<PAGE>
As filed with the Securities and Exchange Commission on April 14, 1999
Registration No. 333-72999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
To
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. Larry W. Sonsini, Esq.
Timothy R. Curry, Esq. David C. Drummond, Esq.
David A. Makarechian, Esq. Mark L. Reinstra, Esq.
Elizabeth A.R. Yee, Esq. Michael F. Hayden, Esq.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
Two Embarcadero Place 650 Page Mill Road
2200 Geng Road Palo Alto, California 94304-1050
Palo Alto, California 94303 (650) 493-9300
(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. [_]
---------------
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 April 14, 1999.
4,000,000 Shares
Portal Software, Inc.
[LOGO OF PORTAL APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of Portal Software, Inc. All of
the 4,000,000 shares of common stock are being sold by Portal.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $10.00 and $12.00. Application has been made for quotation of the
common stock on the Nasdaq National Market under the symbol "PRSF".
Immediately following and conditioned upon the sale of the shares in the
initial public offering, Portal will sell to Cisco Systems, Inc. and Andersen
Consulting LLP in a concurrent private placement, an additional 3,000,000 and
up to 400,000 shares of common stock, respectively, at the initial public
offering price less the underwriting discount.
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................
Underwriting discount........................................
Proceeds, before expenses, to Portal.........................
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 600,000 shares from Portal at the initial public offering price less
the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
Goldman, Sachs & Co.
Credit Suisse First Boston
BancBoston Robertson Stephens
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: (1) assumes no exercise of the underwriters'
over-allotment option; (2) reflects a three-for-one split of the outstanding
shares of common stock and preferred stock to be completed before the
effectiveness of the registration statement related to this offering; (3)
reflects the conversion of all of our outstanding preferred stock into common
stock upon the effectiveness of the registration statement; (4) reflects our
reincorporation into Delaware immediately prior to the consummation of this
offering; and (5) reflects the issuance of 3,400,000 shares of common stock in
the concurrent placement. See "Description of Capital Stock" and
"Underwriting".
Portal Software, Inc.
Our Business
We develop, market and support real-time, scalable customer management and
billing software, or CM&B software, for providers of Internet-based services.
Our Infranet software is a comprehensive solution that meets the complex,
mission-critical provisioning, accounting, reporting and marketing needs of
providers of Internet-based services. Our "Real Time No Limits" Infranet
solution enables the real-time provisioning and reporting of services,
including such functions as account creation, user authentication and
authorization, activity tracking, pricing and rating, billing and customer
service, including self-service, all on a scale of up to millions of users. We
have built Infranet using an open architecture with fully documented
application programming interfaces, or APIs, which facilitate customization,
integration with existing software applications, and creation of new services
by our customers, partners and third parties.
We were founded in 1985 as an on-line service and one of the first Internet
service providers, or ISPs, and we began focusing in late 1993 on developing
and marketing real-time CM&B software for the Internet. We shipped the first
generally available version of Infranet in May 1996. Our approximately 80
Infranet customers include ISPs, such as Concentric Network Corporation and
UUNET Technologies, Inc.; on-line enterprises, such as Juno Online Services,
Inc. and 3Com Corporation's Palm.net; and on-line divisions of
telecommunications carriers, such as BellSouth Corp. and U S West, Inc.
Our Market Opportunity
Providers of Internet-based services and telecommunications carriers are
demanding enhanced capabilities from their CM&B systems as the relentless pace
of change and innovation mandates a new level of CM&B performance and
functionality. Existing CM&B systems used by many traditional
telecommunications carriers are not designed to accommodate "always on", data-
oriented services and can generally be characterized as (1) inflexible, (2)
capable only of periodic processing or "batch-oriented", (3) proprietary,
(4) centralized and (5) difficult to scale in an Internet environment. Existing
CM&B solutions have significant difficulties in adapting to the needs of
providers of Internet-based services that continually introduce new services
and programs.
We believe that providers of Internet-based services will increasingly
require a CM&B solution that is real-time, distributed, scalable, flexible and
easily adaptable to a vast number of emerging products and services. Infranet
is designed to meet the critical functional requirements of scalability,
enterprise-wide integration, including interoperability with legacy systems,
comprehensive functionality, ease of use, flexibility and improved time to
market. This enables service providers to capture the business benefits of
increased revenue, reduced costs and improved customer service.
3
<PAGE>
Our Strategy
Our strategy is to establish Portal as the CM&B platform of choice for
providers of Internet-based services. Key elements of this strategy are:
Extend Market Leadership Position. Our objective is to extend our position as
a leader in the Internet-based CM&B market to establish Portal as the broad
platform of choice for providers of Internet-based services. We intend to take
advantage of our technological leadership, strategic partnerships, significant
customer relationships, broad-based sales and marketing efforts and scalable
business model to create a widespread customer base that will be difficult for
potential competitors to penetrate.
Target Leading Providers of Advanced Communications Services Worldwide. The
scalability and flexibility of Infranet enables us to target a broad range of
providers of Internet-based services, including on-line service divisions of
major telecommunications providers worldwide, on-line service providers and
companies that use the Internet to provide entirely new types of communications
services.
Build a Long-Term, High Margin, Software-Driven Business Model. The
scalability, comprehensive functionality and extensibility of Infranet,
combined with our strategic partnerships, are designed to allow us to achieve
and maintain a high margin, software-driven business, rather than the service-
intensive, customer-specific approach of many of our competitors.
Leverage Partnerships and Alliances with Systems Integrators, and with
Platform, Software and Services Providers. We have established a series of
partnerships and alliances with systems integrators, such as Andersen
Consulting LLP, Cap Gemini Group, NTT Software Corporation and
PricewaterhouseCoopers LLP and hardware platform, software and services
providers, such as Cisco Systems, Inc., Compaq Corporation, Hewlett-Packard
Company, Microsoft Corporation, Oracle Corporation and Sun Microsystems, Inc.
We believe that our partnership strategy is unique in breadth and scope within
our market, provides us with a competitive advantage and serves as a "force
multiplier" which leverages our own internal capabilities.
Grow with Customers and the Internet. Our strategy is to maximize
opportunities for long-term revenue growth by targeting service providers with
excellent growth prospects and capitalizing on additional sales opportunities
with our customers through the addition of subscribers, add-on component sales,
additional service revenues and maintenance and support agreements. We intend
to continue to evolve and refine our business to track the growth of Internet-
based services, so that as these services proliferate, our revenue growth
opportunities will also increase.
Corporate Information
Portal Software, Inc. was incorporated in California in March 1994 as Portal
Information Network, Inc. In December 1995, Portal Communications Company, a
company founded by John E. Little, Portal's Chief Executive Officer, and
incorporated in California in May 1985, was merged into Portal Information
Network, Inc. In October 1997, Portal Information Network, Inc. changed its
name to Portal Software, Inc. Portal Software, Inc. plans to reincorporate in
Delaware prior to the consummation of the offering. References in this
prospectus to "Portal", "we", "our" and "us" refer to Portal Software, Inc., a
Delaware corporation, its predecessors, and each of its subsidiaries. Portal's
principal executive offices are located at 20883 Stevens Creek Boulevard,
Cupertino, California 95014 and Portal's telephone number is (408) 343-4400.
Information contained on Portal's Web site does not constitute part of this
prospectus.
Portal(R) and Infranet(R) are registered trademarks of Portal and the Portal
logo, Infranet IPT and Real Time No Limits are trademarks of Portal. Each
trademark, tradename or service mark of any other company appearing in this
prospectus belongs to its holder.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered... 4,000,000 shares
Common stock offered in
the concurrent
placement. ........... Up to 3,400,000 shares
Common stock to be
outstanding after the
offering and the
concurrent
placement. . 75,235,730 shares
Use of proceeds........ For general corporate
purposes, repayment of
certain indebtedness
and working capital,
including sales and
marketing activities,
product development and
support and capital
expenditures. See "Use
of Proceeds".
Proposed Nasdaq
National Market
symbol................ PRSF
</TABLE>
The common stock outstanding after this offering excludes:
. 6,179,898 shares of common stock issuable upon exercise of stock options
and warrants outstanding as of January 31, 1999 at a weighted average
exercise price of $1.45 per share;
. 10,525,842 shares of common stock available for grant under our 1999
Stock Incentive Plan which incorporates our 1995 Stock Option/Stock
Issuance Plan; and
. 1,800,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
See "Capitalization", "Management--Benefit Plans", "Description of Capital
Stock" and Notes 6 and 8 of Notes to Consolidated Financial Statements.
Summary Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------------------------------
1995 1996 1997 1998 1999
----------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues............. $ 1,517 $ 1,862 $ 5,045 $ 9,416 $ 26,669
Total costs and expenses... 1,717 2,347 7,299 16,802 43,797
Loss from operations....... (200) (485) (2,254) (7,386) (17,128)
Net loss................... (197) (535) (2,274) (7,587) (17,408)
Pro forma basic and diluted
net loss per share
(unaudited)............... $ (0.30)
========
Shares used in computing
pro forma basic and
diluted net loss per share
(unaudited)............... 58,084
========
</TABLE>
<TABLE>
<CAPTION>
January 31, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
Consolidated Balance Sheet Data: (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents....................... $11,809 $11,809 $ 86,261
Working capital (deficit)....................... (9,150) (9,150) 65,302
Total assets.................................... 32,344 32,344 106,796
Long-term obligations, net of current portion... 2,022 2,022 2,022
Stockholders' equity (net capital deficiency)... (6,551) (6,551) 67,901
</TABLE>
The consolidated balance sheet data is set forth on an actual basis; pro
forma to give effect to the conversion of the outstanding preferred stock into
common stock upon completion of the offering; and as adjusted to reflect the
sale of 4,000,000 shares of common stock in this offering at an assumed initial
public offering price of $11.00 per share and 3,400,000 shares issued in the
concurrent placement and after deducting the estimated underwriting discount
and the estimated offering expenses. See "Use of Proceeds" and
"Capitalization". Working capital (deficit) at January 31, 1999 includes the
effect of deferred revenue of $23,344,000.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. The risks and uncertainties described
below are not the only ones facing our company. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also
may become important factors that may adversely affect our company.
Risks related to our business
It is difficult to evaluate our business because we have a limited history
operating as a provider of CM&B software
Portal has a relatively brief operating history as a provider of CM&B
software. As a result, our historical financial information is of limited value
in projecting future operating results. In late 1993, we changed our strategic
focus from operating as an ISP to developing CM&B software for Internet-based
businesses and we had no meaningful license revenue until 1996. This change
required us to adjust our business processes and make a number of significant
personnel changes, including changes and additions to our engineering and
management teams. Therefore, in evaluating our business, you must consider the
risks and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets, including those discussed below and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Our business strategy may not be successful and we may not
successfully address these risks.
We have not achieved profitability and expect to continue to incur net losses
for at least the next several quarters
We may not be able to increase or even maintain our revenues, and we may not
achieve sufficient revenues or profitability in any future period. We incurred
net losses of approximately $17.4 million for fiscal year 1999, $7.6 million
for fiscal year 1998 and $2.3 million for fiscal year 1997. As of January 31,
1999, we had an accumulated deficit of approximately $27.9 million. We have not
achieved profitability and expect to continue to incur net losses for at least
the next several quarters even if sales of our CM&B software continue to grow.
In addition, we expect to significantly increase our sales and marketing,
product development and administrative expenses. As a result, we will need to
generate significant revenues from sales of Infranet to achieve and maintain
profitability. We expect that we will face increased competition which will
make it more difficult to increase our revenues. Even if we are able to
increase revenues, we may experience price competition which would lower our
gross margins and our profitability. Another factor that will lower our gross
margins is the percentage of our revenues that is derived from indirect
channels and from services, both of which generally have lower margins.
If we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Our quarterly operating results may fluctuate in future periods and we may fail
to meet expectations
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of public market analysts and investors, and the
price of our common stock may fall. Factors that could cause quarterly
fluctuations include:
. variations in demand for our products and services;
. the timing and execution of individual contracts, particularly large
contracts that would materially affect our operating results in a given
quarter;
. the timing of sales of our products and services;
6
<PAGE>
. our ability to develop and attain market acceptance of enhancements to
Infranet and new products and services;
. delays in introducing new products and services;
. new product introductions by competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. the mix of products and services sold;
. the mix of sales channels through which our products and services are
sold;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. the timing of releases of new versions of third-party software and
hardware products that work with our products;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
technical support and other management personnel;
. our ability to expand our operations;
. the amount and timing of expenditures related to expansion of our
operations; and
. global economic conditions as well as those specific to ISPs and other
providers of Internet-based services.
We have difficulty predicting the volume and timing of orders. For example,
substantially all of our future revenues will come from licenses of Infranet
and related services, and the market for this product is in its early stages of
development and is therefore unpredictable. In any given quarter, our sales
have involved, and we expect will continue to involve, large financial
commitments from a relatively small number of customers. As a result, the
cancellation or deferral of even a small number of licenses of Infranet would
reduce our revenues, which would adversely affect our quarterly financial
performance. Also, we have often booked a large amount of our sales in the last
month of the quarter and often in the last week of that month. Accordingly,
delays in the closing of sales near the end of a quarter could cause quarterly
revenue to fall substantially short of anticipated levels. Significant sales
may also occur earlier than expected, which could cause operating results for
later quarters to compare unfavorably with operating results from earlier
quarters.
