of retaking or
repossessing the Premises, removing persons and property therefrom, securing new
tenants, and, if Landlord shall maintain and operate the Premises, the costs
thereof) and necessary or reasonable alterations.
(b) Second, to the payment of any indebtedness of Tenant to
Landlord other than Fixed Rent, Additional Rent and other sums due and unpaid
hereunder.
(c) Third, to the payment of Fixed Rent, Additional Rent and
other sums due and unpaid hereunder, and the residue, if any, shall be held by
Landlord and applied in payment of other or future obligations of Tenant to
Landlord as the same may become due and payable.
Should the rentals received from such reletting, when applied in the manner and
order indicated above, at any time be less than the total amount owing from
Tenant pursuant to this Lease, then Tenant shall pay such deficiency to
Landlord, and if Tenant does not pay such deficiency within five (5) days of
Tenant's receipt of written notice thereof, Landlord may bring an action against
Tenant for recovery of such deficiency or pursue its other remedies hereunder or
under
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California Civil Code Section 1951.8, California Code of Civil Procedure Section
1161 et seq., or any similar, successor or related provision of law.
Section 19.4 (a) All rights, powers and remedies of Landlord
hereunder and under any other agreement now or hereafter in force between
Landlord and Tenant shall be cumulative and not alternative and shall be in
addition to all rights, powers and remedies given to Landlord at law or in
equity. The exercise of any one or more of such rights or remedies shall not
impair Landlord's right to exercise any other right or remedy including, without
limitation, any and all rights and remedies of Landlord under California Civil
Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or
any similar, successor or related provision of law.
(b) If, after Tenant's abandonment of the Premises, Tenant
leaves behind any items of personal property, then Landlord shall store such
property at a warehouse or any other location at the risk, expense and for the
account of Tenant, and such property shall be released only upon Tenant's
payment of such charges, together with moving and other costs relating thereto
and all other sums due and owing under this Lease. If Tenant does not reclaim
such property within the period permitted by law, Landlord may sell such
property in accordance with law and apply the proceeds of such sale to any sums
due and owing hereunder, or retain said property, granting Tenant credit against
sums due and owing hereunder for the reasonable value of such property.
(c) To the extent permitted by law, Tenant hereby waives all
provisions of, and protections under, any decisions, statutes, rules,
regulations and other laws of the State of California to the extent same are
inconsistent and in conflict with specific terms and provisions hereof.
Section 19.5 Default Interest; Other Rights of Landlord. Any Rent or
------------------------------------------
damages payable under this Lease and not paid when due shall bear interest at
the Interest Rate from the due date until paid, and the interest shall be deemed
Additional Rent. If Tenant fails to pay any Additional Rent when due, Landlord,
in addition to any other right or remedy, shall have the same rights and
remedies as in the case of a default by Tenant in the payment of Fixed Rent. If
Tenant is in arrears in the payment of Rent, Tenant waives Tenant's right, if
any, to designate the items against which any payments made by Tenant are to be
credited, and Landlord may apply any payments made by Tenant to any items
Landlord sees fit, regardless of any request by Tenant. Landlord reserves the
right, without liability to Tenant and without constituting any claim of
constructive eviction, to suspend furnishing or rendering to Tenant any
property, material, labor, utility or other service, whenever Landlord is
obligated to furnish or render the same at the expense of Tenant, in the event
that (but only for so long as) an Event of Default by Tenant is continuing
hereunder.
ARTICLE 20
LANDLORD'S RIGHT TO CURE; FEES AND EXPENSES
If Tenant defaults in the performance of its obligations under this
Lease, Landlord, without thereby waiving such default, may perform such
obligation for the account
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and at the expense of Tenant: (a) immediately or at any time thereafter, and
without notice, in the case of emergency creating a risk of imminent harm to
persons or property or in the case the default (i) will result in a material
violation of any Requirement, or (ii) will result in a cancellation of any
insurance policy maintained by Landlord, and (b) in any other case if an Event
of Default exists and Landlord gives notice of Landlord's intention so to
perform the defaulted obligation. As soon as reasonably possible following
Landlord's commencement of any action pursuant to clause (a) above, Landlord
shall advise Tenant in writing of the initiation by Landlord of any such
actions. All costs and expenses incurred by Landlord in connection with any such
performance by it for the account of Tenant and all costs and expenses,
including reasonable counsel fees and disbursements, incurred by Landlord in any
action or proceeding (including any unlawful detainer proceeding) brought by
Landlord to enforce any obligation of Tenant under this Lease and/or right of
Landlord in or to the Premises, shall be paid by Tenant to Landlord on demand,
with interest thereon at the Interest Rate from the date incurred by Landlord.
Except as expressly provided to the contrary in this Lease, all costs and
expenses which, pursuant to this Lease (including the Rules and Regulations) are
incurred by Landlord and payable to Landlord by Tenant, and all charges, amounts
and sums payable to Landlord by Tenant for any property, material, labor,
utility or other services which, pursuant to this Lease or at the request and
for the account of Tenant, are provided, furnished or rendered by Landlord,
shall become due and payable by Tenant to Landlord in accordance with the terms
of the bills rendered by Landlord to Tenant.
ARTICLE 21
NO REPRESENTATIONS BY LANDLORD; LANDLORD'S APPROVAL
Section 21.1 No Representations. Except as expressly set forth
------------------
herein, Landlord and Landlord's agents have made no warranties, representations,
statements or promises with respect to the Building, the Real Property or the
Premises and no rights, easements or licenses are acquired by Tenant by
implication or otherwise. This Lease contains the entire agreement between the
parties and all understandings and agreements previously made between Landlord
and Tenant are merged in this Lease, which alone fully and completely expresses
their agreement. Tenant is entering into this Lease after full investigation and
is not relying upon any statement or representation made by Landlord not
embodied in this Lease.
Section 21.2 Written Approval. All references in this Lease to the
----------------
consent or approval or Landlord mean the written consent or approval of
Landlord, duly executed by Landlord.
Section 21.3 No Money Damages. Wherever in this Lease Landlord's
----------------
consent or approval is required, Landlord hereby acknowledges its duty to act in
each such case consistent with a covenant of good faith and fair dealing (but
Landlord shall not otherwise be subject to a "reasonableness" standard where
Landlord has reserved its right to act in its sole discretion). If Landlord
refuses to grant such consent or approval, whether or not Landlord expressly
agreed that such consent or approval would not be unreasonably withheld, Tenant
shall not make, and Tenant hereby waives, any claim for money damages (including
any claim by way of set-off, counterclaim or defense) based upon Tenant's claim
or assertion that Landlord unreasonably withheld or delayed its consent or
approval. Tenant's sole remedy shall be an
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action or proceeding to enforce such provision, by specific performance,
injunction or declaratory judgment. Notwithstanding the foregoing, Tenant's
waiver set forth in the second sentence of this Section 21.3 shall not apply to
any final non-appealable judgment that Tenant obtains from a court of competent
jurisdiction that Landlord acted in bad faith in making its determination to
withhold its consent or approval.
Section 21.4 Vibrations. Tenant recognizes and acknowledges that the
----------
operation of the Building equipment may cause minimal amounts of vibration or
noise which may be transmitted throughout the Premises. Beyond using its
commercially reasonable efforts to reasonably minimize any such vibration or
noise, Landlord shall have no obligation to reduce such vibration or noise
beyond that which is customary in comparable first-class office buildings of
similar age and construction.
Section 21.5 Light and Air. Tenant covenants and agrees that no
-------------
diminution of light, air or view by any structure which may hereafter be erected
(whether or not by Landlord) shall entitle Tenant to any reduction of Rent under
this Lease, result in any liability of Landlord to Tenant, or in any other way
affect this Lease or Tenant's obligations.
ARTICLE 22
END OF TERM
Section 22.1 Expiration. Upon the expiration or other termination of
----------
this Lease, Tenant shall quit and surrender the Premises to Landlord vacant,
broom clean and in good order and condition, ordinary wear and tear, repairs and
damage for which Tenant is not responsible under the terms of this Lease
excepted, and Tenant shall remove all of Tenant's Property and Tenant's
Alterations as may be required pursuant to Article 5 of this Lease. The
foregoing obligation shall survive the expiration or sooner termination of the
Term.
Section 22.2 Holdover Rent. Landlord and Tenant recognize that the
-------------
damage to Landlord resulting from any failure by Tenant to timely surrender
possession of the Premises may be substantial, may exceed the amount of the Rent
theretofore payable hereunder, and will be impossible to accurately measure.
Tenant therefore agrees that if possession of the Premises is not surrendered to
Landlord within twenty-four (24) hours after the Expiration Date or sooner
termination of the Term, in addition to any other rights or remedies Landlord
may have hereunder or at law, Tenant shall (a) pay to Landlord for each month
during which Tenant holds over in the Premises after the Expiration Date or
sooner termination of the Term, in addition to all Additional Rent, (i) for the
first month, a sum equal to one hundred twenty-five percent (125%) of the Fixed
Rent payable under this Lease for the last full calendar month of the Term
("Final Fixed Rent"), for the next two (2) months of any such holdover, one
hundred fifty percent (150%) of such Final Fixed Rent and, thereafter, two
hundred percent (200%) of such Final Fixed Rent, (b) be liable to Landlord for
(i) any payment or rent concession which Landlord may be required to make to any
tenant obtained by Landlord for all or any part of the Premises (a "New Tenant")
in order to induce such New Tenant not to terminate its lease by reason of the
holding-over by Tenant, and (ii) the loss of the benefit of the bargain if any
New Tenant shall terminate its lease by reason of the holding-over by Tenant,
and (c) indemnify Landlord against all claims for damages by any New Tenant. All
such holdover rent shall be
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determined based upon the number of calendar days during any month such holdover
occurs and the actual number of calendar days in any such month in which
Tenant's holding-over continues. No holding-over by Tenant, nor the payment to
Landlord of the amounts specified above, shall operate to extend the Term
hereof. Nothing herein contained shall be deemed to permit Tenant to retain
possession of the Premises after the Expiration Date or sooner termination of
this Lease, and no acceptance by Landlord of payments from Tenant after the
Expiration Date or sooner termination of the Term shall be deemed to be other
than on account of the amount to be paid by Tenant in accordance with the
provisions of this Article 22. All of Tenant's obligations under this Article
shall survive the expiration or earlier termination of the Term of this Lease.
ARTICLE 23
QUIET ENJOYMENT
Provided this Lease is in full force and effect and no Event of
Default then exists, Tenant may peaceably and quietly enjoy the Premises without
hindrance by Landlord or any person lawfully claiming through or under Landlord,
subject to the terms and conditions of this Lease and to all Superior Leases and
Mortgages.
ARTICLE 24
NO SURRENDER; NO WAIVER
Section 24.1 No Surrender or Release. No act or thing done by
-----------------------
Landlord or Landlord's agents or employees during the Term shall be deemed an
acceptance of a surrender of the Premises, and no provision of this Lease shall
be deemed to have been waived by Landlord, unless such waiver is in writing and
is signed by Landlord, and any such waiver shall be effective only for the
specific purpose and in the specific instance in which given. If Tenant at any
time desires to have Landlord sublet the Premises for Tenant's account, Landlord
or Landlord's agents are authorized to receive Tenant's keys to the Premises for
such purpose without releasing Tenant from any of the obligations under this
Lease, and Tenant hereby relieves Landlord of any liability for loss of or
damage to any of Tenant's effects in connection with such subletting.
Section 24.2 No Waiver. The failure of either party to seek redress
---------
for violation of, or to insist upon the strict performance of, any covenant or
condition of this Lease, or any of the Rules and Regulations, shall not be
construed as a waiver or relinquishment for the future performance of such
obligations of this Lease or the Rules and Regulations, or of the right to
exercise such election but the same shall continue and remain in full force and
effect with respect to any subsequent breach, act or omission. The receipt by
Landlord of any Rent payable pursuant to this Lease or any other sums with
knowledge of the breach of any covenant of this Lease shall not be deemed a
waiver of such breach. No payment by Tenant or receipt by Landlord of a lesser
amount than the monthly Fixed Rent or Additional Rent herein stipulated shall be
deemed to be other than a payment on account of the earliest stipulated Fixed
Rent or Additional Rent, or as Landlord may elect to apply such payment, nor
shall any endorsement or statement on any check or any letter accompanying any
check or payment as Fixed Rent or
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Additional Rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such Fixed Rent or Additional Rent or pursue any other remedy
provided in this Lease. The existence of a right of renewal or extension of this
Lease, or the exercise of such right, shall not limit Landlord's right to
terminate this Lease in accordance with the terms hereof, or create any option
for further extension or renewal of this Lease.
ARTICLE 25
WAIVER OF TRIAL BY JURY
THE PARTIES HEREBY AGREE THAT THIS LEASE CONSTITUTES A WRITTEN CONSENT
TO WAIVER OF TRIAL BY JURY PURSUANT TO THE PROVISIONS OF CALIFORNIA CODE OF
CIVIL PROCEDURE SECTION 631 AND EACH PARTY DOES HEREBY CONSTITUTE AND APPOINT
THE OTHER PARTY ITS TRUE AND LAWFUL ATTORNEY-IN-FACT, WHICH APPOINTMENT IS
COUPLED WITH AN INTEREST, AND EACH PARTY DOES HEREBY AUTHORIZE AND EMPOWER THE
OTHER PARTY, IN THE NAME, PLACE AND STEAD OF SUCH PARTY, TO FILE THIS LEASE WITH
THE CLERK OR JUDGE OF ANY COURT OF COMPETENT JURISDICTION AS A STATUTORY WRITTEN
CONSENT TO WAIVER OF TRIAL BY JURY.
LANDLORD'S INITIALS: _____ TENANT'S INITIALS: _____
If Landlord commences any summary proceeding against Tenant, Tenant
will not interpose any counterclaim of any nature or description in any such
proceeding (unless failure to impose such counterclaim would preclude Tenant
from asserting in a separate action the claim which is the subject of such
counterclaim), and will not seek to consolidate such proceeding with any other
action which may have been or will be brought in any other court by Tenant.
This Article 25 shall survive the expiration or earlier termination of this
Lease.
ARTICLE 26
INABILITY TO PERFORM
This Lease and the obligations of the parties hereunder (including the
obligation of Tenant to pay Rent and to perform all of the other covenants and
agreements of Tenant hereunder) shall not be affected, impaired or excused by
any Unavoidable Delays except as otherwise expressly set forth herein. Each
party shall use reasonable efforts to promptly notify the other of any
Unavoidable Delay which prevents such party from fulfilling any of its
obligations under this Lease. Notwithstanding the foregoing, no Unavoidable
Delay shall excuse the timely performance of any obligation under this Lease
which is to be performed or discharged by the payment of money.
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ARTICLE 27
NOTICES
Except as otherwise expressly provided in this Lease, consents,
notices, demands, requests, approvals or other communications given under this
Lease shall be in writing and shall be deemed sufficiently given or rendered if
delivered by hand (provided a signed receipt is obtained) or if sent by
registered or certified mail (return receipt requested) or by a nationally
recognized overnight delivery service making receipted deliveries, addressed as
follows:
if to Tenant, (a) at Tenant's address set forth on the first page
of this Lease, Attn: Sr. Director, Operations and Attention: General Counsel, if
mailed prior to Tenant's taking possession of the Premises, or (b) at the
Building, Attn: Sr. Director, Operations and Attention: General Counsel, if
mailed subsequent to Tenant's taking possession of the Premises, or
if to Landlord, at Landlord's address set forth on the first page
of this Lease, Attn: Chief Financial Officer, and with copies to (v) Tishman
Speyer Properties L.P., 444 Castro Street, Suite 520, Mountain View, CA 94041,
Attn: Property Manager -CO (w) Tishman Speyer Properties L.P., 520 Madison
Avenue, New York, New York 10022, Attn: General Counsel, (x) Tishman Speyer
Properties L.P., 520 Madison Avenue, New York, New York 10022, Attn: Head of
Management Department and (y) any Mortgagee or Lessor which shall have requested
copies of notices, by notice given to Tenant in accordance with the provisions
of this Article 27 at the address designated by such Mortgagee or Lessor;
or to such other address(es) as either Landlord or Tenant or any Mortgagee or
Lessor may designate as its new address(es) for such purpose by notice given to
the other in accordance with the provisions of this Article 27. Any such
approval, consent, notice, demand, request or other communication shall be
deemed to have been given on the date of receipted delivery or refusal to accept
delivery or three (3) Business Days after it shall have been mailed as provided
in this Article 27, whichever is earlier.
ARTICLE 28
RULES AND REGULATIONS
Tenant and Tenant's contractors, employees, agents, visitors and
licensees shall observe and comply with the Rules and Regulations, as reasonably
supplemented or reasonably amended from time to time, provided, that in case of
any conflict or inconsistency between the provisions of this Lease and any of
the Rules and Regulations as originally promulgated or as so supplemented or so
amended from time to time, the provisions of this Lease shall control. Landlord
reserves the right, from time to time, so to adopt additional Rules and
Regulations and so to amend the Rules and Regulations then in effect.
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ARTICLE 29
BROKER
Section 29.1 Broker Representations. Landlord has retained
----------------------
Landlord's Broker as leasing agent in connection with this Lease and Landlord
will be solely responsible for any fee that may be payable to Landlord's Broker.
Landlord agrees to pay a commission to Tenant's Broker pursuant to a separate
agreement. Each of Landlord and Tenant represents and warrants to the other that
it has not dealt with any broker in connection with this Lease other than
Landlord's Agent, Landlord's Broker and Tenant's Broker and that to the best of
its knowledge and belief, no other broker, finder or like entity procured or
negotiated this Lease or is entitled to any fee or commission in connection
herewith. The execution and delivery of this Lease by each party shall be
conclusive evidence that each party has relied upon the foregoing
representations and warranties.
Section 29.2 Indemnity. Each of Landlord and Tenant shall indemnify,
---------
defend, protect and hold the other party harmless from and against any and all
costs expenses, claims and liabilities (including reasonable attorneys' fees and
disbursements) which the indemnified party may incur by reason of any claim of
or liability to any broker, finder or like agent (other than Landlord's Agent,
Landlord's Broker and Tenant's Broker) arising out of any dealings claimed to
have occurred between the indemnifying party and the claimant in connection with
this Lease, and/or the above representation being false. Landlord shall
indemnify, defend, protect and hold Tenant harmless from any claim of or
liability to Landlord's Agent or Landlord's Broker respecting any fee or
commission relating to this Lease. The provisions of this Article 29 shall
survive the expiration or earlier termination of the Term of this Lease.
ARTICLE 30
INDEMNITY
Section 30.1 (a) Tenant's Indemnity. Tenant shall not do or permit
------------------
to be done any act or thing upon the Premises or the Building which may subject
Landlord to any liability or responsibility for injury, damages to persons or
property or to any liability by reason of any violation of law or of any
Requirement, and shall exercise such control over the Premises as to fully
protect Landlord against any such liability. Tenant shall indemnify, defend,
protect and hold harmless each of the Indemnitees from and against any and all
Losses (as defined in subsection (c) hereof), resulting from any claims (i)
against Indemnitees to the extent arising from any act, omission or negligence
of Tenant, its contractors, licensees, agents, servants, employees, invitees or
visitors and (ii) against the Indemnitees arising from any accident, injury or
damage whatsoever caused to any person or to the property of any person and
occurring during or (if Tenant shall continue to use and occupy the Premises),
after the expiration of the Term, in the Premises, except to the extent that any
such accident, injury or damage results from the active negligence or willful
misconduct of Landlord or its contractors, agents or employees.
(b) Landlord's Indemnity. Landlord shall indemnify, defend and
--------------------
hold harmless Tenant from and against all claims against Tenant arising from any
accident, injury or damage whatsoever caused to any person or the property of
any person in or about the common
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or public areas of the Building (specifically excluding the Premises), except to
the extent caused by the act, omission or negligence of Tenant or its
contractors, licensees, agents, servants, employees, invitees or visitors.
(c) Indemnity Inclusions. For purposes of this Article 30, the
--------------------
term "Losses" means any and all losses, liabilities, damages, claims, judgments,
fines, suits, demands, costs, interest and expenses of any kind or nature
(including reasonable attorneys' fees and disbursements) incurred in connection
with any claim, proceeding or judgment and the defense thereof, and including
all costs of repairing any damage to the Premises or the Building or the
appurtenances of any of the foregoing to which a particular indemnity and hold
harmless agreement applies.
Section 30.2 Defense and Settlement. If any claim, action or
----------------------
proceeding is made or brought against any Indemnitee, then upon demand by an
Indemnitee, Tenant, at its sole cost and expense, shall resist or defend such
claim, action or proceeding in the Indemnitee's name (if necessary), by
attorneys approved by the Indemnitee, which approval shall not be unreasonably
withheld. Attorneys for Tenant's insurer shall hereby be deemed approved for
purposes of this Section 30.2. Notwithstanding anything herein contained to the
contrary, Tenant may direct the Indemnitee to settle any claim, suit or other
proceeding provided that (a) such settlement shall involve no obligation on the
part of the Indemnitee other than the payment of money, (b) any payments to be
made pursuant to such settlement shall be paid in full exclusively by Tenant at
the time such settlement is reached, (c) such settlement shall not require the
Indemnitee to admit any liability, and (d) the Indemnitee shall have received an
unconditional release from the other parties to such claim, suit or other
proceeding. The provisions of this Article 30 shall survive the expiration or
earlier termination of this Lease.
ARTICLE 31
MISCELLANEOUS
Section 31.1 Delivery. This Lease shall not be binding upon Landlord
--------
or Tenant unless and until Landlord shall have executed and delivered a fully
executed copy of this Lease to Tenant.
Section 31.2 Transfer of Real Property. Landlord's obligations under
-------------------------
this Lease shall not be binding upon the Landlord named herein after the sale,
conveyance, assignment or transfer (collectively a "Transfer") by such Landlord
(or upon any subsequent landlord after the Transfer by such subsequent landlord)
of its interest in the Building or the Real Property, as the case may be, and in
the event of any such Transfer, Landlord (and any such subsequent Landlord)
shall be entirely freed and relieved of all covenants and obligations of
Landlord hereunder, and the transferee of Landlord's interest (or that of such
subsequent Landlord) in the Building or the Real Property, as the case may be,
shall be deemed to have assumed all obligations under this Lease.
Section 31.3 Limitation on Liability. The liability of Landlord for
-----------------------
Landlord's obligations under this Lease shall be limited to Landlord's interest
in the Real Property or any interest of Landlord in any insurance claims,
condemnation awards, sales proceeds or rents, all as
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attributable to Landlord's interest in the Real Property, and Tenant shall not
look to any other property or assets of Landlord or the property or assets of
any partner, shareholder, director, officer, principal, employee or agent,
directly and indirectly, of Landlord (collectively, the "Parties") in seeking
either to enforce Landlord's obligations under this Lease or to satisfy a
judgment for Landlord's failure to perform such obligations; and none of the
Parties shall be personally liable for the performance of Landlord's obligations
under this Lease.
Section 31.4 Rent. Notwithstanding anything to the contrary
----
contained in this Lease, all amounts payable by Tenant to or on behalf of
Landlord under this Lease, whether or not expressly denominated Fixed Rent,
Tenant's Tax Payment, Tenant's Operating Payment, Additional Rent or Rent, shall
constitute rent for the purposes of Section 502(b)(6) of the United States
Bankruptcy Code.
Section 31.5 Entire Document. This Lease (including any Schedules and
---------------
Exhibits referred to herein and all supplementary agreements provided for
herein) contains the entire agreement between the parties and all prior
negotiations and agreements are merged into this Lease. All of the Schedules and
Exhibits attached hereto are incorporated in and made a part of this Lease,
provided that in the event of any inconsistency between the terms and provisions
of this Lease and the terms and provisions of the Schedules and Exhibits hereto,
the terms and provisions of this Lease shall control. All Article and Section
references set forth herein shall, unless the context otherwise requires, be
deemed references to the Articles and Sections of this Lease.
Section 31.6 Governing Law. This Lease shall be governed in all
-------------
respects by the laws of the State of California.
Section 31.7 Unenforceability. If any provision of this Lease, or
----------------
its application to any person or circumstance, shall ever be held to be invalid
or unenforceable, then in each such event the remainder of this Lease or the
application of such provision to any other person or any other circumstance
(other than those as to which it shall be invalid or unenforceable) shall not be
thereby affected, and each provision hereof shall remain valid and enforceable
to the fullest extent permitted by law.
Section 31.8 Lease Disputes. (a) Except as expressly provided to
--------------
the contrary in this Lease, Landlord and Tenant agree that all disputes arising,
directly or indirectly, out of or relating to this Lease, and all actions to
enforce this Lease, shall be dealt with and adjudicated in the state courts of
the State of California or the United States District Court for the Northern
District of California and for that purpose each of Landlord and Tenant hereby
expressly and irrevocably submits itself to the jurisdiction of such courts. So
far as is permitted under applicable law, this consent to personal jurisdiction
shall be self-operative and no further instrument or action, other than service
of process in one of the manners specified in this Lease, or as otherwise
permitted by law, shall be necessary in order to confer jurisdiction upon it in
any such court.
(b) To the extent that Tenant has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with
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respect to itself or its property, Tenant irrevocably waives such immunity in
respect of its obligations under this Lease.
Section 31.9 Landlord's Agent. Unless Landlord shall render written
----------------
notice to Tenant to the contrary, Tishman Speyer Properties, L.P. is authorized
to act as Landlord's agent in connection with the performance of this Lease, and
Tenant shall direct all correspondence and requests to, and shall be entitled to
rely upon correspondence received from, Tishman Speyer Properties, L.P., as
agent for the Landlord in accordance with Article 27. Tenant acknowledges that
Tishman Speyer Properties, L.P. is acting solely as agent for Landlord in
connection with the foregoing; and neither Tishman Speyer Properties, L.P. nor
any of its direct or indirect partners, officers, shareholders, directors,
employees, principals, agents or representatives shall have any liability to
Tenant in connection with the performance of this Lease, and Tenant waives any
and all claims against any and all of such parties arising out of, or in any way
connected with, this Lease, the Building or the Real Property.
Section 31.10 Estoppel. Within fifteen (15) days following request
--------
from Landlord, any Mortgagee or any Lessor, Tenant shall deliver to Landlord a
written statement executed and acknowledged by Tenant, in form satisfactory to
Landlord, (a) stating the Commencement Date and the Expiration Date, and that
this Lease is then in full force and effect and has not been modified (or if
modified, setting forth all modifications), (b) setting forth the date to which
the Fixed Rent and any Additional Rent have been paid, together with the amount
of monthly Fixed Rent then payable, (c) stating whether or not, to the best of
Tenant's knowledge, Landlord is in default under this Lease, and, if Landlord is
in default, setting forth the specific nature of all such defaults, (d) stating
the amount of the Security Deposit, if any, under this Lease, (e) stating
whether there are any subleases or assignments affecting the Premises, (f)
stating the address of Tenant to which all notices and communication under the
Lease shall be sent, and (g) responding to any other matters reasonably
requested by Landlord, such Mortgagee or such Lessor. Tenant acknowledges that
any statement delivered pursuant to this Section 31.10 may be relied upon by any
purchaser or owner of the Real Property or the Building, or all or any portion
of Landlord's interest in the Real Property or the Building or any Superior
Lease, or by any Mortgagee, or assignee thereof or by any Lessor, or assignee
thereof.
Section 31.11 Certain Interpretational Rules. For purposes of this
------------------------------
Lease, whenever the words "include", "includes", or "including" are used, they
shall be deemed to be followed by the words "without limitation" and, whenever
the circumstances or the context requires, the singular shall be construed as
the plural, the masculine shall be construed as the feminine and/or the neuter
and vice versa. This Lease shall be interpreted and enforced without the aid of
any canon, custom or rule of law requiring or suggesting construction against
the party drafting or causing the drafting of the provision in question.
Section 31.12 Captions. The captions in this Lease are inserted only
--------
as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Lease or the intent of any provision hereof.