We record as deferred revenue fees from contracts that do not meet our
revenue recognition policy requirements. While a portion of our revenues each
quarter is recognized from deferred revenue, our quarterly performance will
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts that we enter into may not result in revenue in the
quarter in which the contract was signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our customer support capabilities, develop
new distribution channels and fund greater levels of research and development.
We determine our operating expenses largely on the basis of anticipated revenue
trends and a high percentage of our expenses are fixed in the short term. As a
result, a delay in generating or recognizing revenue could cause significant
variations in our operating results from quarter-to-quarter and could result in
substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
It is difficult to predict the timing of individual orders because Infranet has
a long and variable sales cycle
To date, the sales cycle for Infranet has been three to six months or more
and has required pre-purchase evaluation by a significant number of employees
in our
7
<PAGE>
customers' organizations. The long sales and implementation cycles for Infranet
may cause license revenues and operating results to vary significantly from
period to period. Along with systems integrators and our other distribution
partners, we spend significant time educating and providing information to our
prospective customers regarding the use and benefits of Infranet. Even after
purchase, our customers tend to deploy Infranet slowly and deliberately,
depending on the specific technical capabilities of the customer, the size of
the deployment, the complexity of the customer's network environment, and the
quantity of hardware and the degree of hardware configuration necessary to
deploy Infranet. See "--Our quarterly operating results may fluctuate in future
periods and we may fail to meet expectations" and "Business--Sales and
Marketing".
Our business depends on the acceptance of Infranet, and it is uncertain whether
the market will accept this product
Our future growth depends on the commercial success of Infranet.
Substantially all of our licensing revenues are derived from Infranet. Our
business will be harmed if our target customers do not adopt and purchase
Infranet. The market for Internet-based CM&B software is in its early stages of
development. Our future financial performance will also depend on the
successful development, introduction and customer acceptance of new and
enhanced versions of Infranet. We are not certain that our target customers
will widely adopt and deploy Infranet as their CM&B solution. In the future we
may not be successful in marketing Infranet or any new or enhanced products or
services.
Significant technical challenges arise in our business because many of our
customers purchase and implement Infranet in phases, deploy Infranet across a
variety of computer hardware platforms and integrate it with a number of legacy
systems, third-party software applications and programming tools.
Implementation currently requires participation by our professional services
group, which has significantly limited resources. Some customers may also
require us to develop costly customized features or capabilities, which
increase our costs and consume our limited customer service and support
resources. Also, revenues we derive from our services business have a
significantly lower margin than revenues derived from licensing Infranet. If
new or existing customers have difficulty deploying our products or require
significant amounts of our professional services support, our operating margins
could be harmed.
We must hire and retain qualified sales personnel to sell Infranet
Our financial success depends to a large degree on the ability of our direct
sales force to increase sales to a level required to reach and maintain
profitability. Therefore, our ability to increase revenues in the future
depends considerably upon our success in recruiting, training and retaining
additional direct salespeople and the success of the direct sales force. There
is a shortage of direct sales personnel with the skills and expertise necessary
to sell our products. Also, it may take a new salesperson several months before
he or she becomes a productive member of our sales force. Our business will be
harmed if we fail to hire or retain qualified sales personnel, or if newly
hired salespeople fail to develop the necessary sales skills or develop these
skills more slowly than we anticipate.
In addition, we may miss sales opportunities that are available through other
sales distribution methods and other sources of leads, such as domestic and
foreign resellers and value-added resellers. In the future, we intend to
augment our indirect sales distribution methods through additional third-party
distribution arrangements. However, there is no guarantee that we will
successfully augment these arrangements or that the expansion of indirect sales
distribution methods will increase revenues. We may be at a serious competitive
disadvantage if we fail to enhance these indirect sales channels. See
"Business--Sales and Marketing".
8
<PAGE>
We also use systems integrators and other strategic relationships to implement
and sell Infranet
We have entered into relationships with third-party systems integrators, as
well as with hardware platform and software applications developers and service
providers. We have derived, and anticipate that we will continue to derive, a
significant portion of our revenues from customers that have significant
relationships with our market and platform partners. We could lose sales
opportunities if we fail to work effectively with these parties or fail to grow
our base of market and platform partners.
Many of these partners also work with competing software companies, and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to marketing our products versus the products of others.
We may not be able to enter into additional, or maintain our existing,
strategic relationships on commercially reasonable terms, or at all. Our
agreements with these parties typically are in the form of nonexclusive
referral fee or reseller agreements that may be terminated by either party
without cause or penalty and with limited notice. Therefore, there is no
guarantee that any single party will continue to market our products. If these
relationships fail, we will have to devote substantially more resources to the
distribution, sales and marketing, implementation and support of Infranet than
we would otherwise, and our efforts may not be as effective as those of our
partners, either of which would harm our business.
Our customer base is concentrated and the loss of one or more of our customers
could cause our business to suffer
A substantial portion of our license and services revenues in any given
quarter has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitments. As a result, if a large
contract is cancelled or deferred or an anticipated contract does not
materialize, our business would be harmed. We have initially targeted large
ISPs, including on-line divisions of telecommunications carriers and other
providers of Internet-based services. Some of the industries we have targeted
are consolidating, which could reduce the number of potential customers
available to us. See "Business--Customers".
Our business will suffer dramatically if we fail to successfully manage our
growth
Our ability to successfully offer Infranet and new products and services in a
rapidly evolving market requires an effective planning and management process.
We continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. Our business will
suffer dramatically if we fail to effectively manage this growth. On January
31, 1999, we had a total of 242 employees, compared to a total of 119 employees
on January 31, 1998. From February 1999 through March 1999, we hired 61
additional employees, and we expect to continue to hire new employees at a
rapid pace. This growth has placed, and our anticipated future operations will
continue to place, a significant strain on our management systems and resources
and on our internal training capabilities. We expect that we will need to
continue to improve our financial and managerial controls and reporting systems
and procedures, and will need to continue to expand, train and manage our work
force worldwide. We expect that we will also have to expand our facilities, and
we may face difficulties and significant expenses identifying and moving into
suitable office space.
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
9
<PAGE>
or future products could harm our sales unless and until we can secure another
source. We may not be able to replace the functionality provided by the third-
party software currently offered with our products if that software becomes
obsolete, defective or incompatible with future versions of our products or is
not adequately maintained or updated. The absence of, or any significant delay
in, the replacement of that functionality could result in delayed or lost sales
and increased costs and could harm our business in the short-term.
Our significant international operations and our planned expansion of our
international operations make us much more susceptible to risks from
international operations
For the year ended January 31, 1999, we derived approximately 27% of our
revenue from sales outside North America, and we have offices located in
England, Hong Kong and Australia. As a result, we face risks from doing
business on an international basis, including, among others:
. reduced protection for intellectual property rights in some countries;
. licenses, tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer sales and payment cycles;
. greater difficulties in collecting accounts receivable;
. political and economic instability;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. compliance with a wide variety of complex foreign laws and treaties; and
. variance and unexpected changes in local laws and regulations.
We plan to establish additional facilities in other parts of the world. The
expansion of our existing international operations and entry into additional
international markets will require significant management attention and
financial resources. We cannot be certain that our investments in establishing
facilities in other countries will produce desired levels of revenue. In
addition, we have sold Infranet internationally for only a few years and we
have limited experience in developing localized versions of Infranet and
marketing and distributing them internationally.
Further, our international revenues are denominated in U.S. dollars.
Therefore, a strengthening of the dollar versus other currencies could make our
products less competitive in foreign markets.
To the extent that we are unable to successfully manage expansion of our
business into international markets due to any of the foregoing factors, our
business could be adversely affected.
Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations
Although we have not done so in the past, we may make acquisitions or
investments in other companies, products or technologies. If we make any
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners.
We may have to incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities for any acquisition could be
substantially dilutive to our stockholders. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.
10
<PAGE>
Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of Infranet
Software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. Errors or defects that
affect the operation of our software could result in:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.
We are still in the process of completing testing of our Year 2000 readiness
and face uncertainty as a result. Infranet operates in complex network
environments and directly and indirectly interacts with a number of other
hardware and software systems. Our software also interfaces with third-party
systems, such as credit card processing services and customer-specific
modifications that our service providers, third-party integrators and customers
have created to be used with Infranet. Despite preliminary investigation and
testing by us and our partners, Infranet and the underlying systems and
protocols running it may contain errors or defects associated with Year 2000
date functions. We may not identify all Year 2000 failures in our partners'
products because not all failures are within the scope of these tests. In
addition, some of our customers elect to integrate Infranet with interfaces not
ordinarily supported by Portal. This integration, whether performed by Portal,
the customer or a third party systems integrator, is also not within the scope
of Portal's in-house testing efforts. Portal has advised all customers that
they must independently test these integrations for year 2000 compliance.
We also have not performed any operational tests on our internal systems.
Accordingly, we are unable to predict to what extent our business may be
affected if our software, the systems that operate in conjunction with our
software or our internal systems experience a material Year 2000 failure.
The purchasing patterns of our customers and potential customers based on
Year 2000 issues may make it difficult to predict future sales of Infranet.
Many companies are deferring software purchases until after January 1, 2000.
Other companies are accelerating purchases of software products prior to 2000,
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Our proprietary rights may be inadequately protected, and there is a risk of
infringement
Our success and ability to compete depend substantially upon our internally
developed technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology or to develop products with the same
functionality as our products. Others may develop technologies that are similar
or superior to our technology. Policing unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that our software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grow and the functionality of products in different industry
segments overlaps. Some of our competitors in the market for CM&B software may
have filed or may intend to file patent applications covering aspects of their
technology upon which they may claim our technology infringes. We cannot be
certain that any of these competitors will not
11
<PAGE>
make a claim of infringement against us with respect to our products and
technology.
As is common in the software industry, we may receive, from time to time,
notice of claims of infringement of other parties' proprietary rights. Any
litigation, brought by us or by others, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
product shipment delays or require us to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on acceptable terms, or at all,
and could have a material and adverse impact on our gross margins and
profitability. If a successful claim of product infringement were made against
us and we could not develop non-infringing technology or license the infringed
or similar technology on a timely and cost-effective basis, our business could
be significantly harmed. See "Business--Intellectual Property".
Our business will suffer if our software contains errors or our product
development is delayed
We face possible claims and higher costs as a result of the complexity of our
products and the potential for undetected errors. Due to the "mission critical"
nature of Infranet, undetected errors are of particular concern. The
implementation of Infranet, which we accomplish through our services division
and with our partners, typically involves working with sophisticated software,
computing and communications systems. If we experience difficulties with an
implementation or do not meet project milestones in a timely manner, we could
be obligated to devote more customer support, engineering and other resources
to a particular project and to provide these services at reduced or no cost. If
our software contains undetected errors or we fail to meet our customers'
expectations or project milestones in a timely manner we could experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to achieve market acceptance;
. diversion of development resources;
. injury to our reputation;
. increased service and warranty costs;
. legal actions by customers against us; and
. increased insurance costs.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, these contractual
limitations on liability may not be enforceable and we may be subject to claims
based on errors in our software or mistakes in performing our services
including claims relating to damages to our customers' internal systems. A
product liability claim, whether or not successful, could harm our business by
increasing our costs and distracting our management.
In the past we have failed to release certain new products and upgrades on
time. These delays may result in:
. customer dissatisfaction;
. cancellation of orders and license agreements;
. negative publicity;
. loss of revenues;
. slower market acceptance; or
. legal action by customers against us.
Our business may be harmed if we are unable to develop, license or acquire new
products or enhancements to Infranet on a timely and cost-effective basis, or
if these products or enhancements are not accepted by the market. See
"Business--Products and Services".
12
<PAGE>
Our officers and directors will be able to exert significant control on Portal
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately 65.8% of our outstanding common stock
following the completion of this offering and the concurrent placement. In
addition, Cisco, which will purchase 3,000,000 shares of common stock in the
concurrent placement, has agreed in certain circumstances to vote all shares of
common stock it owns, in the event that the board of directors of Portal
approves a sale of substantially all of the assets of Portal, or a merger in
which Portal is not the surviving corporation, in proportion to the vote of all
of the stockholders of Portal. This may further enhance our officers' and
directors' ability to exert control over Portal. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
Stockholders" and "Description of Capital Stock--Concurrent Private Placement".
We are subject to anti-takeover provisions that could delay or prevent an
acquisition of our company
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Further, without any further vote or
action on the part of the stockholders, the board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever
issued, may have preference over and harm the rights of the holders of common
stock. Although the issuance of this preferred stock will provide us with
flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
a majority of our outstanding voting stock. We currently have no plans to issue
preferred stock.
Certain provisions of our amended and restated certificate of incorporation
and bylaws and the Delaware General Corporation Law may delay or impede a
merger, tender offer or proxy contest involving Portal. Furthermore, the board
of directors is divided into three classes, only one of which is elected each
year. Directors may only be removed by the affirmative vote of 66 2/3% or
greater of all classes of voting stock, and the removal must be for cause.
These factors may further delay or prevent a change of control of Portal.