Section 31.13 Parties Bound. The terms, covenants, conditions and
-------------
agreements contained in this Lease shall bind and inure to the benefit of
Landlord and Tenant and, except as
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otherwise provided in this Lease, to their respective legal representatives,
successors, and assigns.
Section 31.14 Memorandum of Lease. This Lease shall not be recorded;
-------------------
however, at Landlord's request, Landlord and Tenant shall promptly execute,
acknowledge and deliver a memorandum with respect to this Lease sufficient for
recording and Landlord may record the Memorandum.
Section 31.15 Counterparts. This Lease may be executed in two or
------------
more counterparts, each of which shall constitute an original, but all of which,
when taken together, shall constitute but one instrument.
Section 31.16 Covenants, Conditions and Restrictions. Landlord and
--------------------------------------
Tenant agree that the terms of this Lease, Landlord's and Tenant's rights and
obligations under this Lease, and Tenant's use of the Premises, shall be subject
and subordinate to the terms of that certain Declaration of Covenants,
Conditions and Restrictions and Grant of Easements for Cupertino City Center,
dated October 2, 1985, which was recorded in the official records of Santa Clara
County, California, on October 9, 1985, as Instrument No. 8554457 (as amended
from time to time, the "CC&Rs"). Tenant acknowledges and agrees that Tenant
shall comply with the provisions of the CC&Rs with respect to the Premises,
which provisions are incorporated herein by this reference.
Section 31.17 Rooftop Communications Equipment. During the Term of
--------------------------------
this Lease (and any renewals or extensions thereof), Tenant shall have the
right, without payment of any fee or charge therefor, to install and operate
microwave transmitter-receivers or satellite dishes (each, a "Satellite Dish")
of a weight, height and width reasonably acceptable to Landlord and as
reasonably necessary for Tenant's use of the Premises. Landlord shall not
withhold its consent to the installation of a Satellite Dish reasonably
comparable to those installed on buildings in Cupertino, California that are
comparable to the Building. Tenant's rights pursuant to this Section 31.17 are
subject to the following:
(a) The precise location of any Satellite Dish shall be as
approved by Landlord in its reasonable discretion within ten (10) days following
receipt of Tenant's request to install such Satellite Dish on the roof of the
Building.
(b) Tenant shall pay any federal, state and local taxes
applicable to the installation and use of any Satellite Dish and Tenant shall
procure, maintain and pay for and obtain all fees, permits and governmental
agency licenses necessary in connection with the installation, maintenance and
operation of such Satellite Dish; provided, however, that Landlord shall
reasonably cooperate with the efforts of Tenant in connection with any
governmental application or filing required thereby.
(c) Tenant shall be permitted, at its expense, but without
separate charge other than any charges permitted to be imposed by Landlord under
Article 5 hereof, to install, modify, alter, repair, maintain, operate and
replace in one (1) existing chaseway of the Building in an area in the core of
the Building one (1) non-dedicated conduit for its cabling use (and the use of
the cables contained therein connecting to the Building's roof for operation of
Tenant's
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Satellite Dish(es)). All installations required in connection with any Satellite
Dish shall be made by means of conduits, wires or cables that will pass through
existing openings in the walls or roof decks of the Building, and all cables and
wires located on the roof of the Building used in connection with any Satellite
Dish shall be covered by rust-proof conduits and attachments. In no event shall
any of Tenant's installations be made through the roof surface or membrane of
the Building without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole and absolute discretion. The installation of any
Satellite Dish shall be subject to Landlord's review and approval and shall
conform to the engineering standards commonly used for installing similar
microwave and satellite dishes on comparable buildings.
(d) Tenant, at its sole cost and expense, shall comply with all
present and future laws, the CC&Rs and with any reasonable requirements of any
applicable fire rating bureau relating to the maintenance, use, installation and
operation of any Satellite Dish. Tenant shall install, maintain and operate all
of its equipment used in connection with any Satellite Dish in conformity with
all laws and all regulations of all government agencies having jurisdiction over
the installation, use and operation of such Satellite Dish, including, without
limitation, the Federal Aviation Administration and the Federal Communications
Commission; provided, however, that if compliance with such laws or regulations
would require a change in the size, configuration or location of any Satellite
Dish, such changes shall be subject to Landlord's prior written consent in
accordance with subsection (a) above.
(e) Prior to the expiration or earlier termination of the Term
of this Lease, Tenant shall remove any and all Satellite Dishes and all wires
and cables used in connection with such Satellite Dish(es), and shall restore
and repair all damage to the Building occasioned by the installation,
maintenance or removal of such Satellite Dish(es). If Tenant fails to timely
complete such removal, restoration and repair, all sums incurred by Landlord to
complete such work shall be paid by Tenant to Landlord upon demand.
(f) Landlord makes no representations or warranties whatsoever
with respect to the fitness or suitability of the Building for the installation,
maintenance and operation of any Satellite Dish, including, without limitation,
with respect to the quality and clarity of any receptions and transmissions to
or from any Satellite Dish and the presence of any interference with such
signals, whether emanating from the Building or otherwise.
(g) Tenant must contact the manager of the Building prior to the
date Tenant proposes to install any Satellite Dish on the roof of the Building
in order to make arrangements for the movement of any materials needed in
connection with the installation of such Satellite Dish.
(h) Tenant shall provide adequate maintenance personnel in order
to ensure the safe operation of any Satellite Dish. In addition, Tenant shall
install, maintain and operate all of its equipment used in connection with any
Satellite Dish in a fashion and manner so as not to interfere with the use and
operation of any: (i) other television or radio equipment in the Building; (ii)
present or future electronic control system for any of the Building Systems or
the operation of the elevators in the Building; (iii) other transmitting,
receiving or master television, telecommunications or microwave antenna
equipment currently located on the roof of the Building; or (iv) any radio
communication system now used by Landlord. In addition,
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Tenant shall use its commercially reasonable efforts to ensure that Tenant will
not interfere with any equipment installed by Landlord in the future. Landlord
shall use its commercially reasonable efforts to ensure that Tenant's equipment
will not be unreasonably interfered with.
Section 31.18 Public Artwork. Notwithstanding any provision of this
--------------
Lease to the contrary, Landlord hereby covenants and agrees to install on the
Real Property, at Landlord's sole cost and expense, certain public artwork
required by the City of Cupertino, or other applicable Governmental Authorities,
in connection with the approval of the initial development of the Real Property.
Tenant acknowledges and agrees that the aesthetic attributes of such public
artwork shall be determined solely by Landlord, subject to any requirements
imposed by the City of Cupertino or other applicable Governmental Authorities.
Section 31.19 Limitation on Damages. Except as otherwise provided in
---------------------
Section 1951.2 of the California Civil Code and in Section 22.2 of this Lease
and notwithstanding any provision of this Lease other than such Section 22.2 to
the contrary, in no event shall Landlord or Tenant be liable or responsible for
any indirect, consequential, punitive or exemplary damages.
Section 31.20 Expedited Arbitration. In connection with any dispute
---------------------
between Landlord and Tenant pursuant to Section 15.14 hereof, Landlord and
Tenant agree that: (a) upon the request of Tenant, the dispute shall be
submitted to the AAA for disposition pursuant to the "Expedited Procedures of
the Association" of the AAA; (b) the decision of the AAA shall be final and all
actions necessary to implement the decision of the AAA shall be undertaken as
soon as possible, but in no event later than ten (10) Business Days after the
rendering of such decision; (c) all fees payable to the AAA for services
rendered in connection with the resolution of the dispute shall be paid by the
party suffering the adverse decision of the AAA. For purposes of this Section
31.24, the phrase "Expedited Procedures of the Association" shall mean those
procedures set forth in paragraphs 53 through 57 of that certain booklet
published by the Association and titled "Commercial Arbitration Rules," as
amended and effective on November 1, 1993.
ARTICLE 32
TAX STATUS OF BENEFICIAL OWNERS
Tenant recognizes and acknowledges that Landlord and/or certain
beneficial owners of Landlord may from time to time qualify as real estate
investment trusts pursuant to Sections 856 et seq. of the Code or as entities
described in Section 511(a)(2) of the Code, and that avoiding (a) the loss of
such status, (b) the receipt of any income derived under any provision of this
Lease that does not constitute "rents from real property" (in the case of real
estate investment trusts) or that constitutes "unrelated business taxable
income" (in the case of entities described in Section 511(a)(2) of the Code),
and (c) the imposition of penalty or similar taxes (each an "Adverse Event") is
of material concern to Landlord and such beneficial owners. In the event that
this Lease or any document contemplated hereby could, in the opinion of counsel
to Landlord, result in or cause an Adverse Event, Tenant agrees to cooperate
with Landlord in negotiating an amendment or modification thereof and shall at
the request of Landlord execute and deliver such documents reasonably required
to effect such amendment or modification. Any amendment or modification pursuant
to this Article 32 shall be structured so
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that the economic results to Landlord and Tenant shall be substantially similar
to those set forth in this Lease without regard to such amendment or
modification. Without limiting any of Landlord's other rights under this Article
32, Landlord may waive the receipt of any amount payable to Landlord hereunder
and such waiver shall constitute an amendment or modification of this Lease with
respect to such payment.
ARTICLE 33
SECURITY DEPOSIT
Section 33.1 Security Deposit. Tenant shall deposit the Security
----------------
Deposit with Landlord upon the execution of this Lease in cash as security for
the faithful performance and observance by Tenant of the terms, covenants and
conditions of this Lease, including the surrender of possession of the Premises
to Landlord as herein provided.
Section 33.2 Letter of Credit. In lieu of a cash deposit, Tenant may
----------------
deliver the Security Deposit to Landlord in the form of a clean, irrevocable,
non-documentary and unconditional letter of credit (the "Letter of Credit")
issued by and drawable upon (i) Bank of Boston or (ii) any commercial bank,
trust company, national banking association or savings and loan association with
offices for banking purposes in San Francisco, California, satisfactory to
Landlord (the "Issuing Bank"), which has outstanding unsecured, uninsured and
unguaranteed indebtedness, or shall have issued a letter of credit or other
credit facility that constitutes the primary security for any outstanding
indebtedness (which is otherwise uninsured and unguaranteed), that is then
rated, without regard to qualification of such rating by symbols such as "+" or
"-" or numerical notation, "Aa" or better by Moody's Investors Service and "AA"
or better by Standard & Poor's Rating Service, and has combined capital, surplus
and undivided profits of not less than Five Hundred Million Dollars
($500,000,000.00). Such Letter of Credit shall (a) name Landlord as beneficiary,
(b) be in the amount of the Security Deposit, (c) have a term of not less than
one year, (d) permit multiple drawings, (e) be fully transferable by Landlord
without the payment of any fees or charges by Landlord, and (f) otherwise be in
form and content satisfactory to Landlord. If upon any transfer of the Letter of
Credit, any fees or charges shall be so imposed, then such fees or charges shall
be payable solely by Tenant and the Letter of Credit shall so specify. The
Letter of Credit shall provide that it shall be deemed automatically renewed,
without amendment, for consecutive periods of one year each thereafter during
the Term unless the Issuing Bank sends a notice (the "Non-Renewal Notice") to
Landlord by certified mail, return receipt requested, not less than forty-five
(45) days next preceding the then expiration date of the Letter of Credit
stating that the Issuing Bank has elected not to renew the Letter of Credit.
Landlord shall have the right, upon receipt of the Non-Renewal Notice, to draw
the full amount of the Letter of Credit, by sight draft on the Issuing Bank, and
shall thereafter hold or apply the cash proceeds of the Letter of Credit
pursuant to the terms of this Article 33 until Tenant delivers to Landlord a
substitute Letter of Credit which meets the requirements of this Section 33.2.
The Issuing Bank shall agree with all drawers, endorsers and bona fide holders
that drafts drawn under and in compliance with the terms of the Letter of Credit
will be duly honored upon presentation to the Issuing Bank at an office location
in San Francisco, California, or with respect to the Bank of Boston, any of its
offices in the States of California or New York.
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The Letter of Credit shall be subject in all respects to the Uniform Customs and
Practice for Documentary Credits (1993 revision), International Chamber of
Commerce Publication No. 500.
SECTION 33.3 Application of Security. If (a) an Event of Default by Tenant
-----------------------
occurs in the payment or performance of any of the terms, covenants or
conditions of this Lease, including the payment of Rent, and which includes any
payment default following Tenant's bankruptcy as to which no notice or cure is
required, or (b) Landlord receives a Non-Renewal Notice and Tenant does not
provide a substitute Letter of Credit satisfying the requirements of Section
33.2 within ten (10) Business Days following the date of such Non-Renewal
Notice, Landlord may apply or retain the whole or any part of the cash Security
Deposit or may notify the Issuing Bank and thereupon receive all or such portion
of the Security Deposit represented by the Letter of Credit as is then, and so
long as such Event of Default is continuing, thereafter needed for the uses
hereinbelow authorized, and use, apply, or retain the whole or any part of such
proceeds, as the case may be, to the extent required for the payment of any
Fixed Rent or any other sum as to which Tenant is in default including (a) any
sum which Landlord may expend or may be required to expend by reason of Tenant's
default, and/or (b) any damages or Deficiency to which Landlord is entitled
pursuant to this Lease or applicable Requirements, whether such damages or
Deficiency accrues before or after summary proceedings or other reentry by
Landlord. If Landlord applies or retains any part of the Security Deposit,
Tenant, upon demand, shall deposit with Landlord the amount so applied or
retained so that Landlord shall have the full Security Deposit on hand at all
times during the Term. If Tenant shall fully and faithfully comply with all of
the terms, covenants and conditions of this Lease, the Security Deposit (or so
much thereof as remains after Landlord has been adequately compensated for
damages due to Tenant's failure to comply fully with the terms, covenants and
conditions of this Lease) shall be returned to Tenant after the Expiration Date
and after delivery of possession of the Premises to Landlord in the manner
required by this Lease. Tenant expressly agrees that Tenant shall have no right
to apply any portion of the Security Deposit against any of Tenant's obligations
to pay Rent hereunder.