In addition, Portal has entered into an agreement with Cisco that could delay
or prevent us from being acquired. Subject to certain limitations, if Portal
enters into negotiation with certain third parties regarding a potential
merger, acquisition or other business combination, Portal must notify Cisco of
that potential transaction no later than seven days prior to executing a
definitive agreement. Cisco has seven days from the date of Portal's
notification to prepare its own offer for consideration by Portal and its board
of directors. See "Description of Capital Stock--Concurrent Private Placement".
We do not intend to pay dividends on our common stock
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy".
Risks related to the CM&B industry
Our future success will depend on our ability to manage technological change
The market for CM&B software and services and Internet applications is
characterized by:
. rapid technological change;
. frequent new product introductions;
. changes in customer requirements; and
. evolving industry standards.
Future versions of hardware and software platforms embodying new technologies
and the emergence of new industry standards could render our products obsolete.
Our future success
13
<PAGE>
will depend upon our ability to develop and introduce a variety of new products
and product enhancements to address the increasingly sophisticated needs of our
customers.
Infranet is designed to work on a variety of hardware and software platforms
used by our customers. However, Infranet may not operate correctly on evolving
versions of hardware and software platforms, programming languages, database
environments, accounting and other systems that our customers use. We must
constantly modify and improve our products to keep pace with changes made to
these platforms and to back-office applications and other Internet-related
applications. This may result in uncertainty relating to the timing and nature
of new product announcements, introductions or modifications, which may harm
our business. If we fail to modify or improve our products in response to
evolving industry standards, our products could rapidly become obsolete, which
would harm our business.
The markets in which we sell our product are highly competitive and we may not
be able to compete effectively
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition from providers of traditional CM&B
software such as Amdocs Limited, Kenan Systems Corporation, which was recently
acquired by Lucent Technologies, Inc., LHS Group Inc. and Saville Systems PLC;
emerging providers of Internet-specific billing software, such as Belle Systems
S/A, Solect Technology Group and TAI Corporation; and proprietary systems
developed by providers of Internet-based services. We also compete with systems
integrators and with internal MIS departments of larger telecommunications
carriers. We are aware of numerous other major ISPs, software developers and
smaller entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete with Infranet.
We anticipate continued growth and competition in the on-line services and
telecommunications industries and the entrance of new competitors into the CM&B
software market, and that the market for our products and services will remain
intensely competitive. We expect that competition will increase in the near
term and that our primary long-term competitors may have not yet entered the
market. Many of our current and future competitors have significantly more
personnel and greater financial, technical, marketing and other resources than
we do.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, current
and potential competitors have greater name recognition and more extensive
customer bases that they can leverage. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could harm our business. See "Business--
Competition".
Our business substantially depends upon the continued growth of the Internet
and Internet-based services
We sell Infranet to organizations providing Internet-based services.
Consequently, our future revenues and profits, if any, substantially depend
upon the continued acceptance and use of the Internet as an effective medium of
commerce and communication. Rapid growth in the use of the Internet and on-line
services is a recent phenomenon and it may not continue. As a result, a broad
base of regular Internet users may not develop, and the market may not accept
recently introduced services and products that rely upon the Internet, such as
Infranet.
In addition, for a variety of reasons the Internet may not be accepted as a
viable long-term medium of commerce and communication. For example, the network
infrastructure that supports the Internet may not develop adequately. To the
extent that the Internet continues to experience significant expansion in the
number of users, frequency of use or bandwidth requirements, the infrastructure
for the Internet may be unable to support the demands placed upon it. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the
14
<PAGE>
Internet also could result in slower response times and adversely affect usage
of the Internet generally and our customers in particular. Any of these events
could significantly reduce demand for our products and harm our business.
Our future success depends on our ability to attract and retain additional
personnel
We intend to hire a significant number of additional sales, support,
marketing, administrative and research and development personnel in 1999 and
beyond. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. We
currently have a small customer service and support organization and will need
to increase our staff to support new customers and the expanding needs of our
existing customers. Hiring qualified customer service and support personnel, as
well as sales, marketing, administrative and research and development
personnel, is very competitive in our industry, particularly in the San
Francisco Bay Area, where Portal is headquartered, due to the limited number of
people available with the necessary technical skills and understanding of the
Internet. We expect to face greater difficulty attracting these personnel with
equity incentives as a public company than we did as a privately held company.
Our future success also depends upon the continued service of our executive
officers and other key sales, marketing and support personnel in general, and
on the services of John E. Little, our President and Chief Executive Officer,
and David S. Labuda, our Chief Technology Officer, in particular. None of our
officers or key employees is bound by an employment agreement for any specific
term. Our relationships with these officers and key employees are at will.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our products and services and increased costs of doing business
Due to the increasing popularity and use of the Internet, it is possible that
state and federal regulators could adopt laws and regulations that may impose
additional burdens on those companies conducting business on-line.
The growth and development of the market for Internet-based services may
prompt calls for more stringent consumer protection laws. The adoption of any
additional laws or regulations may decrease the expansion of the Internet. A
decline in the growth of the Internet could decrease demand for our products
and services and increase our cost of doing business, or otherwise harm our
business. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our
costs could increase and our growth could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing
laws and regulations to the Internet and other on-line services.
Risks related to this offering
We have substantial discretion as to how to use the proceeds from this offering
and the concurrent placement
Our management has broad discretion as to how to spend the proceeds from this
offering and the concurrent placement and may spend these proceeds in ways with
which our stockholders may not agree. We cannot predict that investment of the
proceeds will yield a favorable or any return. See "Use of Proceeds".
There has been no prior public market for our common stock, and the price of
our common stock may be volatile
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. We are negotiating the initial offering price of the common
stock with the underwriters. However, the initial offering price may not be
indicative of the prices that will prevail in the public market after the
offering, and the market price of the common stock could fall below the initial
public offering price. See "Underwriting".
15
<PAGE>
The trading price of the common stock may fluctuate widely as a result of a
number of factors, many of which are outside our control. Some of these factors
include:
. quarter-to-quarter variations in our operating results;
. failure to meet the expectations of industry analysts;
. changes in earnings estimates by analysts;
. announcements and technological innovations or new products by us or our
competitors;
. increased price competition;
. developments or disputes concerning intellectual property rights; and
. general conditions in the Internet industry.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
Internet and computer software companies and which have often been unrelated to
the operating performance of these companies.
Future sales of shares could affect our stock price
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants and shares
issued in the concurrent placement, in the public market following this
offering, the market price of our common stock could fall. Such sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate. Upon completion of
this offering and the concurrent placement, we will have outstanding 75,235,730
shares of common stock, based upon 67,835,730 shares outstanding as of January
31, 1999, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options or warrants after January 31, 1999. Of these
shares, the 4,000,000 shares sold in this offering will be freely tradable.
This leaves 67,835,730 shares eligible for sale in the public market beginning
180 days after the date of this prospectus and up to 3,400,000 shares eligible
for sale in the public market beginning one year after the date of this
prospectus.
Investors in this offering will suffer immediate and substantial dilution
If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value. If other
securityholders exercise options or warrants to purchase our capital stock, you
will suffer further dilution. See "Dilution".
This prospectus contains forward-looking statements; these statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control
This prospectus contains forward-looking statements that are not historical
facts but rather are based on current expectations, estimates and projections
about our industry, our beliefs and assumptions. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates" and variations
of these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors, some of which are
beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" and elsewhere in this prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus. We undertake no
obligation to update these statements or publicly release the results of any
revisions to the forward-looking statements that we may make to reflect events
or circumstances after the date of this prospectus or to reflect the occurrence
of unanticipated events.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to Portal from the sale and issuance of the 4,000,000 shares
of common stock offered and from the concurrent placement of 3,400,000 shares
of common stock are estimated to be $74.5 million (approximately $80.6 million
if the underwriters' over-allotment option is exercised in full), at the
assumed initial public offering price of $11.00 per share after deducting the
estimated underwriting discount and estimated offering expenses. Portal is
conducting this offering primarily to increase its equity capital, create a
public market for its common stock and to facilitate future access by Portal to
public equity markets. Portal intends to use the net proceeds for general
corporate purposes and working capital, including sales and marketing
activities, product development and support and capital expenditures. In
addition, Portal will use the net proceeds to repay the customer deposit for
prepaid services which bears interest at a rate of 10% per annum, matures on
November 30, 1999, and under which Portal owed $1.1 million as of April 1,
1999. Portal may also use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. Portal has no agreements or commitments with
respect to any acquisition or investment, and it is not involved in any
negotiations with respect to any transaction. Pending these uses, the net
proceeds of this offering and the concurrent placement will be invested in
short-term, interest-bearing, investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".
DIVIDEND POLICY
Portal has never declared or paid dividends on its capital stock and does not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of
Portal's board of directors after taking into account various factors,
including its financial condition, operating results, current and anticipated
cash needs and plans for expansion.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Portal as of January 31,
1999, on an actual basis; on a pro forma basis giving effect to the conversion
of 9,550,729 outstanding shares of convertible preferred stock into 28,652,187
shares of common stock upon the completion of this offering; and as adjusted to
reflect the estimated net proceeds from the sale of 4,000,000 shares of common
stock offered by Portal in this offering at the assumed initial public offering
price of $11.00 per share and 3,400,000 shares of common stock in the
concurrent placement and after deducting the underwriting discount and the
estimated offering expenses. This table should be read in conjunction with the
consolidated financial statements and notes to consolidated financial
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
January 31, 1999
--------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share amounts)
<S> <C> <C> <C>
Current portion of long-term obligations....... $ 4,601 $ 4,601 $ 4,601
======== ======== ========
Long-term obligations, excluding current
portion....................................... $ 2,022 $ 2,022 $ 2,022
Stockholders' equity (net capital deficiency):
Convertible preferred stock: 20,000,000 shares,
no par value per share, authorized, actual;
5,000,000 shares, $0.001 par value per share,
authorized, pro forma and as adjusted;
9,550,729 shares, no par value per share,
issued and outstanding, actual; no shares,
$0.001 par value per share, issued and
outstanding, pro forma and as adjusted........ 18,482 -- --
Common stock: 35,000,000 shares, no par value
per share, authorized, actual; 250,000,000
shares, $0.001 par value per share,
authorized, pro forma and as adjusted;
13,061,181 shares, no par value per share,
issued and outstanding, actual; 67,835,730
shares, $0.001 par value per share, issued and
outstanding, pro forma; 75,235,730 shares,
$0.001 par value per share, issued and
outstanding, as adjusted...................... 927 19,409 93,861
Additional paid-in capital..................... 16,753 16,753 16,753
Notes receivable from stockholders............. (318) (318) (318)
Deferred stock compensation.................... (14,456) (14,456) (14,456)
Accumulated deficit............................ (27,939) (27,939) (27,939)
-------- -------- --------
Stockholders' equity (net capital deficiency).. (6,551) (6,551) 67,901
-------- -------- --------
Total capitalization........................... $ (4,529) $ (4,529) $ 69,923
======== ======== ========
</TABLE>
The number of shares of common stock outstanding as of January 31, 1999
excludes:
. 6,179,898 shares of common stock issuable upon exercise of stock options
and warrants outstanding at a weighted average exercise price of $1.45
per share;
. 10,525,842 shares of common stock available for grant under the 1999
Stock Incentive Plan which incorporates our 1995 Stock Option/Stock
Issuance Plan; and
. 1,800,000 shares of common stock reserved for issuance under Portal's
1999 Employee Stock Purchase Plan.
See "Management--Benefit Plans", "Description of Capital Stock" and Notes 6 and
8 of Notes to Consolidated Financial Statements.
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<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of Portal at January 31,
1999, was approximately $(6,551,000), or $(0.10) per share. Pro forma net
tangible book value (deficit) per share represents total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding
after giving effect to the conversion of all outstanding convertible preferred
stock. After giving effect to the 4,000,000 shares of common stock offered in
this offering at the assumed initial public offering price of $11.00 per share,
and 3,400,000 shares offered in the concurrent placement and after deducting
the estimated underwriting discount and estimated offering expenses, Portal's
pro forma net tangible book value at January 31, 1999 would have been
$67,901,000, or $0.90 per share. This represents an immediate increase in net
tangible book value of $1.00 per share to existing stockholders and an
immediate dilution of $10.10 per share to new investors purchasing shares of
common stock in this offering. Dilution is defined as the reduction in the
proportion of income, or earnings per share, to which each share is entitled
due to the issuance of additional shares. With the sale and issuance of
4,000,000 shares in this offering and up to 3,400,000 shares in the concurrent
placement, existing stockholders will suffer an immediate reduction in the net
tangible book value of their shares because such additional shares decrease the
percentage ownership of the existing stockholder. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $11.00
Pro forma net tangible book value (deficit) per share prior to
the offering................................................. $ (0.10)
Increase per share attributable to new investors.............. 1.00
--------
Pro forma net tangible book value per share after the offering.. 0.90
------
Dilution per share to new investors............................. $10.10
======
</TABLE>
The following table summarizes, as of January 31, 1999, on the pro forma
basis described above, the total number of shares and consideration paid to
Portal and the average price per share paid by existing stockholders and by new
investors purchasing shares of common stock in this offering at an assumed
initial public offering price of $11.00 per share (before deducting the
estimated underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 67,835,730 90.2% $19,448,000 19.8% $ 0.29
New public investors..... 4,000,000 5.3 44,000,000 44.8 11.00
Concurrent placement
investors............... 3,400,000 4.5 34,782,000 35.4 10.23
---------- ----- ----------- -----
Totals................... 75,235,730 100.0% $98,230,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of January 31, 1999 and exclude:
. 6,179,898 shares of common stock issuable upon exercise of stock options
and warrants outstanding at a weighted average exercise price of $1.45
per share;
. 10,525,842 shares of common stock available for grant under the 1999
Stock Incentive Plan which incorporates our 1995 Stock Option/Stock
Issuance Plan; and
. 1,800,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan.
To the extent that any of these options or warrants are exercised, there will
be further dilution to new investors. See "Capitalization", "Management--
Benefit Plans", "Description of Capital Stock" and Notes 6 and 8 of Notes to
Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of Portal Software, Inc. and the Notes to Consolidated Financial Statements
included elsewhere in this prospectus. The consolidated statement of operations
data set forth below for the fiscal years ending January 31, 1997, 1998 and
1999 and the consolidated balance sheet data at January 31, 1998 and 1999 have
been derived from audited consolidated financial statements of Portal Software,
Inc. included elsewhere in this prospectus, which have been audited by Ernst &
Young LLP, Independent Auditors. The consolidated statement of operations data
for the year ended January 31, 1996 and the consolidated balance sheet data at
January 31, 1996 and 1997, are derived from audited consolidated financial
statements that are not included in this prospectus. The consolidated statement
of operations data for the year ended January 31, 1995 and the consolidated
balance sheet data at January 31, 1995 are unaudited. The basic and diluted net
loss per share and the pro forma basic and diluted net loss per share
computation excludes potential shares of common stock (options and common
stock) subject to repurchase rights held by Portal, preferred stock and
warrants, since their effect would be antidilutive. See Note 1 of Notes to
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used to compute basic and diluted net loss per
share and pro forma basic and diluted net loss per share. The historical
results are not necessarily indicative of results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License fees................ $ -- $ -- $ 3,944 $ 6,892 $ 13,536
Services.................... 1,517 1,862 1,101 2,524 13,133
------- ------- -------- -------- ---------
Total revenues............. 1,517 1,862 5,045 9,416 26,669
------- ------- -------- -------- ---------
Costs and expenses:
Cost of license fees........ -- 13 62 970 458
Cost of services............ 791 267 518 2,152 9,425
Research and development.... 432 517 2,527 5,628 11,252
Sales and marketing......... -- 44 2,371 5,436 14,112
General and administrative.. 494 1,506 1,821 2,616 6,253
Amortization of deferred
stock compensation......... -- -- -- -- 2,297
------- ------- -------- -------- ---------
Total costs and expenses... 1,717 2,347 7,299 16,802 43,797
------- ------- -------- -------- ---------
Loss from operations.......... (200) (485) (2,254) (7,386) (17,128)
Interest income (expense) and
other income, net............ 3 (50) (20) (201) 435
------- ------- -------- -------- ---------
Loss before income taxes...... (197) (535) (2,274) (7,587) (16,693)
Provision for income taxes.... -- -- -- -- (715)
------- ------- -------- -------- ---------
Net loss...................... $ (197) $ (535) $ (2,274) $ (7,587) $ (17,408)
======= ======= ======== ======== =========
Basic and diluted net loss per
share ....................... $(0.10) $(0.16) $ (0.18) $ (0.37) $ (0.59)
======= ======= ======== ======== =========
Shares used in computing basic
and diluted net loss per
share ....................... 2,017 3,394 12,432 20,786 29,531
======= ======= ======== ======== =========
Pro forma basic and diluted
net loss per share
(unaudited) ................. $ (0.30)
=========
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)... 58,084
=========
<CAPTION>
January 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents .... $ 16 $ 328 $ 1,540 $ 14,646 $ 11,809
Working capital (deficit)..... (373) (1,045) (651) 6,581 (9,150)
Total assets.................. 549 881 3,527 23,125 32,344
Long-term obligations, net of
current portion.............. 170 98 447 1,500 2,022
Stockholders' equity (net
capital deficiency).......... (26) (652) 111 7,763 (6,551)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties. These forward-
looking statements include, among others, those statements including the words
"expects", "anticipates", "intends", "believes" and similar language. Portal's
actual results could differ materially from those discussed in this prospectus.
Factors that could cause or contribute to these differences include, but are
not limited to, the risks discussed in the section entitled "Risk Factors" in
this prospectus.
Overview
Portal Software, Inc. develops, markets and supports real-time customer
management and billing software, known as CM&B software, for providers of
Internet-based services. Portal was incorporated in California in March 1994 as
Portal Information Network, Inc. In December 1995, Portal Communications
Company, a predecessor company that was founded in 1985, was merged with and
into Portal Information Network, Inc. Portal Communications Company operated a
proprietary, network-based on-line system, provided Internet access and hosted
private label on-line services from its inception until 1996 when these
services were discontinued and the individual customers were sold to Sprint
Corporation. In October 1997, Portal Information Network, Inc. changed its name
to Portal Software, Inc.
In late 1993, Portal began focusing on developing and marketing real-time
CM&B software for the Internet. The first generally available version of the
product, named Infranet, was shipped in May 1996.
Beginning with fiscal year 1997, substantially all of Portal's revenues have
come from the license of one product, Infranet, and from related services.
Revenues consist of Infranet license, consulting, training, support and
maintenance fees. License revenues are comprised of perpetual or multiyear
license fees which are primarily derived from contracts with corporate
customers and resellers. Portal believes that future license revenues will be
generated from three sources:
. license fees from new customers;
. license fees for new products to existing customers; and
. growth in the subscriber base of its existing customers, which will lead
to increased revenue from subscriber-based licenses.
Revenue from license fees is recognized when a formal agreement exists or
purchase order is received, delivery of the product has occurred, no
significant Portal obligations with regard to implementation remain, the fee is
fixed or determinable and collectibility is probable. For electronic delivery,
the software is considered to have been delivered when Portal has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee
is collected. Revenue from arrangements with customers that are not the
ultimate users, such as resellers, is not recognized until the product is
delivered to the end-user.
Services revenues are primarily comprised of revenues from systems
integration or other consulting activities, maintenance agreements and training
of customers and partners. If the software is paid for by the customer prior to
the commencement of services and Portal is required to perform only training or
limited installation services, Portal recognizes services revenues as these
services are performed. Otherwise, Portal recognizes services revenues using
contract accounting. Maintenance agreements provide for technical support and
include the right to unspecified upgrades. Maintenance revenues are deferred
and recognized on a straight-line basis over the life of the related agreement,
which is typically one year. Customer advances and billed amounts due from
customers in excess of revenues recognized are recorded as deferred revenue.
21
<PAGE>
Portal's cost of license fees includes a royalty payment for third-party
technology included in Infranet. Resellers' commissions are also included in
cost of license fees when Portal is paid directly by a customer for a contract
originated by a systems integrator. Agreements with some of these partners
require Portal to make a payment equal to a percentage of the license and
maintenance revenues recognized. Cost of license fees do not include costs of
packaging, documentation or delivery as our product is delivered electronically
via the Internet. Cost of services consists primarily of headcount-related
expenses, costs related to outside consultants, travel and overhead associated
with delivering consulting, training and support to Portal's customers.
Portal has a limited operating history as a software company. Portal incurred
a net loss of $2.3 million for fiscal year 1997, $7.6 million for fiscal year
1998, and $17.4 million for fiscal year 1999. As of January 31, 1999, Portal
had an accumulated deficit of $27.9 million. Since 1994, Portal has not
achieved profitability on a quarterly or annual basis, and Portal anticipates
that it will incur net losses for at least the next several quarters. Portal
expects to increase its sales and marketing, product development and
administrative expenses for the foreseeable future. As a result, Portal will
need to generate significant revenues from licenses of Infranet to achieve and
maintain profitability.
Portal has generated a substantial portion of its historical Infranet
revenues from approximately 80 customers. Portal has established a series of
partnerships with systems integrators and hardware platform, software and
service providers. Portal has derived, and anticipates that it will continue to
derive, a substantial portion of its revenues from customers that have
significant relationships with its market and platform partners.
Results of Operations
The following table sets forth the results of operations for Portal expressed
as a percentage of total revenues. The historical results are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Year Ended
January 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
License fees............................................. 78 % 73 % 51 %
Services................................................. 22 27 49
--- --- ---
Total revenues......................................... 100 100 100
--- --- ---
Costs and expenses:
Cost of license fees..................................... 1 10 2
Cost of services......................................... 10 23 35
Research and development................................. 50 60 42
Sales and marketing...................................... 47 58 53
General and administrative............................... 36 28 23
Amortization of deferred stock compensation.............. -- -- 8
--- --- ---
Total costs and expenses............................... 144 179 163
Loss from operations....................................... (44) (79) (63)
Interest income (expense) and other income, net............ 0 (2) 1
--- --- ---
Loss before income taxes................................... (44) (81) (62)
Provision for income taxes................................. -- -- (3)
--- --- ---
Net loss................................................... (44)% (81)% (65)%
=== === ===
</TABLE>
22
<PAGE>
Years Ended January 31, 1998 and 1999
Revenues
Total revenues were $26.7 million in fiscal year 1999, an increase of $17.3
million or 183% over fiscal year 1998. In fiscal year 1999, no customer
accounted for 10% or more of total revenues, while one customer in fiscal year
1998 accounted for 47% of total revenues. In fiscal year 1999, Portal's top ten
customers accounted for approximately 37% of total revenues, while in fiscal
year 1998, the top ten customers accounted for 83% of total revenues.
License fees declined as a percentage of total revenues in fiscal year 1999
compared to fiscal year 1998 primarily due to Portal signing several contracts
in fiscal year 1999 that could not be recognized under Portal's revenue
recognition policy. The license fees on these contracts were deferred because
features promised to the customer were not yet available as the functionality
required by such customers was in the process of being developed, or the
license fees were bundled with services considered essential to the
functionality of the software being delivered. The percentage decline was also
due to increased demand for Portal's services.
Portal's business strategy is to provide CM&B software that will meet the
needs of different Internet service business models. Consequently, because of
the number of different Internet service business models, Portal has received,
and will continue to receive, requests from customers to provide special
features that do not currently exist in its product but that Portal may agree
to provide to the customer in the future. It is Portal's expectation that
certain customers will continue to negotiate and require features that are not
immediately available. However, as Infranet matures, Portal expects that fewer
orders will require features not yet available.
License fees totaled $13.5 million in fiscal year 1999, an increase of $6.6
million or 96% over fiscal year 1998. The increase in license fees was
primarily due to expanded marketing activities, growth in Portal's sales force
and greater demand for and the acceptance of Infranet.
Services revenues were $13.1 million in fiscal year 1999, an increase of
$10.6 million or 420% over fiscal year 1998. The increase in services revenues
resulted, in part, from the increase in support and maintenance service fees
related to Portal's growing installed base, both in terms of directly supported
sites as well as additional users, and the renewal of maintenance contracts.
The increase also resulted from the timing of services revenue recognition,
which typically begins prior to the recognition of license fees, particularly
in the case of large customers that require integration with legacy systems. In
addition, the increase in services revenues resulted from increased demand for
Portal's consulting, maintenance
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------- Percent
1998 1999 Change
---------------------- -------
Geographical Revenues: (in thousands)
<S> <C> <C> <C>
North America.................................... $ 7,955 $ 19,531 146%
Percentage of total revenues................... 85% 73%
International
Europe.......................................... 1,072 4,406 311%
Percentage of total revenues................... 11% 17%
Intercontinental................................ 389 2,732 602%
Percentage of total revenues................... 4% 10%
---------- ----------- ----
Total international.............................. 1,461 7,138 389%
Percentage of total revenues................... 15% 27%
---------- ----------- ----
Total revenues................................... $ 9,416 $ 26,669 183%
========== =========== ====
</TABLE>
23
<PAGE>
and training services to meet the increasingly complex demands of Portal's
customers.
North American revenues, which are defined by Portal as revenues from the
United States and Canada, were $19.5 million in fiscal year 1999, an increase
of $11.6 million or 146%, over fiscal year 1998. The increase in North American
revenues was primarily due to expanded marketing activities, greater acceptance
of Infranet and growth in Portal's sales force in the North American market.
International revenues for Europe and Intercontinental, which are defined by
Portal as Asia-Pacific, Japan and Latin America, totaled $7.1 million in fiscal
year 1999, an increase of $5.7 million or 389% over fiscal year 1998. European
revenues were $4.4 million in fiscal year 1999, an increase of $3.3 million or
311% over fiscal year 1998. Intercontinental revenues were $2.7 million in
fiscal year 1999, an increase of $2.3 million or 602% over fiscal year 1998.
The increase in international revenues was primarily due to growth in Portal's
direct sales force and increased marketing efforts worldwide and the opening of
an international sales office in Hong Kong.
International revenues represented 27% of total revenues in fiscal year 1999,
compared with 15% in fiscal year 1998. In fiscal year 1999, revenues from
Europe were 17% of total revenues and revenues from Intercontinental were 10%
of total revenues.