SECTION 33.4 Transfer. (A) Upon a sale of the Real Property or the
--------
Building or a leasing of the Building, or any financing of Landlord's interest
therein, Landlord shall have the right to transfer the cash Security Deposit or
the Letter of Credit, as applicable, to the vendee, lessee or lender. With
respect to the Letter of Credit, within five (5) days after notice of such sale,
leasing or financing, Tenant, at its sole cost, shall arrange for the transfer
of the Letter of Credit to the new landlord or the lender, as designated by
Landlord in the foregoing notice or have the Letter of Credit reissued in the
name of the new landlord or the lender. Tenant shall look solely to the new
landlord or lender for the return of such cash Security Deposit or Letter of
Credit and the provisions hereof shall apply to every transfer or assignment
made of the Security Deposit to a new landlord. Tenant shall not assign or
encumber or attempt to assign or encumber the cash Security Deposit or Letter of
Credit and neither Landlord nor its successors or assigns shall be bound by any
such action or attempted assignment, or encumbrance.
SECTION 33.5 Reduction in Security Deposit Amount.
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(A) Definitions. For purposes of this Section 33.5, the following
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terms shall have the meanings set forth below:
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(i) "Audited Financial Statements" means unqualified (except
for a qualification for a change in accounting principles with which the opining
CPA concurs) audited financial statements of Tenant as of the end of, and for
the, applicable Measurement Year, certified by any of the "Big Five" firms of
independent certified public accountants or any other firm of independent
certified public accountants of recognized standing selected by Tenant but
acceptable to Landlord ("CPA").
(ii) "Cash Flow From Operations" means, with respect to any
Measurement Year, cash flow from operating activities as set forth in the Tenant
Financial Report and determined in accordance with GAAP, including, without
limitation, the requirements of Financial Accounting Standards Board Statement
No. 95, as amended, but adjusted to exclude any such cash flows arising from
extraordinary or non-recurring items.
(iii) "Financial Milestones" means that (A) as of the applicable
Measurement Date, Tenant has Working Capital of at least Thirty Million Dollars
($30,000,000.00) and (B) during the applicable Measurement Year, Tenant has
achieved (1) Net Sales of at least One Hundred Million Dollars ($100,000,000.00)
and (2) Cash Flow From Operations that is greater than Zero (0).
(iv) "GAAP" means generally accepted accounting principles,
consistently applied.
(v) "Measurement Date" means the last day of the applicable
Measurement Year.
(vi) "Measurement Year" means Tenant's most recent four-(4-)
quarter fiscal period ending prior to the applicable Reduction Date.
(vii) "Milestones" means the Financial Milestones and the
Secondary Milestones, collectively.
(viii) "Net Sales" means, with respect to any Measurement Year,
aggregate gross revenues from the sale of Tenant's products or merchandise or
the provision of services by Tenant in connection with Tenant's business, but
deducting or excluding therefrom, as applicable: (A) appropriate allowances for
(1) merchandise returns by customers, (2) uncollectible accounts receivable and
(3) anticipated direct or indirect refunds, rebates, discounts or other credits
or sales price reductions to customers; (B) interest, service, finance or sales
carrying charges paid by customers for extension of credit on sales where not
included in the merchandise sales price; and (C) revenues from sales, not in the
ordinary course of Tenant's business, of fixtures, machinery or equipment; all
as determined in accordance with GAAP.
(ix) "Reduction Date" means the first (1st) anniversary of the
Commencement Date and each anniversary of the Commencement Date thereafter.
(x) "Reduction Increment" means an amount equal to the lesser
of (a) fifteen percent (15.00%) of the initial amount of the Security Deposit or
(b) the excess of the then amount of the Security Deposit over the Reduction
Limit.
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(xi) "Reduction Limit" means One Million One Hundred Thousand
Dollars ($1,100,000.00).
(xii) "Secondary Milestones" means that (A) as of the applicable
Measurement Date, Tenant has Working Capital of at least Fifty Million Dollars
($50,000,000.00) and (B) during the applicable Measurement Year, Tenant has
achieved (1) Net Sales of at least Two Hundred Fifty Million Dollars
($250,000,000.00) and (2) Cash Flow From Operations of at least Thirty Million
Dollars ($30,000,000.00).
(xiii) "Secondary Reduction Increment" means an amount equal to
the lesser of (a) twenty-five percent (25.00%) of the initial amount of the
Security Deposit or (b) the excess of the then amount of the Security Deposit
over the Reduction Limit.
(xiv) "Tenant Financial Report" means a report package
consisting of: (A) a certificate of Tenant setting forth each component of the
applicable Milestones and, with respect to any such component that is not set
forth on the face of the Audited Financial Statements, a supporting schedule
showing, in reasonable detail, the calculation thereof, certified by the
principal financial officer of Tenant as fairly presenting the amounts of all
components of the applicable Milestones in accordance with this Article 33,
together with copies of (B) the applicable Audited Financial Statements.
(xv) "Working Capital" means the excess of current assets over
current liabilities of Tenant, as such terms are defined by, and determined in
accordance with, GAAP.
(B) Reduction Procedure. Following each Reduction Date, Tenant shall
deliver to Landlord a Tenant Financial Report and, provided that Tenant has
satisfied each of the applicable Financial Milestones or, as the case may be,
each of the Secondary Milestones, as of the Measurement Date and with respect to
the Measurement Year and, provided further that both (A) no Event of Default has
occurred and is continuing as of the date that is ten (10) Business Days
following the date upon which Landlord receives such Tenant Financial Report
("Release Date") and (B) no Event of Default described in Section 18.1(a) hereof
has occurred on three (3) or more occasions during the portion of the Term
preceding such Release Date, then, for each such Reduction Date until the amount
of the Security Deposit has been reduced to the Reduction Limit, if Tenant has
so satisfied the applicable Financial Milestones, the Security Deposit shall be
reduced effective as of the Release Date by the Reduction Increment, unless
Tenant has so satisfied the applicable Secondary Milestones, in which event the
Security Deposit shall be reduced by the Secondary Reduction Increment. Promptly
following any such Release Date, Landlord shall provide written notice to Tenant
of any such permitted reduction in the amount of the Security Deposit and (i) if
Tenant has posted the Security Deposit in cash, Landlord shall deliver a check
payable to the order of Tenant in the amount of the Reduction Increment or the
Secondary Reduction Increment, as the case may be, together with such notice or
(ii) if Tenant has delivered to Landlord the Security Deposit in the form of a
Letter of Credit, then, from and after Tenant's receipt of such Landlord notice,
Tenant shall be authorized to deliver a substitute or amended Letter of Credit
to Landlord satisfying the requirements set forth in Section 33.2 above and in
an amount equal to the Security Deposit as reduced by such Reduction Increment
or
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Secondary Reduction Increment, as the case may be, and Landlord shall exchange
the prior Letter of Credit for the substitute Letter of Credit in cooperation
with the Issuing Bank.
ARTICLE 34
RENEWAL TERM
SECTION 34.1 Renewal Term. Tenant shall have the right to renew the Term
------------
for all of the Premises for one (1) renewal term of five (5) years ("Renewal
Term") which shall commence on the day following the expiration of the initial
Term and end on the fifth (5th) anniversary of the originally-scheduled
Expiration Date, unless the Renewal Term shall sooner terminate pursuant to any
of the terms of this Lease or otherwise. The Renewal Term shall commence only if
(a) Tenant shall have notified Landlord in writing of Tenant's exercise of such
renewal right (the "Exercise Notice") not later than fourteen (14) months prior
to the Expiration Date, (b) at the time of the exercise of such right and
immediately prior to the Expiration Date, no Event of Default shall have
occurred and be continuing hereunder, and (c) Tenant and/or a Related Entity
shall be in occupancy of at least sixty-six percent (66%) of the rentable area
of the Premises at the time such Exercise Notice is given. Time is of the
essence with respect to the giving of the Exercise Notice of Tenant's exercise
of such renewal option. The Renewal Term shall be upon all of the agreements,
terms, covenants and conditions hereof binding upon Tenant, except that the
Fixed Rent (as defined in Section 1.1) shall be determined as provided in
Section 34.2 and Tenant shall have no further right to renew the Term. Upon the
commencement of the Renewal Term, (A) the Renewal Term shall be added to and
become part of the Term (but shall not be considered part of the initial Term),
(B) any reference to "this Lease", to the "Term", the "term of this Lease" or
any similar expression shall be deemed to include the Renewal Term, and (C) the
expiration of the Renewal Term shall become the Expiration Date.
SECTION 34.2 Renewal Term Rent. If the Term shall be renewed as provided
in Section 34.1, the annual Fixed Rent payable during the Renewal Term shall be
equal to one hundred percent (100%) of the annual fair market rental value of
the Premises (the "Fair Market Value") as of the day immediately following the
originally-scheduled Expiration Date. For purposes hereof, the "Fair Market
Value" shall mean the rent at which tenants, as of the commencement of the
Renewal Term, will be leasing non-sublease space on a "triple-net" basis
comparable in size, location and quality to the Premises, for a comparable term,
and considering all other factors relevant to the determination of Fair Market
Value, which comparable space is located in first-class office buildings
comparable to the Building in Cupertino, California. Within thirty (30) days
following Landlord's receipt of the Exercise Notice, Landlord shall advise
Tenant in writing of Landlord's determination of Fair Market Value (the "Rent
Notice"). Within thirty (30) days of Tenant's receipt of Landlord's Rent Notice,
Tenant shall advise Landlord in writing whether Tenant accepts Landlord's
determination of Fair Market Value, elects to rescind Tenant's exercise of the
renewal option or elects to have the determination of Fair Market Value be
resolved by arbitration as provided in Section 34.3 hereof. Tenant's failure to
so advise Landlord of its election within such thirty-(30-) day period shall
constitute Tenant's acceptance of Landlord's determination of Fair Market Value.
If Tenant timely elects to rescind its exercise of the renewal option, the Term
of this Lease shall end on the Expiration Date. If the Fixed Rent payable during
the Renewal Term has not been determined prior to the
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commencement thereof, Tenant shall pay Fixed Rent in an amount equal to the Fair
Market Value for the Premises as determined by Landlord (the "Interim Rent").
Upon final determination of the Fixed Rent for the Renewal Term, Tenant shall
commence paying such Fixed Rent as so determined, and within ten (10) days after
such determination Tenant shall pay any deficiency in prior payments of Fixed
Rent or, if the Fixed Rent as so determined shall be less than the Interim Rent,
Tenant shall be entitled to a credit against the next succeeding installments of
Fixed Rent in an amount equal to the difference between each installment of
Interim Rent and the Fixed Rent as so determined which should have been paid for
such installment until the total amount of the over payment has been recouped.
SECTION 34.3 Arbitration. If Tenant shall dispute Landlord's determination
-----------
of Fair Market Value pursuant to Section 34.2, Tenant shall give notice to
Landlord of such dispute within ten (10) days of Tenant's receipt of Landlord's
determination, and such dispute shall be determined by a single arbitrator
appointed in accordance with the American Arbitration Association Real Estate
Valuation Arbitration Proceeding Rules. The arbitrator shall be impartial and
shall have not less than ten (10) years' experience in the County of Santa Clara
in a calling related to the leasing of commercial office space in office
buildings comparable to the Building, and the fees of the arbitrator shall be
shared equally by Landlord and Tenant. Within fifteen (15) days following the
appointment of the arbitrator, Landlord and Tenant shall attend a hearing before
the arbitrator at which each party shall submit a report setting forth its
determination of the Fair Market Value of the Premises for the Renewal Term,
together with such information on comparable rentals and such other evidence as
such party shall deem relevant. The arbitrator shall, within thirty (30) days
following such hearing and submission of evidence, render his or her decision by
selecting the determination of Fair Market Value submitted by either Landlord or
Tenant which, in the judgment of the arbitrator, most nearly reflects the Fair
Market Value of the Premises for the Renewal Term. The arbitrator shall have no
power or authority to select any Fair Market Value other than a Fair Market
Value submitted by Landlord or Tenant, and the decision of the arbitrator shall
be final and binding upon Landlord and Tenant.
ARTICLE 35
SIGNAGE
SECTION 35.1 Exterior Signage. Subject to the provisions of this Article
----------------
35, Tenant shall have the right, in accordance with this Article 35, and subject
to (i) Landlord's prior review and approval, which shall not be unreasonably
withheld, conditioned or delayed, (ii) the receipt by Tenant of all necessary
governmental approvals therefor and (ii) the compliance of any such signage with
all Requirements and the CC&Rs to construct, install, maintain, repair and
replace signs and other identifying materials containing the Tenant Name (as
hereinafter defined) in, on or about the Premises.
(A) Monument Signage.
----------------
(i) Subject to the provisions of this Section 35.1(a),
Tenant shall have the right to have a monument sign exclusively bearing the
Tenant Name at a prominent location on the Real Property to be selected by
Tenant and approved by Landlord (the
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"Monument Sign"), or if such location shall not be permitted by Governmental
Authorities having jurisdiction, at another location proximate thereto mutually
and reasonably acceptable to the parties.
(ii) The Monument Sign (A) shall be consistent with the
quality and appearance of the Building, (B) shall be subject to receipt by
Tenant of all governmental permits and approvals required therefor and (C) if
desired to be illuminated by Tenant, shall be illuminated with such lighting and
at such times as shall be reasonably approved in advance by Landlord and Tenant.
Notwithstanding the foregoing, in the event Tenant is unable to obtain any such
approval or permit after exercise of its commercially reasonable efforts, Tenant
may, at Tenant's sole cost and expense, require that (X) the parties make such
reasonable changes and/or modifications to the location and/or any other
characteristic of the Monument Sign which may have adversely affected Tenant's
ability to obtain such approval or permit, and (Y) notwithstanding any such
disapproval, Tenant may exercise any rights of appeal or rehearing available,
resubmit Tenant's application therefor with the changes or modifications
described in clause (X) above and/or at reasonable intervals after any prior
disapproval, resubmit its application for such permit or approval (with or
without changes).
(iii) For purposes of this Article 35, "Tenant Name" means
Portal Software and any other legal name or trade name by which Tenant or its
products may be known. As part of the Tenant Name, Tenant may include any logo
commonly associated with Tenant or its products.