Expenses
Cost of License Fees
Cost of license fees consists of resellers' commission payments to systems
integrators and third-party royalty obligations. Cost of license fees was $0.5
million in fiscal year 1999, a decrease of $0.5 million or 53% from fiscal year
1998. Gross margin for license fees was approximately 97% in fiscal year 1999
compared to approximately 86% in fiscal year 1998. The increase in gross margin
and the decrease in cost of license fees were primarily due to a substantial
reseller commission paid to a systems integrator in fiscal year 1998. Portal
did not incur any shipping, packaging or documentation costs, as its product
was delivered electronically over the Internet. Portal believes that in future
periods resellers' commissions may increase in aggregate dollars and as a
percentage of total revenues as Portal expands its base of systems integrator
partners.
Cost of Services
Cost of services primarily consists of maintenance, consulting, and training
expenses. Cost of services was $9.4 million in fiscal year 1999, an increase of
$7.3 million or 338% over fiscal year 1998. The increase was primarily due to
an increase in the number of consulting and support personnel necessary to
support both the expansion of Portal's installed base of customers and new
installations. Gross margin for services was approximately 28% in fiscal year
1999 compared to approximately 15% in fiscal year 1998. The increase in gross
margin for services was due primarily to increased availability and utilization
of service personnel. Portal expects cost of services to increase substantially
in the next few quarters as a result of increased demand for services.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs for Portal's development and technical support efforts. Research and
development expenses were $11.3 million in fiscal year 1999, an increase of
$5.6 million or 100% over fiscal year 1998. The increase was primarily due to
an increase in the number of research and development personnel necessary to
support both expanded functionality of Infranet and increases in Portal's
quality assurance, technical support and technical publications operations.
Portal believes its investment in research and development will increase
substantially in future periods. Portal has not capitalized any software
development costs to date.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel and related costs for
Portal's direct sales force, marketing staff and marketing programs, including
trade shows, advertising
24
<PAGE>
and costs associated with Portal's recruitment of new and maintenance of
existing strategic partnerships. Sales and marketing expenses were $14.1
million in fiscal year 1999, an increase of $8.7 million or 160% over fiscal
year 1998. The increase was primarily due to an increase in the number of sales
and marketing personnel, the opening of new sales offices in the United States
and Hong Kong, the costs of establishing sales capabilities in China and
expenses incurred in connection with trade shows and additional marketing
programs. Portal expects that sales and marketing expenses will increase
substantially over the next year as Portal hires additional sales and marketing
personnel, increases spending on advertising and marketing programs and
establishes sales offices in additional domestic and international locations.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources and facilities and information system expenses not
allocated to other departments. General and administrative expenses were
$6.3 million in fiscal year 1999, an increase of $3.6 million or 139% over
fiscal year 1998. The increase was primarily due to an increase in the number
of general and administrative personnel and to increased legal and accounting
costs incurred in connection with business activities. Portal expects that
general and administrative expenses will increase substantially over the next
year as Portal hires additional general and administrative personnel.
Amortization of Deferred Stock Compensation
Portal recorded deferred stock compensation of approximately $16.8 million in
fiscal year 1999, representing the difference between the exercise prices of
options granted to acquire certain shares of common stock during fiscal year
1999 and the deemed fair value for financial reporting purposes of Portal's
common stock on their respective grant dates. Portal amortized deferred
compensation expense of $2.3 million during fiscal year 1999. This compensation
expense relates to options awarded to individuals in all operating expense
categories. Total deferred compensation at January 31, 1999 of approximately
$14.5 million is being amortized over the vesting periods of the options on a
graded vesting method. The amortization of deferred compensation currently
recorded is estimated to be $8.2 million in fiscal year 2000, $3.7 million in
fiscal year 2001 and $1.9 million in fiscal year 2002.
Provision for Income Taxes
The $0.7 million income tax provision shown for this period is the result of
alternative minimum taxes, foreign withholding taxes on revenue, and tax on
earnings generated from operations in certain foreign jurisdictions.
25
<PAGE>
Years Ended January 31, 1997 and 1998
Revenues
Total revenues were $9.4 million in fiscal year 1998, an increase of $4.4
million or 87% over fiscal year 1997. In fiscal year 1998, one customer
accounted for approximately 47% of total revenues, while another customer
accounted for 36% of total revenues in fiscal year 1997. In fiscal year 1998,
Portal's top ten customers accounted for approximately 83% of total revenues,
while in fiscal year 1997, the top ten customers accounted for 78% of total
revenues.
License fees were $6.9 million in fiscal year 1998, an increase of $2.9
million or 75% over fiscal year 1997. The increase in license fees was
primarily due to expanded sales and marketing activities and greater acceptance
of Infranet.
Services revenues were $2.5 million in fiscal year 1998, an increase of $1.4
million or 129% over fiscal year 1997. The increase in services revenues
resulted, in part, from the increase in support and maintenance service fees
related to Portal's growing installed base, both in terms of directly supported
sites as well as additional users, and the renewal of maintenance contracts.
The increase also resulted from the timing of services revenue recognition,
which typically begins prior to the recognition of license fees, particularly
in the case of large customers that require integration with legacy systems. In
addition, the increase in services revenues resulted from increased demand for
Portal's consulting, maintenance and training services to meet the increasingly
complex demands of Portal's customers.
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------- Percent
1997 1998 Change
----------- ----------- -------
(in thousands)
<S> <C> <C> <C>
Geographical Revenues:
North America................................... $ 4,370 $ 7,955 82%
Percentage of total revenues.................. 87% 85%
International
Europe......................................... 400 1,072 168%
Percentage of total revenues.................. 8% 11%
Intercontinental............................... 275 389 41%
Percentage of total revenues.................. 5% 4%
----------- ----------- ----
Total international............................. 675 1,461 116%
Percentage of total revenues.................. 13% 15%
----------- ----------- ----
Total revenues.................................. $ 5,045 $ 9,416 87%
=========== =========== ====
</TABLE>
North American revenues were $8.0 million in fiscal year 1998, an increase of
$3.6 million or 82% over fiscal year 1997. The increase in North American
revenues was primarily due to expanded marketing activities, greater acceptance
of Infranet and growth in Portal's sales force.
International revenues for Europe and Intercontinental totaled $1.5 million
in fiscal year 1998, an increase of $0.8 million or 116% over fiscal year 1997.
European revenues were $1.1 million in fiscal year 1998, an increase of $0.7
million or 168% over fiscal year 1997, due to the recognition of revenues from
seven additional European customers in fiscal year 1998. Intercontinental
revenue increased 41% over fiscal year 1997. The increase in international
revenues was primarily due to the growth in Portal's direct sales force and
increased marketing efforts worldwide, particularly in Europe.
International revenues represented 15% of total revenue in fiscal year 1998,
compared with 13% in fiscal year 1997.
Expenses
Cost of License Fees
Cost of license fees consists of resellers' commission payments to systems
integrators
26
<PAGE>
and third-party royalty obligations. Cost of license fees was $1.0 million in
fiscal year 1998, an increase of $0.9 million over fiscal year 1997. Gross
margin for license fees was approximately 86% in fiscal year 1998 compared to
approximately 98% in fiscal year 1997. The decrease in gross margin for license
fees and the increase in cost of license fees was primarily due to a reseller
commission paid to a systems integrator in fiscal year 1998. Portal did not
incur any shipping, packaging or documentation costs, as its product was
delivered electronically over the Internet.
Cost of Services
Cost of services primarily consists of maintenance, consulting and training
expenses. Cost of services was $2.2 million in fiscal year 1998, an increase of
$1.6 million or 315% over fiscal year 1997. The increase was primarily due to
an increase in the number of consulting and support personnel necessary to
support expansion of Portal's installed base of customers and new
installations. Gross margin for services was approximately 15% in fiscal year
1998, compared to approximately 53% in fiscal year 1997. The decrease in gross
margin for services was due primarily to the shift of service personnel from
higher margin ISP- related services to lower margin product consulting
services.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs for Portal's development and technical support efforts. Research and
development expenses were $5.6 million in fiscal year 1998, an increase of $3.1
million or 123% over fiscal year 1997. The increase was primarily due to an
increase in the number of research and development personnel necessary to
support expanded functionality of Infranet and increases in Portal's quality
assurance, technical support and technical publications operations.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel and related costs for
Portal's direct sales force, marketing staff and marketing programs, including
trade shows, advertising and costs associated with Portal's recruitment of new
and maintenance of existing strategic partnerships. Sales and marketing
expenses were $5.4 million in fiscal year 1998, an increase of $3.1 million or
129% over fiscal year 1997. The increase was primarily due to an increase in
the number of sales and marketing personnel, the opening of new sales offices
in the United States, Australia and the United Kingdom and expenses incurred in
connection with trade shows and additional marketing programs.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources and facilities and information system expenses not
allocated to other departments. General and administrative expenses were
$2.6 million in fiscal year 1998, representing an increase of $0.8 million or
44% over fiscal year 1997. The increase was primarily due to an increase in the
number of general and administrative personnel and to increased legal and
accounting costs incurred in connection with business activities.
27
<PAGE>
Quarterly Results of Operations
The following table presents Portal's operating results for each of the eight
quarters in the period ended January 31, 1999. The information for each of
these quarters is unaudited and has been prepared on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of Portal and the financial statement
footnotes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31,
1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License fees........... $ 1,480 $ 1,528 $ 1,831 $ 2,053 $ 2,185 $ 1,876 $ 3,817 $ 5,658
Services............... 284 299 906 1,035 1,881 2,411 3,414 5,427
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 1,764 1,827 2,737 3,088 4,066 4,287 7,231 11,085
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of license fees... 230 233 246 261 60 86 143 169
Cost of services....... 103 252 654 1,143 1,201 1,673 2,232 4,319
Research and
development........... 894 1,148 1,470 2,116 2,207 2,460 3,148 3,437
Sales and marketing.... 1,065 1,083 1,453 1,835 2,000 3,141 4,016 4,955
General and
administrative........ 569 632 641 774 714 1,273 1,439 2,827
Amortization of
deferred stock
compensation.......... -- -- -- -- 96 234 537 1,430
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 2,861 3,348 4,464 6,129 6,278 8,867 11,515 17,137
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... $(1,097) $(1,521) $(1,727) $(3,041) $(2,212) $(4,580) $(4,284) $(6,052)
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License fees........... 84% 84% 67% 66% 54% 44% 53% 51%
Services............... 16 16 33 34 46 56 47 49
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of license fees... 13 13 9 8 1 2 2 2
Cost of services....... 6 14 24 37 30 39 31 39
Research and
development........... 51 63 54 69 54 57 43 31
Sales and marketing.... 60 59 53 59 49 73 56 45
General and
administrative........ 32 34 23 25 18 30 20 25
Amortization of
deferred stock
compensation.......... -- -- -- -- 2 6 7 13
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 162 183 163 198 154 207 159 155
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (62)% (83)% (63)% (98)% (54)% (107)% (59)% (55)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Cost of license fees declined by $0.2 million or 77% between the fourth
quarter of fiscal year 1998 and the first quarter of fiscal year 1999 primarily
due to a reseller's commission expense associated with license fee revenue
recognized in fiscal year 1998, which was not an expense item in the first
quarter of fiscal year 1999. Cost of services increased by $2.1 million or 94%
from the third to the fourth quarter of fiscal year 1999, as Portal continued
to increase headcount necessary to provide consulting and implementation
services to its customers. Sales and marketing expenses increased by $1.1
million or 57% from the first to the second quarter of fiscal year 1999
primarily due to growth in sales headcount in the United States, the United
Kingdom and Hong Kong in the second quarter.
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Portal's operating results may fluctuate substantially in the future as a
result of a variety of factors, many of which are outside Portal's control,
including those discussed elsewhere in this prospectus. See "Risk Factors--Our
quarterly operating results may fluctuate in future periods and we may fail to
meet expectations".
Liquidity and Capital Resources
Cash and cash equivalents totaled $11.8 million at January 31, 1999, down
from $14.6 million at January 31, 1998. The decrease resulted primarily from
cash used for operations and the purchase of property and equipment, and was
partially offset by cash generated from Portal's $2.8 million capital lease
line facility.
Portal used $3.3 million in cash for operations in fiscal year 1999, an
increase of $0.6 million over the $2.7 million used in fiscal year 1998. Cash
used from operations was primarily comprised of a $17.4 million loss and an
$8.8 million increase in accounts receivable, partially offset by a $15.6
million increase in deferred revenue and an increase in other accrued
liabilities of $4.1 million.
In fiscal year 1999, cash used in investing activities was $2.8 million,
primarily for the purchase of computer servers, workstations, networking
equipment and other capital equipment. This amount was funded almost entirely
from Portal's equipment lease line facility, primarily to further expand its
product capability, increase internal network communication, product
demonstration and service capability.
Portal has raised equity capital from outside investors to fund its
operations. In fiscal year 1997, Portal raised approximately $2.4 million from
the sale of preferred stock. In fiscal year 1998, Portal raised approximately
$15.0 million from the sale of preferred stock. In fiscal year 1999, Portal
raised $0.4 million from the exercise of warrants for preferred stock issued in
connection with its capital lease line facility and its term loan, and raised
an additional $0.4 million from sales of common stock, primarily upon exercise
of stock options by employees. In fiscal year 1998, Portal also raised an
additional $0.1 million from sales of common stock, primarily upon exercise of
stock options by employees.