(iv) The Monument Sign may be designed to include up to four
(4) identification bands. Tenant may assign its rights to the Monument Sign to
any permitted assignee of this Lease or transfer a right to use one or more of
such identification bands to any subtenant in occupancy of at least one (1)
entire floor of the Building, in either case subject to Landlord's approval, not
to be unreasonably withheld, of any Tenant Name to be placed on such Monument
Sign other than as defined in Section 35.1(a)(iii). Tenant may not design and
install a Monument Sign containing more than such four (4) identification bands
without the prior written consent of Landlord, which consent may be withheld in
Landlord's sole discretion.
(B) Additional Wall Signage.
-----------------------
Subject to the provisions of this Article 35, including, without
limitation, the receipt of all approvals therefor from Governmental Authorities,
Tenant shall have the right to construct one (1) additional sign (the "Eyebrow
Sign"), in which case Tenant shall bear all costs and expenses relating to the
design, construction, permitting, maintenance and repair of such Eyebrow Sign.
The Eyebrow Sign shall be located on the exterior walls of the Building at the
top of the Building and a location reasonably acceptable to the parties.
Landlord agrees to exercise commercially-reasonable efforts in support of
Tenant's efforts to obtain required approvals from Governmental Authorities for
such Eyebrow Sign, so long as such Landlord efforts result in no cost or expense
to Landlord. Tenant hereby acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty concerning the obtaining of
approvals from Governmental Authorities concerning any such Eyebrow Sign.
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SECTION 35.2 Miscellaneous.
-------------
(a) The size and quantity of all of Tenant's identifying
language shall be consistent with the tenant identity signage programs of first
class office buildings in Cupertino, California comparable to the Building,
shall be in keeping with the overall character of the Building's architecture
and construction materials, and shall be otherwise subject to Landlord's prior
review and approval in accordance with Section 35.1.
(b) Tenant shall be solely responsible for all costs and
expenses relating to the design, permitting (including receipt of all necessary
electrical, building and other permits and/or approvals), fabrication,
installation, operation and all on-going maintenance and repair of any and all
signage installed by Tenant in accordance with the terms and provisions of this
Article 35, together with all electrical equipment related thereto.
SECTION 35.3 Restoration of the Building. At the expiration or earlier
---------------------------
termination of the Term of this Lease, Tenant shall, at its sole cost and
expense, remove any displays of the Tenant Name or other insignia, and restore
the areas of the Building where such identifying materials were located.
[BALANCE OF THIS PAGE INTENTIONALLY BLANK]
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SECTION 35.4 Modifications to Existing Drive-Way. Landlord acknowledges
-----------------------------------
that Tenant has advised Landlord of Tenant's desire to explore the potential of
creating a circular drive way in front of the Building (the "Proposed Drive
Way") and the creation of a limited number of at-grade visitor parking spaces in
front of the Building (the "Visitor Spaces"). Provided that Tenant engages, at
its sole cost and expense, the architectural services of Hellmuth, Obata &
Kassabaum, Inc. ("HOK") and subject to the receipt of all necessary approvals
from the City of Cupertino and from the owner's association pursuant to the
CC&Rs, Landlord shall not unreasonably withhold its consent (and shall
reasonably cooperate with Tenant in prosecuting any necessary consents) to the
installation by Tenant, at its sole cost and expense, of up to three (3) such
Visitor Spaces. In addition, Landlord shall consider any proposal received from
Tenant (and prepared by HOK) to install the Proposed Drive Way; provided that
Landlord's consent with respect thereto may be given or withheld in the exercise
of Landlord's sole and absolute discretion.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
LANDLORD: TENANT:
- --------- -------
TST CUPERTINO, L.L.C., a Delaware PORTAL SOFTWARE, INC.,
limited liability company a Delaware corporation
By: /s/ ANDREW J. NATHAN By: /s/ JACK L. ACOSTA
-------------------------------- ------------------------------
Name: Andrew J. Nathan Name: Jack L. Acosta
------------------------------
Its: Vice President Its: Vice President and Chief
-------------------------------
Financial Officer
By: /s/ MITCHELL GAYNOR
------------------------------
Name: Mitchell Gaynor
Its: General Counsel and Secretary
72
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EXHIBIT A
FLOOR PLANS
[SEE ATTACHED COPIES OF THE FLOOR PLANS FOR EACH OF THE FIRST (1ST )
THROUGH FOURTH (4TH) FLOORS, INCLUSIVE, OF THE BUILDING WHICH
COMPRISE, RESPECTIVELY, EXHIBIT A-1 THROUGH EXHIBIT A-4]
A-1
<PAGE>
EXHIBIT B
DEFINITIONS
Base Rate: The annual rate of interest publicly announced from time
---------
to time by Citibank, N.A., or its successor, in New York, New York as its "base
rate" (or such other term as may be used by Citibank, N.A., from time to time,
for the rate presently referred to as its "base rate").
Building System: The mechanical, electrical, plumbing, sanitary,
---------------
sprinkler, heating, ventilation and air conditioning, security, life-safety,
elevator and other service systems or facilities of the Building up to the point
of localized distribution to the Premises (excluding, however, supplemental HVAC
systems of tenants (including Tenant), sprinklers and the horizontal
distribution systems within and servicing the Premises and by which mechanical,
electrical, plumbing, sanitary, heating, ventilating and air conditioning,
security, life-safety and other service systems are distributed from the base
Building risers, feeders, panelboards, etc. for provision of such services to
the Premises).
Business Days: All days, excluding Saturdays, Sundays and all days
-------------
observed by either the State in which the Building is located, the Federal
Government or the labor unions servicing the Building as legal holidays.
Code: The Internal Revenue Code of 1986, as amended, and the
----
regulations promulgated thereunder.
Cost Per Kilowatt Hour: (a) The total cost for electricity incurred
----------------------
by Landlord to service the Building during a particular billing period
(including energy charges, demand charges, surcharges, time-of-day charges, fuel
adjustment charges, rate adjustment charges, taxes, rebates and any other
factors used by the public utility company in computing its charges to
Landlord), divided by (b) the total kilowatt hours purchased by Landlord to
provide electricity to the Building during such period.
Deficiency: The difference between (a) the Fixed Rent and Additional
----------
Rent for the period which otherwise would have constituted the unexpired portion
of the Term (assuming the Additional Rent for each year thereof to be the same
as was payable for the year immediately preceding such termination or re-entry),
and (b) the net amount, if any, of rents collected under any reletting effected
pursuant to the provisions of the Lease for any part of such period (after first
deducting from such rents all expenses incurred by Landlord in connection with
the termination of this Lease, Landlord's re-entry upon the Premises and such
reletting, including repossession costs, brokerage commissions, attorneys' fees
and disbursements, and alteration costs).
Excluded Expenses: (a) Taxes; (b) franchise or income taxes imposed
-----------------
upon Landlord; (c) mortgage amortization and interest; (d) leasing commissions;
(e) the cost of tenant installations and decorations incurred in connection with
preparing space for any Building tenant, including workletters and concessions;
(f) ground rent, if any; (g) management
B-1
<PAGE>
fees exceeding an amount (the "Management Fee") equal to three percent (3%) of
the sum of (A) Fixed Rent due under this Lease, (B) the aggregate of all
Operating Expenses excluding the Management Fee and (C) Taxes; (h) wages,
salaries and benefits paid to any persons above the grade of Building Manager;
(i) legal and accounting fees, judgments and other costs relating to (A)
disputes with tenants, prospective tenants or other occupants of the Building,
(B) disputes with purchasers, prospective purchasers, Mortgagees or prospective
Mortgagees, Lessors or prospective Lessors of the Building or the Real Property
or any part of either, or (C) negotiations of leases, contracts of sale or
mortgages; (j) costs of services provided to other tenants of the Building on a
"rent-inclusion" basis which are not provided to Tenant on such basis; (k) costs
that are reimbursed out of insurance, warranty or condemnation proceeds, or
which are reimbursable by Tenant or other tenants other than pursuant to an
expense escalation clause; (l) costs in the nature of penalties or fines; (m)
costs for services, supplies or repairs paid to any related entity in excess of
costs that would be payable in an "arm's length" or unrelated situation; (n)
allowances, concessions or other costs and expenses of improving or decorating
any demised or demisable space in the Building; (o) consulting, brokerage,
appraisal, advertising and promotional fees and expenses in connection with the
leasing, financing or sale of the Building; (p) the costs of installing,
operating and maintaining a specialty improvement or an improvement other than
for general office use, including a cafeteria, lodging or private dining
facility, or an athletic, luncheon or recreational club; (q) any costs or
expenses (including fines, interest, penalties and legal fees) arising out of
Landlord's failure to timely pay Operating Expenses or Taxes; (r) costs incurred
in connection with the removal, encapsulation or other treatment of any
Hazardous Materials other than with respect to any Hazardous Materials
introduced into the Premises and/or the Building by Tenant or its employees,
agents or contractors, and (s) the cost of capital improvements other than those
expressly included in Operating Expenses pursuant to Section 8.1 of this Lease;
(t) costs of correcting defects in, or significant design error relating to, the
initial design or construction of the Building; (u) the wages and benefits of
any employee who does not devote substantially all of his or her employed time
to the operation and management of the Building or Real Property unless such
wages and benefits are prorated to reflect time spent on operating and managing
the Real Property vis-a-vis time spent on matters unrelated to operating and
managing the Real Property; (v) charitable and political contributions or
membership fees (w) any costs expressly excluded from Operating Expenses
elsewhere in this Lease; (x) costs or expenses arising from the active
negligence or willful misconduct of Landlord or Landlord's agents, servants or
employees or from the breach by Landlord of any of its obligations under this
Lease; (y) except for any amortization or depreciation charges expressly
provided for in this Lease as includable in Operating Expenses, depreciation
charges or contributions to capital replacement reserves; (z) except for costs
and expenses incurred for maintenance and repair of objects of art on or about
the Real Property for which Landlord is responsible including, without
limitation, such artwork referred to in Section 31.18, costs for any sculptures,
paintings, furniture or other objects of art; (aa) charges to reserves for
uncollectible accounts; (ab) costs and expenses associated with the operation of
the entity that is Landlord including associated accounting and legal fees,
costs concerning disputes with Landlord's Agent or Landlord's other agents and
employees, and general corporate and administrative expenses (other than travel
and related expenses reasonably incurred by persons responsible for the
operation, management and repair of the Building who are based outside of the
San Francisco Bay Area); (ac) costs incurred to correct any "Year 2000" software
problems in any Building Systems; and (ad) the amount of any deductible carried
by Landlord under insurance policies
B-2
<PAGE>
respecting the Building which exceed One Hundred Fifty Thousand Dollars
($150,000.00) or, with respect to earthquake insurance, five percent (5%) of the
replacement value of the Building.
Governmental Authority (Authorities): The United States of America,
------------------------------------
the City of Cupertino, County of Santa Clara, or State of California, or any
political subdivision, agency, department, commission, board, bureau or
instrumentality of any of the foregoing, now existing or hereafter created,
having jurisdiction over the Real Property or any portion thereof or the curbs,
sidewalks, and areas adjacent thereto.
Hazardous Materials: Any substances, materials or wastes currently or
-------------------
in the future deemed or defined in any Requirement as "hazardous substances,"
"toxic substances," "contaminants," "pollutants" or words of similar import.
HVAC Systems: The Building System designed to provide heating,
------------
ventilation and air conditioning.
Indemnitees: Landlord, Landlord's Agent, each Mortgagee and Lessor,
-----------
and each of their respective direct or indirect partners, officers,
shareholders, directors, members, trustees, beneficiaries, employees,
principals, contractors, licensees, invitees, servants, agents, or
representatives.
Lessor: A lessor under a Superior Lease.
------
Mortgage(s): Any mortgage, trust indenture or other financing
-----------
document which may now or hereafter affect the Premises, the Real Property, the
Building or any Superior Lease and the leasehold interest created thereby, and
all renewals, extensions, supplements, amendments, modifications, consolidations
and replacements thereof or thereto, substitutions therefor, and advances made
thereunder.
Mortgagee(s): Any mortgagee, trustee or other holder of a Mortgage.
------------
Prohibited Use: Any use or occupancy of the Premises that in
--------------
Landlord's reasonable judgment would: (a) cause damage to the Building, the
Premises or any equipment, facilities or other systems therein; (b) impair the
appearance of the Building; (c) interfere with the efficient and economical
maintenance, operation and repair of the Premises or the Building or the
equipment, facilities or systems thereof; (d) adversely affect any service
provided to, and/or the use and occupancy by, any Building tenant or occupants;
(e) violate the certificate of occupancy issued for the Premises or the Building
or (f) adversely affect the image of the Building as a first-class office
location in Cupertino, California. Prohibited Use also includes the use of any
part of the Premises for: (i) a restaurant or bar (other than one (1) full-scale
cafeteria for use by Tenant's employees and invitees, provided such cafeteria is
not open to the general public and is constructed in accordance with the
Workletter Agreement or Article 5 hereof and which Tenant hereby acknowledges
shall, in either event, constitute a Specialty Alteration); (ii) the
preparation, consumption, storage, manufacture or sale of food or beverages
(except in connection with vending machines and/or warming kitchens or break
rooms installed for the use of Tenant's employees only), liquor, tobacco or
drugs; (iii) the business of photocopying, multilith or offset printing (except
photocopying in connection with Tenant's own business); (iv) a typing or
stenography business; (v) a school or classroom (other than a training facility
for
B-3
<PAGE>
Tenant's customers and invitees); (vi) lodging or sleeping; (vii) the operation
of retail facilities (meaning a business whose primary patronage arises from the
generalized solicitation of the general public to visit Tenant's offices in
person without a prior appointment) of a savings and loan association or retail
facilities of any financial, lending, securities brokerage or investment
activity; (viii) a payroll office; (ix) a barber, beauty or manicure shop; (x)
an employment agency, executive search firm or similar enterprise; (xi) offices
of any Governmental Authority, any foreign government, the United Nations, or
any agency or department of the foregoing; (xii) the manufacture, retail sale,
storage of merchandise or auction of merchandise, goods or property of any kind
to the general public which could reasonably be expected to create a volume of
pedestrian traffic substantially in excess of that normally encountered in the
Premises; (xiii) the rendering of medical, dental or other therapeutic or
diagnostic services; or (xiv) any illegal purposes or any activity constituting
a nuisance.