Portal has used debt and leases to partially finance its operations and
capital purchases. Portal has a $3.0 million capital lease line facility with
an equipment lessor which it established in fiscal year 1998. The lease line
has a term of 48 months and bears interest at a rate of 8.5% per annum. At
January 31, 1999, Portal had utilized $2.8 million of available borrowing under
the capital lease line facility. At January 31, 1999, Portal had outstanding a
$3.0 million term loan with a finance company, which bears interest at the
bank's prime rate plus 2.25%. The term loan is collateralized by substantially
all of Portal's assets, with the exception of new equipment purchased using
funds provided by the capital lease line facility. Portal repaid $1.5 million
of the term loan in February 1999 and $0.5 million in March 1999 and the term
loan matures as to the remaining $1.0 million in April 1999. Portal also
converted a customer deposit for prepaid services into a $1.1 million short-
term liability in fiscal year 1999. This liability matures on November 30, 1999
and bears interest at a rate of 10% per annum. The balance due in November may
decline as services rendered for this customer are deducted from the
outstanding principal.
The capital lease line facility, the term loan, and the customer debt
comprised the entire amount of the debt obligations on Portal's balance sheet
as of January 31, 1999. The capital lease line facility and term loan include
certain covenants requiring minimum liquidity, tangible net worth and
profitability over time. The capital lease line facility and term loan become
due immediately if Portal fails to meet these covenants. In addition, under the
term loan, the lender would have the right to effect its security interest in
the collateral to satisfy any amounts due upon acceleration. Portal is
currently, and has always been, in compliance with these covenants.
Portal's capital requirements depend on numerous factors, including market
acceptance
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of Portal's products, the resources Portal devotes to developing, marketing,
selling and supporting its products, the timing and extent of establishing
international operations, and other factors. Portal expects to devote
substantial capital resources to hire and expand its sales, support, marketing
and product development organizations, to expand marketing programs, to
establish additional facilities worldwide and for other general corporate
activities. Although Portal believes that its current cash balances and the net
proceeds from this offering and the concurrent placement will be sufficient to
fund its operations for at least the next 12 months, Portal may require
additional financing within this time frame. Additional funding, if needed, may
not be available on terms acceptable to Portal, or at all.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
Portal has conducted a limited review of the products for which it currently
provides maintenance, including certain previous versions of Infranet. This
review included a search of the software code, and Portal believes that it has
identified all instances where date specific information is required. Based on
this limited review, Portal believes the products for which it currently
provides maintenance and support, when configured and used in accordance with
its documentation, correctly recognize Year 2000 date code and function
properly. Portal has no plans to conduct further review of its currently
supported products.
Portal's software runs on several hardware platforms and operating systems,
including those provided by Compaq Computer Corporation, Hewlett-Packard
Company, Microsoft Corporation and Sun Microsystems, Inc. In addition, Portal's
software interfaces with third-party systems, such as credit card processing
services and customer-specific modifications that Portal service providers,
third-party integrators and customers have created to be used with Infranet.
Portal's software is, therefore, dependent upon the correct processing of dates
by these systems, interfaces and modifications.
Portal has undertaken to contact all partners for which Portal provides
integration as part of Infranet's standard product configuration. In contacting
these partners, we have attempted to ascertain what release or releases of
their products are Year 2000 compliant. To date, Portal has received assurances
from most of its material partners and will continue to pursue assurances from
all remaining partners. In a newly created test environment, Portal will review
Infranet and interfaces to partner products. We may not identify all Year 2000
failures in partner products because not all failures are within the scope of
these tests. Testing of these interfaces is currently underway, and Portal
expects to complete these tests by September 1999. Portal is currently testing
all releases of Infranet which are not scheduled for obsolescence prior to the
end of calendar year 1999.
Some of our customers elect to integrate Infranet with interfaces not
ordinarily supported by Portal. This integration, whether performed by Portal,
the customer or a third-party systems integrator, is not within the scope of
Portal's in-house testing efforts. Portal has advised all customers that they
must independently test these integrations for Year 2000 compliance.
Portal uses multiple software systems for its internal business purposes,
including accounting, human resources, e-mail, engineering development and
testing tools, customer service and support, professional services and sales
tracking applications. Portal has adopted a formal plan for determining the
Year 2000 compliance of its major internal systems. Portal will obtain
verification of Year 2000 compliance for its major internal hardware equipment
and software systems by October 1999.
Portal is in the early stages of assessing its Year 2000 readiness. To date,
the costs for
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conducting its assessment have not been material. Portal currently estimates
that the costs of ensuring that its products and internal systems are Year 2000
compliant will be approximately $500,000 to $750,000. Portal is unable to
predict to what extent its business may be affected if its software or the
systems that operate in conjunction with its software or its internal systems
experience a material Year 2000 failure. Known or unknown errors or defects
that affect the operation of Portal's software could result in delay or loss of
revenue, interruption of customer management and billing services, cancellation
of customer contracts, diversion of development resources, damage to Portal's
reputation, increased service and warranty costs and litigation costs, any of
which could adversely affect Portal's business, financial condition and results
of operations.
Portal does not have a contingency plan to remediate any Year 2000 problems
that may arise and affect its products or internal systems in the future. If
such problems arise, Portal will need to make the necessary expenditures to
assess and remedy such problems. The nature, timing and extent of such
expenditures cannot be estimated. Such expenditures, if required, may have a
material adverse effect on its business, financial condition and results of
operations.
Portal believes that the following consequences are possible in a "worst
case" Year 2000 scenario:
. a significant number of operational inconveniences and inefficiencies for
Portal and its customers that will divert management's time and
attention; and
. costly business disputes, litigation and claims for pricing adjustments,
product returns and warranty obligations.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. Portal expects that the adoption of SOP
No. 98-1 will not have a material impact on its financial position or results
of operations. Portal will be required to implement SOP No. 98-1 for fiscal
year 2000.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. Portal expects that the adoption of SOP No. 98-5 will not have a
material impact on its financial position or results of operations. Portal will
be required to implement SOP No. 98-5 for fiscal year 2000.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because
Portal does not currently hold any derivative instruments and does not engage
in hedging activities, Portal expects that the adoption of FAS No. 133 will not
have a material impact on its financial position or results of operations.
Portal will be required to implement FAS No. 133 for fiscal year 2000.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions, or SOP 98-
9. SOP 98-9 amends SOP 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. Portal has not yet determined the effect of the final adoption of SOP
98-9 on its future revenues and results of operations.
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Qualitative and Quantitative Disclosures about Market Risk
Portal develops products in the United States and sells them in North
America, South America, Asia and Europe. As a result, Portal's financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all sales are
currently made in U.S. dollars, a strengthening of the dollar could make
Portal's products less competitive in foreign markets. Portal's interest income
is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of its investments are in short-term
instruments. Due to the nature of Portal's short-term investments, Portal has
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
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BUSINESS
Portal
Portal develops, markets and supports real-time, scalable customer management
and billing software, or CM&B software, for providers of Internet-based
services. Portal's Infranet software is a comprehensive solution that meets the
complex, mission-critical provisioning, accounting, reporting and marketing
needs of providers of Internet-based services. Portal's Real Time No Limits
Infranet solution enables the real-time provisioning and reporting of services,
including such functions as account creation, user authentication and
authorization, activity tracking, pricing and rating, billing and customer
service, including self-service, all on a scale of up to millions of users.
Portal has built Infranet using an open architecture with fully documented
APIs, which facilitate customization, integration with existing software
applications and creation of new services by its customers, partners and third
parties.
Founded in 1985 as an on-line service and one of the first ISPs, Portal began
focusing in late 1993 on developing and marketing real-time CM&B software for
the Internet. This heritage has given Portal a unique perspective into the
needs of providers of Internet-based services. As Portal developed CM&B
software for its own use, its managers realized that a real-time, scalable CM&B
software solution offered significant potential advantages, relative to
existing solutions, in the areas of revenue enhancement, cost reduction and
customer service and satisfaction. Recognizing that all providers of Internet-
based services shared a set of common customer management and billing needs and
system requirements, Portal evolved its focus toward selling software
exclusively. Portal shipped the first generally available version of its
flagship product, Infranet, in May 1996. Portal's approximately 80 Infranet
customers include ISPs such as Concentric Network and UUNET Technologies; on-
line enterprises, such as Juno Online Services and Palm.net; and on-line
divisions of telecommunications carriers, such as BellSouth and U S West.
Industry Background
The Telecommunications Industry
Today's worldwide telecommunications industry, having undergone a radical
transformation that began with the deregulation wave of the early 1980's, is
becoming increasingly complex, decentralized and competitive. The
telecommunications industry is being driven by a number of powerful global
trends such as the proliferation of service providers, an increase in the
number of services and marketing plans offered and an increased focus on
customer support.
New entrants, such as Level 3 Communications, Inc. and Qwest Communications
International Inc. now compete domestically with traditional providers such as
AT&T Corp., MCI Worldcom, Inc., Sprint, the Regional Bell Operating Companies,
or RBOCs, and internationally with government-owned telecommunications
carriers. Competition has increased through the introduction of wireless
technologies, digital subscriber lines and cable technologies that have
lessened the dependence on monopoly-owned, "last mile" wired infrastructure. In
addition, new technologies and competitive forces have combined to produce a
wide array of new services. Finally, rather than being limited to one service
provider, the customer has gained relatively greater freedom of choice. This
has prompted service providers to focus increasingly on the various aspects of
customer management and billing as a means of competitive differentiation.
Customer Management and Billing Market
Traditionally, telecommunications carriers created their own in-house billing
systems or utilized outside billing service bureaus. These solutions have
generally proven inadequate to meet the demands of an increasingly competitive
and dynamic environment. In many cases, in-house systems have failed to keep
pace with improvements in computing technology, and are prone to the so-called
"Y2K problem". Service bureaus, on the other hand, remain focused on providing
a relatively limited set of high-volume, standardized
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services, and are generally not equipped to provide cost-effective, customized
solutions. In addition, many telecommunications service providers downsized
their in-house IT staffs in the early 1990's and subsequently have encountered
difficulty hiring skilled staff to upgrade and maintain older, legacy systems.
As carrier requirements have become more complex and IT budgets more
constrained, an increasing number of carriers have sought third-party solutions
for mission-critical CM&B functions, leading to the growth of the customer
management and billing software industry.
Today there are a multitude of CM&B solution providers, offering a wide range
of products and services to the telecommunications market. According to a
research report on the CM&B market, the total market for CM&B software and
services is estimated to grow to $14 billion by 2000. Today, third-party
software handles billing and customer care for millions of subscribers
worldwide on a daily basis. For the most part, however, each vendor's solution
is oriented toward supporting a limited set of services provided by
telecommunications carriers and cable system operators. Many vendors specialize
in particular sub-segments of the market, such as wireless telephony, and are
not designed for broad market applications.
On-line Services and the Internet
Since 1994, the Internet and the Worldwide Web have grown at an explosive
pace. International Data Corporation, or IDC, estimates that there were over 68
million Web users worldwide at the end of 1997. IDC projects this number to
increase to over 319 million by the end of 2002, implying an annual growth rate
of over 36%. The growth of the Internet is a global phenomenon that is
fundamentally changing the nature of the telecommunications industry. Web user
growth, coupled with the growth of new types of on-line and electronic
commerce, or e-commerce, services, has driven the emergence of new service
providers such as ISPs, on-line communities, Internet telephony providers and
many others. In addition, traditional telecommunications carriers have entered
the on-line market, providing Internet connections and e-commerce services to
businesses and consumers.
Existing third-party CM&B solutions have experienced significant difficulties
in adapting to the needs of providers of Internet-based services as well as the
Internet operations of traditional providers. Providers of Internet-based
services continually introduce new services and programs that address the
dramatically changing nature of the Internet. Consequently, they need flexible,
powerful CM&B software that is readily adaptable to a wide range of services
and smoothly scales from hundreds to millions of users. To be most effective,
Internet-compatible CM&B software must be capable of operating in real time,
handling high transaction volume, processing many different types of
transactions and tracking multiple flows of information associated with the
usage of various services.
The Internet service environment is dominated by technologies and interfaces
that are fundamentally different from a traditional telephone or cable network.
For example, Internet service providers tend to operate distributed networks of
UNIX or Windows NT-based Web servers, any or all of which may be servicing a
given customer at a given moment. Traditional CM&B systems were typically
designed to interface with and process data from the equipment and technologies
used in telephone and cable television networks rather than in Internet service
environments.
In addition, the growth of the Internet has led to a dramatic rise in data
transmission volume in all service provider networks. If current growth trends
continue, not only will both voice and data traffic continue to grow, but data
traffic will rapidly eclipse traditional, circuit-switched voice-traffic as the
fundamental type of information being transmitted. Data traffic has many
characteristics that are different from those of traditional voice
transmissions. Existing CM&B systems used by many traditional
telecommunications carriers are not oriented toward "always on", data-oriented
services such as digital subscriber line, Internet telephony and virtual
private networks. Many of these older systems will need to be upgraded or
replaced in order to adapt to the changing environment.
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Traditional CM&B solutions can generally be characterized as (1) inflexible,
(2) capable only of periodic processing or "batch-oriented", (3) proprietary,
(4) centralized and (5) difficult to scale to meet the complex requirements of
providers of Internet-based services. In addition to a general lack of
Internet-based capability, traditional systems were typically designed to
service one particular type and size of service provider -- a large,
traditional RBOC-type carrier, for example, or a small competitive cellular
telephone provider. As a result, there is often no smooth migration path; as
the numbers of subscribers and services grow, a "forklift upgrade" to an
entirely different CM&B product is often required. Finally, existing CM&B
solutions are often not able to address one of the most fundamental
requirements facing providers of Internet-based services: minimizing the time
to market for new products and services.
Portal believes that providers of Internet-based services will increasingly
require a CM&B solution that is real-time, distributed, scalable, flexible and
easily adaptable to a vast number of emerging products and services. Providers
of Internet-based services and telecommunications carriers are demanding
enhanced capabilities from their CM&B systems as the relentless pace of change
and innovation mandates a new level of CM&B performance and functionality.
The Portal Software Solution
Portal develops, markets and supports CM&B software that is specifically
designed to meet the complex, mission-critical provisioning, accounting,
reporting and marketing needs of providers of Internet-based services. Portal's
Infranet software is a real-time, scalable solution that enables service
providers to address the critical business needs of customer management,
services support and accurate and timely billing. Portal believes that its
trademarked phrase, Real Time No Limits, accurately describes Infranet as the
only CM&B solution that provides these capabilities in real time, while also
providing a broad and flexible platform for both the integration of existing
products and services and the rapid development and deployment of new ones.
Infranet is designed to enable service providers to capture the business
benefits of increased revenues, reduced costs and improved customer service.
Increased Revenues. By helping to accelerate the time to market for new
services, Infranet enables service providers to offer a variety of services
quickly and to bundle and price these services in an optimal manner. Infranet
enables services to be activated immediately when ordered by a subscriber, so
that the service provider can immediately begin to collect revenue. Subscriber
activity can then be monitored in real time, which allows the service provider
to promote the consumption of more services through such means as targeted
offers or increased credit limits. In addition, Infranet enables a service
provider to analyze and "mine" subscribers' service usage data in real time,
which can in turn be used to measure the success of marketing and targeting
efforts and to identify new opportunities for subscriber revenue. Using
Infranet's data analysis features, a service provider can quickly determine
which offerings are not successful and easily make appropriate adjustments. For
example, an unsuccessful pricing offer can quickly be terminated or tuned for
better subscriber response. Finally, increased billing accuracy reduces the
incidence of uncollected revenue and fraud.
Reduced Costs. Infranet is designed to be an out-of-the-box solution that
works with all relevant Internet standards and minimizes the service provider's
software installation, maintenance and subscriber servicing costs. Through the
immediate validation of subscriber data and verification of credit, Infranet
reduces the need for data correction and the incidence of credit problems. In
addition, subscribers can access their billing and service information
directly, which reduces the degree of costly person-to-person service required
to satisfy the subscriber. Real-time monitoring and authentication
substantially reduce the opportunities for fraud by ensuring that access to the
service provider's network is granted only if the user has been properly
verified. Infranet's monitoring and data analysis capabilities can help the
service provider pinpoint unprofitable
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offerings or identify a degree of usage that justifies volume purchases of
specific resources such as high-speed data circuits at a lower cost.
Improved Customer Service. Infranet enables service providers to offer
improved billing accuracy, enhanced customer service quality and responsiveness
to their subscribers. Using Infranet, service providers can easily tailor their
offerings on a bundled or unbundled basis, substantially increasing customer
choice without incurring additional costs. Up-to-the-minute account balances
and status information can be made available to users on a 24x7 basis, either
over the Internet or via customer service representatives. Potential customer
account issues can be identified and resolved quickly, since there is no need
to wait for regular billing cycles to expose these issues. Infranet's real-time
capability enhances responsiveness to subscribers' needs, which can help reduce
subscriber "churn", or turnover.
Infranet is the culmination of the experience and insights gained through
Portal's years as an ISP, as well as Portal's five-year history as a software
developer. This experience has enabled Portal to design and develop Infranet to
meet the critical functional requirements sought by service providers. These
requirements include scalability, enterprise integration and interoperability,
comprehensive functionality and ease of use, flexibility and improved time to
market--all operating on a real-time basis.
Scalability and Reliability. Infranet will run on a wide range of systems,
from a laptop computer running Windows NT to a large cluster of UNIX-based
servers. Infranet has been designed, using object-oriented programming
methodologies, to scale from hundreds to millions of users through the
incremental addition of servers. This capability allows a service provider to
grow its CM&B infrastructure incrementally as its level of business grows
without the need for architecture redesign or large-scale system replacements.
For example, new servers can be added without taking the system offline,
eliminating costly downtime. By running Infranet on multiple servers, a service
provider can reduce exposure to various types of failures, including individual
server failure, power failure and loss of physical facilities. This level of
reliability and redundancy, long present in the traditional telephone network,
is increasingly required in the Internet environment. Automatic load balancing
features smooth out usage spikes and ensure high availability. Infranet's
object-to-relational data model is optimized for high performance on-line
transaction processing and high reliability.
Enterprise Integration and Interoperability. Infranet has been designed with
fully documented, open APIs that allow Portal, its customers, partners and
third party software developers to integrate Infranet with existing
applications and services requiring minimal effort and programming overhead.
This capability enables new services to be deployed quickly and efficiently
while maintaining smooth interoperability with pre-established services. For
example, a telecommunications carrier might use Infranet to add Internet-
related services which then appear on a subscriber's monthly telephone bill.
Infranet runs on server operating systems from Hewlett-Packard, Microsoft and
Sun Microsystems and utilizes database software from Microsoft and Oracle.
Infranet also can be readily integrated with a variety of packaged software
applications, such as help desk, accounting, taxation and payment systems.
Comprehensive Functionality and Ease of Use. Portal has drawn on its own
experiences to develop a comprehensive suite of pre-defined, ready-to-use CM&B
functions, such as customer registration, business policies, pricing plans and
payment methods. Portal also seeks to provide upgrades and enhancements to
Infranet on a regular basis, with a strong emphasis on response to customer
feedback. Infranet employs a simple, intuitive Windows-based user interface for
efficient addition and deletion of services and functions, as well as a set of
templates for Web-based capabilities such as subscriber registration, password
changes and account balance inquiries. Infranet addresses the entire
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customer management and billing life cycle, from account creation to
monitoring and pricing to back-end management and reporting.
Flexibility and Improved Time to Market. Infranet is designed to be a
modular, extensible software product. This flexibility allows each Portal
customer to tailor its individual Infranet installation to meet the exact
needs of a particular environment, set of services and group of subscribers.
The service provider is thereby empowered to respond quickly to the rapidly
changing needs of the Internet marketplace. In addition, Infranet can
generally be customized to a service provider's needs relatively quickly,
enabling its customers to improve their time to market with new products and
services.
The Portal Software Strategy
Portal's strategy is to establish itself as the CM&B platform of choice for
providers of Internet-based services. Key elements of this strategy are:
Extend Market Leadership Position. Portal's objective is to extend its
position as a leader in the Internet-based CM&B market to establish itself as
the broad platform of choice for providers of Internet-based services. Portal
intends to take advantage of its technological leadership, strategic
partnerships, significant customer relationships, broad-based sales and
marketing efforts and scalable business model to create a widespread customer
base that will be difficult for potential competitors to penetrate. Moreover,
Portal believes that its products enable each customer to design and deploy
new, profitable services, which in turn increase the customer's use of
Portal's products and services and generates additional opportunities for
Portal to grow.
Target Leading Providers of Advanced Communications Services Worldwide. The
scalability and flexibility of its Infranet products enables Portal to target
a broad range of providers of Internet-based services. Portal's targeted
customer segments, and some representative existing customers, include:
. on-line service divisions of traditional major telecommunications
providers worldwide, such as France Telecom SA, NTT Soft and U S West;
. on-line and Internet service providers, such as Concentric Network,
Microsoft, UUNET and Viag Interkom & CO. GmbH; and
. companies that use the Internet to provide entirely new types of
communications services, such as Juno Online Services, Palm.net and
USinternetworking, Inc.
The unique capabilities of Infranet enable Portal to take this portfolio
approach to targeting customers. Portal believes this approach offers the
greatest opportunity for sustained growth, as many of these companies are or
will be the market leaders in their respective industries.
Build a Long-Term, High Margin, Software-Driven Business Model. Portal's
business model is predicated on the sale of standard software products, rather
than the service-intensive, customer-specific solutions offered by many of its
competitors. The scalability, comprehensive functionality and extensibility of
Infranet, combined with Portal's strategic partnerships, are designed to allow
Portal to achieve and maintain a high margin, software-driven business model
without needing to provide an inordinate degree of consulting and integration
services.
Leverage Partnerships and Alliances with Systems Integrators, and with
Platform, Software and Services Providers. Portal has established a series of
partnerships and alliances with systems integrators, such as Andersen
Consulting, Cap Gemini, NTT Soft and PricewaterhouseCoopers and hardware
platform, software and services providers, such as Cisco, Compaq, Hewlett-
Packard, Microsoft, Oracle and Sun Microsystems. These partners and alliances
provide a global extension of Portal's direct sales force and are a
significant source of leads and referrals. This network of partners also
enables Portal to focus on being the CM&B software platform provider while
offering a complete customer solution using third-party components that
perform ancillary functions such as tax or payment processing. In
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addition, Portal's systems integrator partners are trained to integrate
Infranet with customers' existing legacy systems. Portal seeks "best of breed"
partners in each particular area, to associate Infranet with market-leading
technologies, products and systems integrators. Portal believes that this
partnership strategy is unique in breadth and scope within its market, provides
it with a competitive advantage and serves as a "force multiplier" which
leverages Portal's own internal capabilities.
Grow with Customers and the Internet. While initial sales to customers are
often substantial, Portal's strategy is to maximize its available opportunities
for long-term revenue growth by targeting service providers with excellent
growth prospects and capitalizing on additional sales opportunities with its
customers. Portal's subsequent revenue growth can then occur through the
addition of subscribers, add-on component sales, additional service revenues
and maintenance and support agreements. In turn, Portal intends to continue to
evolve and refine its business to track the growth of Internet-based services,
so that as these services proliferate, Portal's revenue growth opportunities
will also increase. Accordingly, Portal typically prices its products on a per-
subscriber basis so that they are more affordable for new, promising service
providers that may in time grow to be leaders in their market segments and
long-term, loyal customers.
Products and Services
Portal develops, markets and supports CM&B software specifically designed to
meet the complex, mission-critical provisioning, accounting, reporting and
marketing needs of providers of Internet-based services. Portal's Infranet
product is an easily integrated, highly flexible enterprise solution comprising
the critical elements necessary for registering, managing, monitoring and
billing users of Internet-based services. Infranet unifies the management of
core business operations and its Real Time No Limits solution differentiates it
from traditional, batch-oriented CM&B solutions.
Portal also offers Infranet IPT, a complete end-to-end CM&B software solution
based on the Infranet platform and specifically tailored to the needs of
Internet telephony service providers. Internet telephony is a growing industry
that uses Internet technologies to bring low-cost, flexible voice
communications services to customers worldwide. Since Internet telephony
providers tend to be startup businesses, they do not have a long history of
using legacy systems, unlike many traditional voice service providers.
Therefore, Portal has an opportunity to be first-to-market with a leading-edge
CM&B solution for this emerging market.
In addition to providing maintenance and support for Infranet, Portal
provides implementation planning and management, training and technical support
and development and customization support through its professional services
organization.
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Infranet
Infranet integrates the functionality for each stage of customer interaction
with a single, unified customer database and a coordinated set of features and
functions. The database acts as the repository for all data collected in real
time during each stage of the customer life cycle, as follows:
Diagram. A circle of arrows connected end to end enclosing a box containing the
word "Infranet." Inside the circle are the areas of data which Infranet tracks:
Account Creation & Service Provisioning, Authentication & Authorization,
Activity Tracking, Rating/Pricing, Billing & Accounts Receivable, Customer
Management and Reporting.
Account Creation and Service Provisioning. Infranet supports a variety of
registration standards and has all of the features necessary to register
subscribers quickly. The Infranet registration process collects the data needed
to provision and bill the subscriber for service, while also allowing service
providers to collect additional subscriber profile information they may desire.
As the data is collected and verified, Infranet creates customer accounts and
activates the selected services in real time.
Authentication and Authorization. Infranet authenticates users based on user
name and password, checks account status and authorizes access to individual
services. Infranet can also check for duplicate user names and available credit
or resources, enabling service providers to more effectively detect and prevent
fraud and bad debt.
Activity Tracking. By recording all events in real time in its unified
customer database, Infranet gives service providers the ability to build a
detailed picture of individual customer behavior, either currently or
historically. This also provides a complete audit
trail of customer usage to resolve any issues that may subsequently arise.