Requirements: All present and future laws, rules, orders, ordinances,
------------
regulations, statutes, requirements, codes and executive orders, extraordinary
and ordinary of (i) all Governmental Authorities, including the Americans With
Disabilities Act, 42 U.S.C. (S)12,101 (et seq.), and any law of like import, and
all rules, regulations and government orders with respect thereto, and any of
the foregoing relating to Hazardous Materials, environmental matters, public
health and safety matters, (ii) any applicable fire rating bureau or other body
exercising similar functions, affecting the Real Property or the maintenance,
use or occupation thereof, or any street, avenue or sidewalk comprising a part
of or in front thereof or any vault in or under the same and (iii) all
requirements of all insurance bodies affecting the Premises.
Rules and Regulations: The rules and regulations annexed to and made
---------------------
a part of this Lease as Exhibit G, as they may be modified from time to time by
Landlord.
Specialty Alterations: Alterations consisting of kitchens, pantries,
---------------------
executive bathrooms, raised computer floors, computer installations, safe
deposit boxes, vaults, libraries or file rooms requiring reinforcement of
floors, internal staircases, conveyors, dumbwaiters, and other Alterations of a
similar character.
Substantial Completion: As to any construction performed by any party
----------------------
in the Premises, including any Alterations (but not the Improvements),
"Substantial Completion" or "Substantially Completed" means that such work has
been completed, as reasonably determined by Landlord's architect, in accordance
with (a) the provisions of this Lease applicable thereto, (b) the plans and
specifications for such work, and (c) all applicable Requirements, except for
minor details of construction, decoration and mechanical adjustments, if any,
the noncompletion of which does not materially interfere with Tenant's use of
the Premises.
Superior Lease(s): Any ground or underlying lease of the Real
-----------------
Property or any part thereof heretofore or hereafter made by Landlord and all
renewals, extensions, supplements, amendments, modifications, consolidations,
and replacements thereof.
Tenant's Property: Tenant's movable fixtures and movable partitions,
-----------------
telephone and other equipment, computer systems, trade fixtures, furniture,
furnishings, and other items of personal property which are removable without
material damage to the Premises or Building.
B-4
<PAGE>
Unavoidable Delays: Any inability to fulfill or delay in fulfilling
------------------
any obligations of a party under this Lease expressly or impliedly to be
performed by a party (including inability to make or delay in making any
repairs, additions, alterations, improvements or decorations or Landlord's
inability to supply or delay in supplying any equipment or fixtures), if such
party's inability or delay is due to or arises by reason of strikes, labor
troubles or by accident, or by any cause whatsoever reasonably beyond such
party's control, including laws, governmental preemption in connection with a
national emergency, Requirements or shortages, or unavailability of labor, fuel,
steam, water, electricity or materials, or delays caused by others, mechanical
breakdown, acts of God, enemy action, civil commotion, fire or other casualty.
B-5
<PAGE>
EXHIBIT C
CUPERTINO CITY CENTER V
PARKING RULES AND REGULATIONS
1. Tenant shall not store or permit Tenant's Invitees to store any
automobiles in the Parking Facility without the prior written consent of
Landlord. Except for emergency repairs, neither Tenant nor any Tenant Invitee
shall not perform any work on any automobiles while located in the Parking
Facility. If it is necessary for Tenant or a Tenant Invitee to leave an
automobile in the Parking Facility overnight, Tenant shall provide Landlord with
prior notice thereof, designating the license plate number and model of such
automobile.
2. Cars must be parked entirely within the stall lines painted on
the floor, and only compact cars may be parked in areas reserved for compact
cars.
3. All directional signs and arrows must be observed.
4. The speed limit shall be five (5) miles per hour.
5. Parking spaces reserved for handicapped parking must be used only
by vehicles properly designated.
6. Parking is prohibited in all areas not expressly designated for
parking, including, without limitation:
a. in areas not striped for parking;
b. in aisles;
c. where "no parking" signs are posted;
d. on ramps;
e. in loading zones;
f. in cross-hatched areas; and
g. in such other areas as may be designated by Landlord, its
agents, lessees or licensees.
7. Parking stickers, key cards or any other devices or forms of
identification or entry supplied by Landlord shall remain the property of
Landlord. Such parking identification devices must be displayed as requested,
and any device in the possession of an unauthorized holder will be void.
8. Parking Facility managers and attendants are not authorized to
make or allow any exceptions to these Parking Rules and Regulations.
9. Every person visiting the Parking Facility is required to park
and lock his/her own car.
C-1
<PAGE>
10. Loss or theft of parking identification, key cards or other such
devices must be reported to Landlord and to any Parking Facility manager
immediately. Any parking devices reported lost or stolen found on any authorized
car will be confiscated, and the illegal holder will be subject to prosecution.
Lost or stolen devices found by Tenant must be reported to the office of the
garage immediately.
11. Washing, waxing, cleaning or servicing any vehicle by Tenant or
any Tenant Invitee is prohibited. Parking spaces may be used only for parking
automobiles.
12. NO LIABILITY. TENANT ACKNOWLEDGES AND AGREES THAT, TO THE FULLEST
-----------------------------------------------------------------
EXTENT PERMITTED BY LAW, LANDLORD SHALL NOT BE RESPONSIBLE FOR ANY LOSS OR
- --------------------------------------------------------------------------
DAMAGE TO TENANT OR ANY TENANT INVITEE OR TO TENANT'S OR ANY TENANT INVITEE'S
- -----------------------------------------------------------------------------
PROPERTY (INCLUDING, WITHOUT LIMITATIONS, ANY LOSS OR DAMAGE TO TENANT'S OR ANY
- -------------------------------------------------------------------------------
TENANT INVITEE'S AUTOMOBILE OR THE CONTENTS THEREOF DUE TO THEFT, VANDALISM OR
- ------------------------------------------------------------------------------
ACCIDENT) ARISING FROM OR RELATED TO TENANT'S OR ANY TENANT INVITEE'S USE OF THE
- --------------------------------------------------------------------------------
PARKING FACILITY OR WHETHER OR NOT SUCH LOSS OR DAMAGE RESULTS FROM LANDLORD'S
- ------------------------------------------------------------------------------
ACTIVE NEGLIGENCE OR NEGLIGENT OMISSION, BUT EXCLUDING LANDLORD'S GROSS
- -----------------------------------------------------------------------
NEGLIGENCE OR WILLFUL MISCONDUCT OR ANY FAILURE BY LANDLORD TO MAINTAIN AND
- ---------------------------------------------------------------------------
REPAIR THE LANDLORD REPAIR AREAS.
- --------------------------------
13. Release of Liability. Without limiting the provisions of
Paragraph 12 above and except where caused by the gross negligence or willful
misconduct of Landlord or any failure by Landlord to maintain and repair the
Landlord Repair Areas, Tenant hereby voluntarily releases, discharges, waives
and relinquishes any and all actions or causes of action for personal injury or
property damage occurring to Tenant or any Tenant Invitee arising as a result of
parking in the Parking Facility, or any activities incidental thereto, wherever
or however the same may occur, and further agrees that Tenant will not prosecute
any claim for personal injury or property damage against Landlord or any of its
officers, agents, servants or employees for any said causes of action. It is the
intention of Tenant by this instrument to exempt and relieve Landlord from
liability for personal injury or property damage caused by negligence; provided
that nothing set forth herein shall be construed to impose upon Tenant any
liability or responsibility for claims made by third-parties (and not a Tenant
Invitee) with respect to the Parking Facility in circumstances where neither
Tenant nor any Tenant Invitee was responsible therefor.
14. The garage management reserves the right to refuse the issuance
of monthly stickers or other parking identification devices to Tenant or and
Tenant Invitee who willfully refuses to comply with the above Parking Rules and
Regulations or any City, State or Federal ordinance, law or agreement.
15. Neither Tenant nor any Tenant Invitee shall load or unload in
areas other than those designated by Landlord for such activities.
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16. Tenant, any Tenant Invitee and unauthorized users parked in
prohibited areas are subject to towing at their own expense.
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EXHIBIT D
WORKLETTER AGREEMENT
This Workletter Agreement (the "Agreement") is an exhibit to that certain
Lease (the "Lease"), dated as of the date hereof, between TST Cupertino, L.L.C.
("Landlord"), and Portal Software, Inc. ("Tenant"), wherein Tenant is leasing
certain office space (the "Premises") in Cupertino City Center V (the
"Building"), in Cupertino, California, as more particularly described in the
Lease. In consideration of the parties entering into the Lease and of the
mutual promises and covenants herein contained, Landlord and Tenant hereby agree
as follows:
1. General.
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(a) The purpose of this Agreement is to set forth how the
improvements to the Premises ("Improvements") are to be constructed by Landlord,
how the construction of the Improvements will be paid for, and the time schedule
for completion of the construction of the Improvements.
(b) Except as defined in this Agreement to the contrary, all terms
used in this Agreement shall have the same meaning as the corresponding defined
term in the Lease.
(c) The terms, conditions and requirements of the Lease, except where
clearly inconsistent or inapplicable to this Agreement, are incorporated into
this Agreement.
(d) Except for the Improvements to be constructed pursuant to this
Agreement, Landlord has no obligation to alter the Premises or the Building to
achieve the Ready for Occupancy condition.
(e) Promptly following the date hereof, Tenant shall cause space
plans for the Improvements to be prepared by a licensed architect designated by
Tenant and approved in writing by Landlord, in Landlord's reasonable discretion
("Tenant's Architect"), and submitted to Landlord for approval, which approval
shall not be unreasonably withheld, conditioned or delayed provided such work is
non-structural, does not adversely affect any Building System, and involves no
construction that would be visible from outside of the Premises or would affect
the Certificate of Occupancy for the Building ("CofO") (as so approved, the
"Space Plans"). The Space Plans shall be used by Tenant's Architect in its
preparation of the Proposed Plans and Final Plans (each as hereinafter defined)
for the Improvements.
2. Preparation of Plans and Construction Schedule and Procedures.
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(a) Tenant shall cause to be prepared and delivered to Landlord, for
Landlord's approval, the following proposed drawings (in each case, the
"Proposed Plans") for the Improvements, on or before the indicated deadline:
(i) The location of all interior floor to ceiling walls within
the Premises: August 30, 1999.
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(ii) Architectural drawings (consisting of floor construction
plan, ceiling lighting and layout, power, and telephone plan) which are to a
sufficient stage of completion (approximately sixty percent (60%)) to satisfy
the building permit issuance requirements of the City of Cupertino: September
13, 1999.
(iii) The balance of the architectural drawings as described in
(ii) above: September 27, 1999.
(iv) Finish schedule (consisting of wall finishes and floor
finishes and miscellaneous details): September 27, 1999.
(b) All architectural drawings shall be prepared at Tenant's sole
cost and expense by Tenant's Architect, whom Tenant shall employ. Landlord's
approval of any change in Tenant's Architect shall not be unreasonably withheld,
delayed or conditioned. Tenant shall deliver one set of reproducible
architectural drawings to Landlord. All mechanical drawings for the Premises
shall be prepared at Tenant's sole cost and expense by the applicable design-
build subcontractor reasonably approved by Landlord.
(c) Within five (5) days after Landlord's receipt of the
architectural drawings, Landlord shall advise Tenant of any changes or
additional information required to obtain Landlord's approval.
(d) Within five (5) days after Landlord's receipt of the finish
schedule, Landlord shall advise Tenant of any changes or additional information
required to obtain Landlord's approval.
(e) If Landlord disapproves of or requests additional information
regarding the Proposed Plans, Tenant shall within five (5) days thereafter (or
such longer period as may be reasonably required as a result of the nature or
extent of Landlord's comments, but in no event more than ten (10) days) revise
the Proposed Plans disapproved by Landlord and resubmit such plans to Landlord
or otherwise provide such additional information to Landlord. Landlord shall,
within ten (10) days after receipt of Tenant's revised plans, advise Tenant of
any additional changes which may be required to obtain Landlord's approval. If
Landlord disapproves the revised plans specifying the reason therefor, or
requests further additional information, Tenant shall, within five (5) days (or
such longer period as may be reasonably required as a result of the nature or
extent of Landlord's comments, but in no event more than ten (10) days) of
receipt of Landlord's required changes, revise such plans and resubmit them to
Landlord or deliver to Landlord such further information as Landlord has
requested. Landlord shall, again within five (5) days after receipt of Tenant's
revised plans, advise Tenant of further changes, if any, required for Landlord's
approval. This process shall continue until Landlord has approved Tenant's
revised Proposed Plans. "Final Plans" shall mean such Proposed Plans, as
revised, which have been approved by Landlord and Tenant in writing. Landlord
agrees not to withhold its approval unreasonably. In no event shall Landlord
withhold its consent to any Proposed Plans which are a logical derivation of
space plans previously reviewed and approved by Landlord.
(f) All Proposed Plans and Final Plans shall comply with all
applicable Requirements. Neither review nor approval by Landlord of any
Proposed Plans and resulting Final
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Plans shall constitute a representation or warranty by Landlord that such plans
either (i) are complete or suitable for their intended purpose, or (ii) comply
with applicable Requirements, it being expressly agreed by Tenant that Landlord
assumes no responsibility or liability whatsoever to Tenant or to any other
person or entity for such completeness, suitability or compliance. No changes in
the Final Plans shall be made without Landlord's prior written approval, which
shall not be unreasonably withheld, conditioned or delayed with respect to any
such proposed changes that are non-structural, do not adversely affect any
Building System, do not involve construction that would be visible from outside
the Premises or would affect the CofO. If the Proposed Plans require changes to
the Base Building, Core and Shell, or if Tenant proposes to make any changes
affecting the ground floor lobby, all such changes shall be subject to
Landlord's prior approval, which Landlord, acting in good faith, may withhold in
its sole discretion.
(g) As soon as reasonably possible following the Effective Date, but
in any event by the date Landlord advises Tenant that such information must be
received, Tenant shall advise Landlord of the identity of those subcontractors
for all trades which Tenant desires the Contractor (as hereinafter defined) to
solicit bids from for the Improvements (the "Proposed Subcontractors").
Promptly following Tenant's designation thereof, Landlord shall advise Tenant
whether Landlord disapproves any of the Proposed Subcontractors, which approval
shall not be unreasonably withheld. As soon as reasonably possible following
Tenant's submittal of the Proposed Plans for each component of the Improvements
and such list of Proposed Subcontractors, Landlord shall engage Webcor Builders,
Inc. (the "Contractor"), to solicit bids from subcontractors for all trades
necessary to complete construction of the Improvements shown on such Proposed
Plans or Final Plans, including costs (or savings) for any alternatives shown
thereon. Landlord anticipates that the bid packages for mechanical, electrical
and fire and life safety sub-contractors must be released to the Proposed
Subcontractors on or before August 30, 1999. Promptly upon receipt thereof,
Landlord shall furnish to Tenant copies of all subcontractor bids together with
the associated schedule of values or other breakdown of labor and materials
received from each such Proposed Subcontractor. Upon receipt of all such
subcontractor bids, and any alternative bids respecting any deletions or
substitutions in the scope of the work, Landlord shall review such bids with
Tenant, shall allow Tenant to consult with Landlord in the final selection of
subcontractors and shall advise Tenant of the estimated cost of construction of
the Improvements and approve an estimated final construction cost in an amount
equal to the sum of the lowest bids from all other subcontractors (unless
Landlord or Tenant, in its reasonable discretion, finds any such lowest bid to
be non-conforming or unreasonable (taking into consideration such factors as
its completeness of scope, scheduling approach, staffing, assessment of cost and
other similar items), in which event Landlord shall direct Contractor to accept
the next lowest conforming or reasonable bid), the Contractor's agreed-upon fee
in the amount of four percent (4%) of direct subcontractor costs as described in
the Contract (as hereinafter defined), the cost of the general conditions of the
work in the amount of three percent (3%) of direct subcontractor costs and the
Contractor's contingency (collectively, the "Construction Cost") provided that
no portion of a contingency shall be disbursed without Tenant's prior written
consent. Landlord shall then enter into a guaranteed maximum price amendment
(the "GMP Amendment") to the construction contract (the "Contract") previously
entered into with the Contractor where the basis of payment is the Construction
Cost and providing for progress payments. The sum of (A) the Construction Cost,
(B) the cost of preparing the Space Plans, Proposed Plans, Final Plans, third-
party building and engineering fees, any cost for permitting, including
applications and signoffs, and (C) the Construction Administration Costs (as
hereinafter
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defined) (hereinafter referred to as the "Total Construction Costs"). Tenant
understands and acknowledges that at the time the Contract is executed and
construction of the Improvements has commenced a guaranteed maximum price will
not yet have been established and that the amount of Total Construction Costs
will be a budget estimate only. Tenant shall have the right to approve all items
comprising Total Construction Costs (and shall receive reasonable back-up
information with respect thereto), any material change to the Contract which
differs in any material respect from the form of Contract furnished to Tenant
prior to the Effective Date, and approve the GMP Amendment, which approval shall
not be unreasonably withheld, delayed or conditioned and shall be deemed granted
unless Tenant advises Landlord of its specific objections to the proposed form
of Contract and/or GMP Amendment within two (2) Business Days of receipt
thereof.
(h) As soon as a building permit is first available from the City of
Cupertino (which Tenant acknowledges is anticipated to be prior to the date the
Final Plans are completed and a guaranteed maximum price has been established
under the Contract), Landlord shall instruct the Contractor to commence
construction and to proceed to build the Improvements indicated on the Final
Plans (including all materials shown thereon subject to the provisions of
Section 3 below) as soon thereafter as reasonably possible, consistent with
industry custom and procedure, at Tenant's sole and entire cost. Landlord,
either directly or through its Agent, shall provide the following construction
management services: (a) review mechanical drawings for compliance with the
Final Plans; (b) assist in the drafting of bid documents and coordination; (c)
provide weekly site visits; (d) attend weekly project meetings; (e) be available
during installation of furniture, carpet and window coverings to ensure a
quality installation; and (f) perform one complete follow up on punch list
items. Landlord shall not be responsible for any comprehensive review of any
Shop Drawings.
(i) Tenant shall (A) reimburse to Landlord the actual third-party
costs reasonably incurred by Landlord to approve all plans, specifications and
materials submitted pursuant to this Section 2 and (B) pay to Landlord a
supervision fee in an amount equal to One Hundred Fifteen Thousand Five Hundred
Forty-Seven and 31/100ths Dollars ($115,547.31) for Landlord's services in
connection with this Agreement ((A) and (B) collectively, the "Construction
Administration Costs"), and such reimbursement shall occur by a disbursement to
Landlord not more frequently than monthly from the Disbursement Account.
(j) For purposes of this Agreement and the Lease, the term "Tenant
Delays" shall mean an actual delay in causing the Premises to be Ready for
Occupancy by the Scheduled Commencement Date, as extended by Unavoidable Delays,
which is directly caused by the occurrence of one or more of the events
described in clauses (A) through (G) below:
(A) any revision by Tenant of the Space Plans after Landlord's
approval thereof in accordance with Section 1 above;
(B) any failure by Tenant to provide, or cause to be provided,
the Space Plans, Proposed Plans or any revisions thereto within the time periods
set forth in Section 1 or in paragraphs (a) through (e), inclusive, of this
Section 2 above, the Final Plans, or otherwise to comply with the dates and time
limits in this Agreement, or failure to pay when due any sums due to Contractor
or Landlord;
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(C) any change orders initiated by Tenant or any revisions to
the Final Plans or other delays in completing construction necessitated by such
change orders;
(D) delayed delivery of items specified by Tenant which are long
lead-time items (Landlord shall reasonably endeavor to advise Tenant in writing
of any long lead-time items identified by Landlord in conjunction with
Landlord's review of the Proposed Plans);
(E) Tenant's failure to respond within a reasonable period of
time to any other requests for approval, consent, explanation or interpretation
of anything relating to the construction of the Improvements;
(F) Tenant's activities in the Premises prior to Substantial
Completion of the Improvements which materially impedes or interferes with such
Substantial Completion as reasonably determined by Landlord; or
(G) any other cause in Tenant's exclusive control.
For purposes of this Section 2, the term "Tenant" shall include Tenant's
contractors, agents, architects and consultants. Landlord shall be responsible
for documenting all asserted Tenant Delays, which documentation shall be
available to Tenant upon request. Landlord shall use its good faith efforts to
advise Tenant within one (1) Business Day of the occurrence of any event
constituting Tenant Delays. In addition, Landlord shall have the right to stop
construction if Tenant fails to pay such sums or otherwise materially defaults
in the performance of its obligations under the Lease or this Agreement, and all
such periods in which work has stopped or been suspended shall constitute
"Tenant Delays." Notwithstanding the foregoing, no Tenant Delay shall be deemed
to have occurred unless and until Landlord has provided notice to Tenant (the
"Delay Notice") within five (5) days of the occurrence of the alleged Tenant
Delay, specifying the action or inaction by Tenant that Landlord contends
constitutes the Tenant Delay. If such action or inaction is not cured by Tenant
within two (2) Business Days of receipt of such Delay Notice (the "Grace
Period"), than a Tenant Delay, as set forth in such Delay Notice, shall be
deemed to have occurred commencing as of the expiration of the Grace Period.
(k) Landlord shall use its commercially reasonable efforts to enforce
all warranty obligations of the Contractor in accordance with the terms of the
Contract. Upon Tenant's written request, Landlord shall assign to Tenant all
warranties received from the Contractor under the Contract.
(l) Concurrently with Landlord's execution of the Construction
Contract, Landlord and Tenant shall jointly establish, in the names of both
parties, a disbursement account with the Bank of Boston (the "Disbursement
Account"). The Disbursement Account shall be funded by Tenant in full at the
time the Disbursement Account is established in an amount equal to the Total
Construction Cost as reasonably established by Landlord based upon the then
project budget, shall earn interest solely for the benefit of Tenant and shall
provide that all checks drawn upon the Disbursement Account bear the signature
of both Landlord and Tenant. Upon Landlord's execution of the GMP Amendment, if
the Total Construction Cost as shown thereon exceeds the amount initially funded
by Tenant, Tenant shall immediately deposit such additional amount into the
Disbursement Account. Any costs or fees charged by the Bank of Boston shall
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be borne by Tenant. Within five (5) Business Days of Landlord's request (but not
more frequently than once per month) (which request shall include a copy of the
Contractor's payment application and a certificate by the Contractor with
respect to the percentage of completion of the work by each trade covered by
such application for payment), Tenant shall execute and deliver to Landlord a
check representing the amount of the requested disbursement provided that the
amount of such requested disbursement is pursuant to an application for payment
signed by the Contractor in a form previously approved by Tenant, does not
reflect any amounts not reflected in the Construction Contract, any change order
approved by Tenant, any schedule of values attached thereto or any contingency
shown thereon less the amount of the applicable retainage. If Tenant fails to
timely execute any request for disbursement, such failure shall constitute a
Tenant Delay and Tenant shall indemnify Landlord against any claims made against
Landlord by the Contractor. Provided Tenant timely responds to each request for
disbursement, Landlord shall be solely responsible for payment of the sums due
Contractor under the Contract. Landlord shall periodically furnish to Tenant as
Landlord receives the same in connection with each disbursement to the
Contractor copies of related invoices, conditional and final lien waivers and
other back-up documentation received by Landlord from the Contractor. Following
the Commencement Date, provided the Contractor has been paid in full, Landlord
shall execute such documents as Tenant reasonably requests to terminate
Landlord's interest in the Disbursement Account.
(m) Provided that Tenant notifies Landlord within the date Landlord
has reasonably established to meet the proposed construction schedule , Tenant
shall have the right to designate to Landlord which of the four (4) floors
comprising the Premises the Contractor shall endeavor to make Ready for
Occupancy first if all of the Premises shall not be made Ready for Occupancy at
the same time.
3. Change Orders. No changes in the Final Plans shall be made without
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Landlord's prior written approval, which shall not be unreasonably withheld,
conditioned or delayed with respect to any such proposed changes that are non-
structural, do not adversely affect any Building System, do not involve
construction that would be visible from outside the Premises or would affect the
CofO. If Landlord disapproves any proposed changes to the Final Plans, Landlord
shall advise Tenant with specificity of its reasons therefor and shall advise
Tenant of the specific revisions required to be made in order to obtain
Landlord's consent. If the actual Total Construction Costs are greater than the
estimated Total Construction Costs previously funded by Tenant into the
Disbursement Account, then Tenant shall deposit into the Disbursement Account
such difference in costs promptly upon demand therefor. In connection with any
change order requested by Tenant, Landlord shall receive from the Contractor the
Contractor's estimate of the cost to implement such change order (which shall
include a reasonably itemized breakdown of labor and materials) and any
anticipated delay in causing the Premises to be Ready for Occupancy as a result
thereof. The Contract shall provide that the Contractor's fee and general
conditions with respect to implementing any such change orders shall be four
percent (4%) and three percent (3%), respectively, of direct subcontractor
costs. The costs charged by Landlord to Tenant caused by Tenant's requesting
changes to the Improvements or any Final Plans shall be equal to the sum of (a)
the amount of money Landlord has to pay to cause the Improvements, as reflected
by such revised Final Plans, to be constructed above the costs that Landlord
would have had to pay to cause the Improvements to be constructed if no changes
had been made to such Final Plans, and (b) any cancellation fees, reshipping
charges or any other similar costs incurred by Landlord in connection
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therewith. The failure of Tenant to make any such required deposit into the
Disbursement Account within ten (10) days of the date such deposit is so
required shall constitute an Event of Default under the Lease. Landlord shall
utilize, for the construction of the Improvements, the items and materials
designated in the applicable Final Plans; provided, however, that whenever
Landlord reasonably determines in its judgment that it is not practical or
efficient to use such materials, Landlord shall have the right, upon receipt of
Tenant's consent, not to be unreasonably withheld or delayed, to substitute
comparable items and materials. If Tenant unreasonably refuses to grant such
consent, and Landlord is reasonably delayed in causing the Premises, or any part
thereof, to be Ready for Occupancy because of Tenant's failure to permit the
substitution of comparable items and materials, such delay shall constitute
Tenant Delays.
4. Ready for Occupancy. The term "Ready for Occupancy" means that
-------------------
Landlord has substantially completed the Improvements, and that such work shall
be deemed complete, notwithstanding the fact that minor details of construction,
mechanical adjustments or decoration which do not materially interfere with
Tenant's use of the Premises remain to be performed (items normally referred to
as "punch-list" items). If the City of Cupertino requires as a condition to the
right to lawfully occupy the Premises the issuance of a temporary or permanent
certificate of occupancy, then the Premises shall not be deemed Ready for
Occupancy unless and until such temporary or permanent certificate of occupancy
is issued ("CofO") and unless the Premises and Building then meet all applicable
Requirements (or unless Landlord is proceeding to cause all such Requirements to
be so met and the CofO is not affected thereby and no portion of the Premises
which has been tendered by Landlord may not be used or occupied by Tenant as a
result thereby) the ground floor lobby and all elevator cabs are substantially
complete and all utility services are available. The Premises shall be deemed
Ready for Occupancy even though certain other portions of the Building, which do
not materially interfere with Tenant's efficient conduct of its business, have
not been fully completed, and even though Tenant's furniture, furniture systems,
telephones, telexes, telecopiers, photocopy machines, computers and other
business machines or equipment have not been installed, the purchase and
installation of which shall be Tenant's sole responsibility. Landlord covenants
and agrees that on the Commencement Date, all Building Systems and sub-systems,
the structural elements of the Building and the Building foundation shall be in
good working condition and repair. Subject to the correction by Landlord of the
punch-list items, Tenant shall be obligated to accept the Premises at such time
as it is Ready for Occupancy so long as the Improvements are substantially in
conformance with the Final Plans. Landlord shall make itself available to
conduct a walkthrough of the Premises prior to tender of possession thereof to
identify and, together with Tenant, to prepare within ten (10) days of the date
the Premises is Ready for Occupancy a punch-list of items requiring correction.
Landlord shall use its reasonable efforts to cause the correction of such punch-
list items within thirty (30) days following the Commencement Date and in
connection therewith, all such work shall be performed in a manner reasonably
intended to minimize any inconvenience or disruption to Tenant. As soon as
reasonably possible following the date the Premises are Ready for Occupancy,
Landlord shall cause to be prepared and delivered to Tenant a final accounting
of the amount of Total Construction Costs.
5. Miscellaneous.
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(a) Tenant agrees that, in connection with the Improvements and its
use of the Premises prior to the Commencement Date, Tenant shall have those
duties and obligations with
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respect thereto that it has pursuant to the Lease during the Term, except the
obligation for payment of Rent, and further agrees that Landlord shall not be
liable in any way for injury, loss, or damage which may occur to any of the
Improvements or installations made in the Premises, or to any personal property
placed therein, the same being at Tenant's sole risk.
(b) Except as expressly set forth herein, Landlord has no other
agreement with Tenant and Landlord has no other obligation to do any other work
or pay any amounts with respect to the Premises. Any other work in the Premises
which may be permitted by Landlord pursuant to the terms and conditions of the
Lease shall be done at Tenant's sole cost and expense and in accordance with the
terms and conditions of the Lease.
(c) This Agreement shall not be deemed applicable to any additional
space added to the original Premises at any time or from time to time, whether
by any options under the Lease or otherwise, or to any portion of the original
Premises or any additions thereto in the event of a renewal or extension of the
initial term of the Lease, whether by any options under the Lease or otherwise,
unless expressly so provided in the Lease or any amendment or supplement
thereto.
(d) The failure by Tenant to pay any monies due Landlord pursuant to
this Agreement within the time period herein stated shall be deemed an Event of
Default under the terms of the Lease and for which Landlord shall be entitled to
exercise all remedies available to Landlord for nonpayment of Rent and Landlord,
may, if it so elects, discontinue construction of the Improvements until all
such sums are paid and Tenant has otherwise cured such Event of Default. All
late payments shall bear interest pursuant to Section 2.6 of the Lease.
(e) Tenant hereby acknowledges and agrees that the Improvements shall
include, without limitation, the following items for the Building, each of which
shall comply with Landlord's reasonable specifications therefor: (1) lobby desk
for the main Building lobby, (2) primary refuse dumpster and (3) card-key
secured building-access system. Landlord shall be responsible for the
installation and adjustment of the Parking Facility access control system, which
shall be reasonably compatible with the Building's card-access system to be
installed by Tenant.
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EXHIBIT E
HVAC SPECIFICATIONS
The Building HVAC System serving the Premises is designed (at a
minimum) to maintain average temperatures within the Premises during the hours
of 8:00 a.m. to 6:00 p.m. on Business Days of (i) not less than 68 degrees F.
during the heating season when the outdoor temperature is 34 degrees F. or more
and (ii) not more than 78 degrees F. and 50% humidity + 5% during the cooling
season, when the outdoor temperatures are at 85 degrees F. dry bulb and 66
degrees F. wet bulb, with, in the case of clauses (i) and (ii), a population
load per floor of not more than one person per 150 square feet of useable area,
other than in dining and other special use areas per floor for all purposes, and
shades fully drawn and closed, including lighting and power, and to provide at
least .15 CFM of outside ventilation per square foot of rentable area. Use of
the Premises, or any part thereof, in a manner exceeding the foregoing design
conditions or rearrangement of partitioning after the initial preparation of the
Premises which interferes with normal operation of the air-conditioning service
in the Premises may require changes in the air-conditioning system serving the
Premises.
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EXHIBIT F
CLEANING SPECIFICATIONS
GENERAL CLEANING
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NIGHTLY
General Offices:
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1. All hard surfaced flooring to be swept using approved dustdown
preparation.
2. Carpet sweep all carpets, moving only light furniture (desks, file
cabinets, etc. not to be moved).
3. Hand dust and wipe clean all furniture, fixtures and window sills.
4. Empty all waste receptacles and remove wastepaper.
5. Wash and sanitize all Building water fountains and coolers.
6. Sweep all private stairways.
7. Hand dust and sweep all Building elevators.
Lavatories:
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1. Sweep and wash all floors, using proper disinfectants.
2. Wash and polish all mirrors, shelves, bright work and enameled
surfaces.
3. Wash and disinfect all basins, bowls and urinals.
4. Wash all toilet seats.
5. Hand dust and clean all partitions, tile walls, dispensers and
receptacles in lavatories and restrooms.
6. Empty paper receptacles, fill receptacles from tenant supply and
remove wastepaper.
7. Fill toilet tissue holders from Tenant supply and fill sanitary napkin
dispenser from Tenant supply.
8. Empty and clean sanitary disposal receptacles.
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WEEKLY
1. Vacuum all carpeting and rugs.
2. Dust all door louvers and other ventilating louvers within a person's
normal reach.
3. Wipe clean all brass and other bright work.
QUARTERLY
High dust premises complete including the following:
1. Dust all pictures, frames, charts, graphs and similar wall hangings
not reached in nightly cleaning.
2. Dust all vertical surfaces, such as walls, partitions, doors and other
surfaces not reached in nightly cleaning.
3. Dust all venetian and horizontal blinds.
4. Wash the interior and exterior of all windows.
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EXHIBIT G
RULES AND REGULATIONS
1. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades, screens or other
obstructions shall be attached to or hung in or used in connection with any
exterior window or entry door of the Premises, without the prior written consent
of Landlord.
2. No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed to any part of the outside of the
Premises or Building or on the inside of the Premises if the same can be seen
from the outside of the Premises without the prior written consent of Landlord.
Lettering on doors, if and when approved by Landlord, shall be inscribed,
painted or affixed for Tenant in a size, color and style acceptable to Landlord.
3. The grills, louvers, skylights, windows and doors that reflect or
admit light and/or air into the Premises, halls, passageways or other public
places in the Building shall not be covered or obstructed by Tenant, nor shall
any bottles, parcels or other article be placed on the window sills, radiators
or convectors so as to be visible from the exterior of the Building.
4. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as a Building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
5. The sidewalks, entrances, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purposed other than ingress of egress to and from
the Premises and for delivery of merchandise and equipment in a prompt and
efficient manner, using elevators and passageways designated for such delivery
by Landlord.
6. Except in those areas designated by Tenant as "security areas,"
all locks or bolts of any kind shall be operable by the Grand Master Key. No
locks shall be placed upon any of the doors or windows by Tenant, nor shall any
changes be made in locks or the mechanism thereof which shall make such locks
inoperable by said Grand Master Key. Tenant shall, upon the termination of its
tenancy, turn over to Landlord all keys of stores, offices and toilet rooms,
either furnished to or otherwise procured by Tenant and in the event of the loss
of any keys furnished by Landlord, Tenant shall pay to Landlord the cost
thereof.
7. Tenant shall keep the entrance door to the Premises closed at all
times.
8. Except in connection with Tenant's initial move-in to the
Premises which may occur at such times as Tenant may reasonably require, all
removal or the carrying in or out of any freight, furniture, package boxes,
crates or any other object or matter of any description must take place other
than during the hours of 8:00 a.m. and 6:00 p.m. on Business Days and in such
elevators as Landlord or its Agent may reasonably determine from time to time;
provided that the provisions of this Section 8 shall not be deemed to apply to
Tenant so long as the sole occupant
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<PAGE>
of the Building is Portal Software, Inc. or a Related Entity, or in any case to
the receipt or dispatch by Tenant during ordinary business hours of packages
from a recognized courier service such as Federal Express, United Parcel or DHL.
9. There shall not be used in any space or in the public halls of
the Building, either by Tenant or by jobbers or any others in the moving or
delivery or receipt of safes, freight, furniture, packages, boxes, crates,
paper, office material or any other matter or thing, any hand trucks except
those equipped with rubber tires, side guards and such other safeguards as
Landlord requires.
10. None of Tenant's employees, visitors or contractors shall be
permitted to have access to the Building's roof, mechanical, electrical or
telephone rooms without permission from Landlord.
11. Tenant shall not make or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them.
12. If Tenant elects to lay floor tile, or other similar floor
covering so that the same shall come in direct contact with the floor of the
Premises, an interlining of builder's deadening felt shall be first affixed to
the floor by a paste or other material, soluble in water; the use of cement or
other similar adhesive material being expressly prohibited.
13. Neither Tenant nor any of Tenant's servants, employees, agents,
visitors or licensees shall at any time bring or keep upon the Premises any
hazardous material, inflammable, combustible or explosive fluid, chemical or
substance except such minimal quantities that are incidental to normal office
occupancy.
14. Tenant shall not use or keep, or permit to be used or kept, any
hazardous or toxic materials or any foul or noxious gas or substance in the
Premises or permit or suffer the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the Building by
reason of noise, odors, vibrations or interfere in any way with other tenants or
those having business therein.
15. Tenant shall not cause or permit any odors of cooking or other
processes or any unusual or objectionable odors to emanate from the demised
Premises which would annoy other tenants or create a public or private nuisance.
16. [Intentionally Deleted]
17. Tenant may, at its sole cost and expense and subject to
compliance with all applicable requirements of the Lease, install and maintain
vending machines for the exclusive use by Tenant, its officers, employees and
business guests, provided that each machine, where necessary, shall have a
waterproof pan thereunder and be connected to a drain.
18. Tenant shall not employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the Premises, unless otherwise
agreed to by Landlord in writing or as permitted by Section 11.8 of the Lease.
Tenant shall not cause any unnecessary
G-2
<PAGE>
labor by reason of such Tenant's carelessness or indifference in the
preservation of good order and cleanliness. Tenant shall not clean or permit the
cleaning of any window in the Premises from the outside, in violation of any
requirements.
19. Tenant shall store all its trash, garbage and recyclables within
its Premises. No material shall be disposed of which may result in a violation
of any law or ordinance governing such disposal. All garbage and refuse disposal
shall be made only though entry ways and elevators provided for such purposes
and at such times as Landlord shall designate. Tenant shall use the Building's
hauler.
20. Tenant shall, at its expense, provide artificial light for the
employees of Landlord while doing janitor service or other cleaning, and in
making repairs or alterations in the Premises.
21. Except for the normal hanging of pictures on the interior walls
of the Premises or the installation of millwork or wall coverings, Tenant shall
not maliciously mark, paint, drill into or in any way deface any part of the
Premises or the Building. No boring, cutting or stringing of wires shall be
permitted, except with prior written consent of Landlord, and as Landlord may
direct.
22. The water and wash closets, electrical closets, mechanical rooms,
fire stairs and other plumbing fixtures shall not be used for any purposes other
than those for which they were constructed and no sweepings, rubbish, rags,
acids or other substances shall be deposited therein. All damages resulting from
any misuse of the fixtures shall be borne by Tenant where its servants,
employees, agents, visitors or licensees shall have caused the same, other than
wear and tear.
23. Tenant, before closing and leaving the Premises at any time,
shall see that all lights, water, faucets, etc. are turned out. All entranced
doors in the Premises shall be left locked by Tenant when the Premises are not
in use.
24. No animals of any kind (except for seeing eye dogs) shall be
brought into or kept by any Tenant in or about the Premises or the Building.
25. Canvassing, soliciting and peddling in the Building is prohibited
and each Tenant shall cooperate to prevent the same.
26. The Premises shall not be used for lodging or sleeping or for any
immoral or illegal purposes.
27. The Premises shall not be used for manufacturing (other than
software manufacturing), for the storage of merchandise, or for the sale of
merchandise, goods or property of any kind at auction or otherwise, except as
specifically permitted by the Lease.
28. Tenant shall not occupy or permit any portion of the Premises to
be occupied as an office for a public stenographer or public typist or for the
possession, storage, manufacture or sale of narcotics in any form or as a barber
or manicure shop or as an employment bureau.
G-3
<PAGE>
Tenant shall not engage or pay any employees on the Premises, except those
actually working for such Tenant on said Premises, nor advertise for labor
giving an address at said Premises.
29. Tenant shall not accept barbering or bootblacking services in the
Premises, from any company or persons not approved by Landlord, which approval
shall not be unreasonably withheld, and at hours and under regulations other
than as reasonably fixed by Landlord.
30. The requirements of Tenant will be attended to only upon written
application at the office of the Building (or by a telephone request by an
authorized employee of Tenant), except in the event of any emergency condition.
Employees of Landlord or Landlord's Agent shall not perform any work or do
anything outside of the regular duties, unless under special instructions from
of office of Landlord or in response to an emergency condition.
31. Tenant shall be responsible for the delivery and pick up of all
mail from the United States Post Office.
32. Landlord reserves the right to exclude from the Building between
the hours of 6 p.m. and 8 a.m. and at all hours on Saturdays, Sundays and
holidays observed by the Building all persons who do not present a pass to the
Building signed or approved by Landlord, which approval shall not be
unreasonably withheld. Tenant shall be responsible for all persons for whom a
pass shall be issued at the request of Tenant and shall be liable to Landlord
for all acts of such persons.
33. Tenant shall not invite to the Premises, or permit the visit of,
persons in such number or under such conditions as to interfere with the use and
enjoyment of any of the plazas, entrances, corridors, elevators and other
facilities of the Building by other tenants.
34. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
or any other tenant or tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all of the tenants of the
Building.
35. Landlord shall not be responsible to Tenant or to any other
person for the non-observance or violation of these Rules and Regulations by any
other tenant or other person. Tenant shall be deemed to have read Rules and
Regulations and to have agreed to abide by them as a condition to its occupancy
of the Premises.
36. These Rules and Regulations are in addition to, and shall not be
constructed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease.
G-4
<PAGE>
Exhibit 21.1
List of Subsidiaries of Portal Software, Inc.
Portal International Holdings, Inc., a corporation formed under the laws of
Delaware.
Portal Software International, Pty. Limited, a corporation formed under the laws
of Australia.
Portal Software (Europe) Limited, a corporation formed under the laws of the
United Kingdom.
Portal Software France, SARL, a corporation formed under the laws of France.
Portal Software (Asia Pacific) Limited, a corporation formed under the laws of
Hong Kong.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 24, 1999, except for the first and second paragraphs of Note 6, as to
which the date is April 29, 1999 in the Registration Statement (Form S-1) and
related Prospectus of Portal Software, Inc. for the registration of shares of
its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
August 30, 1999
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