Rating/Pricing. Infranet offers a powerful and flexible "rating engine",
which enables service providers to create a wide variety of pricing plans for a
broad array of services. Infranet can price any tracked event as it occurs, so
that customers and service representatives have real-time access to account
balances and available credit. Infranet's rating engine supports multiple
resource balances and limits, such as cash balances, free hours of usage,
megabytes of server storage or any other resource defined by
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the service provider. The rating of a single event can update any or all
existing balances.
Billing and Accounts Receivable. Infranet's billing and payment system has
been designed for flexibility from the ground up. Billing cycles can be any
multiple of a month and can begin on any day of the month. Because of
Infranet's real-time capability, accounts can be accurately closed at the end
of the billing cycle, irrespective of when the billing process actually takes
place. Infranet also supports multiple currencies and payment in real time,
through interfaces with credit card processing systems such as Paymentech and
ICVerify, or by invoice. A modular payment interface lets customers integrate
additional payment methods and a general ledger interface lets service
providers allocate journal entries using a general ledger code. Infranet
supports both open item and balance forward accounting.
Customer Management. Customer service representatives can access customer
data through an intuitive, Windows-based graphical user interface. Infranet
organizes customer information into a variety of standard screens, which can
also be readily customized. Service representatives can:
. create, search and modify customer accounts;
. view activity, balances and invoices;
. perform billing operations; and
. view and modify account hierarchy.
Infranet enables providers to configure permissions and track customer service
activity, ensuring a complete audit trail on each account.
Infranet supplements these capabilities with a browser-based interface that
enables customers to view selected account information directly. This self-
service feature increases customer convenience and can help reduce customer
service costs.
Reporting. Using the data in the Infranet unified customer database, service
providers can create reports using a powerful, enterprise-wide reporting
infrastructure called Infranet Insite. Insite report templates provide business
intelligence to operations, finance, sales and marketing personnel. Insite
includes a full set of customizable reports, and also supports new report
development.
Portal has structured the pricing of Infranet to accommodate all of its
target customer segments, which range from startups to large on-line service
providers with millions of subscribers. Portal typically prices Infranet on a
per subscriber basis, with customary volume discounts for the upfront purchase
of a large number of licenses. Supplemental purchases of additional components
are also priced on a per subscriber basis, while annual maintenance and support
contracts are priced as a percentage of the associated license revenues.
Portal's initial sales of licenses and associated services, maintenance and
support generally range from the low hundreds of thousands to several million
dollars.
Infranet IPT
Introduced in September 1998, Infranet IPT incorporates Infranet's core
functionality to deliver the CM&B features needed by providers of Internet
telephony services, such as:
. real-time architecture;
. support for a broad range of services and pricing plans;
. out-of-the-box gateway integration;
. prepaid calling card support; and
. zone-based rating.
Infranet IPT is designed to optimize resources for each step of the Internet
telephony process, such as setting up calls, monitoring calls in progress,
tracking usage and billing users. Infranet IPT enables account creation,
authentication and fraud prevention, authorization and credit control, activity
tracking, pricing and billing and customer management and reporting.
Customer Service and Support
Portal believes that a high level of customer service and support is critical
to the successful marketing and sale of Infranet. Portal provides support to
its customers through maintenance and support agreements. Support includes
assistance with technical problems related to the use of Portal's software and
software maintenance and upgrade releases.
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Portal generally provides its base level of customer support via an Internet-
based customer management system and higher levels of support via telephone and
on-site technical assistance. Portal provides customer technical support for
its products primarily from its Cupertino, California location. Portal plans to
establish additional customer support sites domestically and internationally
commensurate with customer needs.
Portal also offers project implementation services to assist customers in the
project planning, installation and implementation of the Portal solution.
Portal consulting services are also available for customers requiring
additional software customization, upgrade assistance or other Infranet-related
technical services. Portal professional services consultants are located in
several cities in the United States and various countries outside the United
States. Portal has a leveraged business model based on using systems integrator
partners to provide jointly or separately a range of services, including first-
line technical support and project implementation services, in various
locations around the world.
Partnerships
Portal has established a series of partnerships and alliances with systems
integrators such as Andersen Consulting, Cap Gemini, NTT Soft and
PricewaterhouseCoopers and hardware platform, software and services
providers such as Cisco, Compaq, Hewlett-Packard, Microsoft, Oracle and Sun
Microsystems. Portal employs this network of partnerships to both expand its
sales, service and marketing capabilities and to extend the technical and
functional application of its solution. Portal's network of partnerships allows
Portal to maintain its focus as a product company while simultaneously
obtaining sales, technical and service leverage through its partners.
The following diagram below illustrates Portal's approach to partnerships by
listing certain of the markets it addresses and some of its current partners:
Diagram entitled "The Portal Market Partnership Model" consisting of a box
representing Portal's approach to partnerships. The middle of the diagram is an
arrow pointing left to right containing the word "Infranet." The arrow
separates Portal's two types of partners: Representative market partners and
representative platform partners.
There are four boxes across the top of the diagram, each representing a
different type of market partner. The first box on the left represents consumer
Internet service providers consisting of integrators, including Andersen, Cap
Gemini, Deloitte & Touche and NTT Soft, and services, including iPass,
Microsoft MCIS & Site Server and Software.Com. The second box represents
business Internet service providers consisting of integrators, including
Andersen, Deloitte & Touche, NTT Soft and PWC and services, including Cisco
NetFlow, HP SIU and XACCT. The third box represents Internet protocol telephony
consisting of integrators such as Finsiel and KPMG and services such as Cisco
and VocalTec. The fourth box represents hosting consisting of integrators such
as Deloitte & Touche and Hewlett-Packard and services such as Microsoft MCIS &
Site Server and Netscape SuiteSpot.
There are six boxes across the bottom of the diagram, each representing a
different type of platform partner. The first box represents hardware partners
such as Compaq, Hewlett-Packard and Sun. The second box represents database
partners such as Microsoft and Oracle. The third box represents customer care
partners such as Clarity, Remedy and Vantive. The fourth box represents
accounting reporting partners such as Oracle and Seagate. The fifth box
represents payment partners such as FDC, Group I, Paymentech, Cybercash and
VeriFone. The sixth box represents tax partners such as Taxware and Vertex.
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There are two types of partners in Portal's "Market Partnership Model":
Market Partners. Portal leverages its own sales and marketing efforts by
taking advantage of the marketing and lead generation capabilities of its
market partners. Market partners are specialized technology and services firms
that adapt Portal's products to the needs of a specified market segment. For
example, in the consumer ISP market, iPass, Inc., Microsoft and Software.com,
Inc. provide complementary services and technologies, which are fully
integrated with Infranet through Portal's open APIs. In turn, a set of systems
integrators, such as Andersen Consulting, Cap Gemini, NTT Soft and
PricewaterhouseCoopers, adapts this combination of Infranet and add-on
technologies to the specific environment of each provider of on-line services.
This combination of add-on technology and systems integration allows Portal to
serve as the enabling technology for a complete solution in each of its
markets. This approach also provides a mechanism for Portal to enter new
markets as opportunities develop.
In April 1999, Portal agreed to enter into a strategic alliance with Andersen
Consulting under which Andersen Consulting will provide services to Portal, the
parties will expand their existing marketing alliance and will work closely
together to expand their customer service and marketing relationship. Under
this arrangement, Andersen Consulting will purchase up to 400,000 shares of
common stock from Portal in the concurrent placement and Portal will pay
Andersen Consulting a services fee of between $2.8 million and $8.8 million,
dependent upon the performance of Portal's stock after this offering. See
"Description of Capital Stock--Concurrent Private Placement".
Platform Partners and Alliances. Portal's technology strategy is to focus
exclusively on Infranet to enable real-time, mission-critical, Internet-based
services. Given this focus, Portal forms partnerships and alliances with
hardware platform providers, such as Cisco, Compaq, Hewlett-Packard and Sun
Microsystems, database software developers such as Microsoft and Oracle, and
software applications developers with best-of-breed products to provide
superior solutions to its customers. By providing its platform partners and
alliances with a fully documented set of open APIs, Portal ensures that
Infranet can interoperate with their products. This allows Portal to partner
with the leading-edge vendors in each area of functionality and provides the
flexibility to adopt new products and technologies rapidly. Portal also seeks
to generate referral sales from its platform partners' sales forces.
In April 1999, Portal entered into a strategic alliance with Cisco under
which Portal and Cisco will jointly develop, market and sell integrated
hardware and software products targeted at providers of Internet-based
services. Under this arrangement, Portal will be Cisco's strategic CM&B
solution provider and Cisco will be Portal's strategic solution provider of
equipment for next generation IP networks. Portal and Cisco have agreed to
cooperate in the development, marketing and sale of these integrated products.
Technology
Portal's software architecture consists of the Infranet platform, upon which
CM&B functionality is layered using fully documented open APIs. This approach,
designed from the start to use object-oriented programming techniques, enables
new processes and services to be readily incorporated, thus allowing an
evolving multi-service model to be built without the need to change the
underlying software foundations. Similarly, changes can be made in the object-
based platform without affecting the behavior of the CM&B functions.
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Infranet's advanced, four-tier client-server architecture was designed from
the ground up to be scalable, reliable, secure and extensible. The four tiers
of Infranet's architecture are:
Diagram entitled "Four Tier Architecture" depicting the four tiers:
Application, Business Process, Object and Data. The application tier contains
the client applications. The business process tier contains the process
modules, the object request broker. The Object tier contains the object server
which consists of the payment and reporting engines. The data tier contains the
database where all the data is stored. Along the bottom of the four tiers are
several machines depicting the hardware infrastructure shown as operating on
either a network or single machine utilizing the four tier architecture.
. Application Tier: includes client applications for registration, customer
service and billing, as well as interfaces to event sources such as
terminal, mail or Web servers.
. Business Process Tier: includes an object request broker, or ORB, that
arbitrates requests between this tier and the object tier and functional
modules that implement the core business operations supported by
Infranet. These modules are driven by business policies that are fully
customizable by the provider.
. Object Tier: manages all account, service, event and pricing information
using a high-level, objected-oriented data model that greatly enhances
the extensibility of the system.
. Data Tier: includes the relational database management systems such as
Oracle and Microsoft SQL Server where all Infranet data is stored, as
well as TCP/IP-based links to external systems such as payment, tax,
credit card authorization and directory-based systems.
Infranet's four-tier architecture has several advantages:
Scalability and Performance. Infranet easily scales to handle subscriber
growth and large numbers of subscribers while maintaining high levels of
performance. Providers can add multiple servers as needed to any or all levels
of the system, generally without incurring downtime. In addition, automatic
load balancing is used to minimize the effect of usage spikes on performance.
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Reliability. Infranet provides 24x7 telecommunications-grade reliability with
features such as automatic reconnection in the event of a lost link and
automatic re-routing in case of a failed re-connect. Both features occur
without interrupting the client application. In addition, Infranet utilizes the
features of the underlying database management system to improve transactional
integrity and account reliability. Because Infranet is designed to take
advantage of redundancy, adding additional systems to the architecture
increases reliability.
Security. Firewalls, proxies and filters can be installed between every tier
of the Infranet architecture to prevent unauthorized access to programs and
data. Providers can determine and audit who has access to the system. Critical
business functions run at the most secure business process tier, and access
lists restrict the use of critical operations. Session monitoring, analysis and
control occur in real time so that problems can be identified and stopped
rapidly.
Extensibility. Infranet offers fully documented open APIs at every level of
the system. These interfaces give providers the ability to integrate Infranet
with legacy and external software. Value-added services, even those developed
by third parties, can be rapidly customized as well.
Sales and Marketing
Sales
Portal's sales strategy is to pursue targeted accounts both through its
direct sales force and indirectly through its strategic partners. Portal has to
date targeted its sales efforts at medium and large ISPs, on-line service
divisions of traditional telecommunications providers and other providers of
Internet-based services.
Portal maintains direct sales personnel in ten states across the United
States, and internationally in Australia, Canada, China, Hong Kong and the
United Kingdom. The direct sales force is organized into individual account
teams, which include both sales representatives and systems engineers. Portal
generates leads from contacts made through marketing partners, seminars and
conferences, which are usually co-sponsored by marketing partners, market
research, its Web site, trade shows, customers and its ongoing public relations
program. The direct sales force is complemented by telemarketing
representatives based at Portal's headquarters in Cupertino, California. Portal
qualifies the leads and assigns an account team to prospective customers. The
account team then initiates the sales process, which generally involves
multiple presentations to information technology and business professionals
within the prospective customer's organization. Portal intends to increase the
size of its direct sales force and establish additional sales offices
domestically and internationally.
Portal complements its direct sales force with a series of partnerships and
alliances with systems integrators such as Andersen Consulting, Cap Gemini, NTT
Soft and PricewaterhouseCoopers, as well as with hardware platform and software
applications developers and service providers such as Cisco, Compaq, Hewlett-
Packard, Microsoft and Sun Microsystems. These partners provide a global
extension of Portal's direct sales force and are a significant source of leads
and referrals. Portal believes these relationships also serve to validate its
technology and facilitate broad market acceptance of Infranet services.
Portal's direct sales force works closely with its indirect distribution
partners. After a partner has introduced Portal's products to a potential
customer, an in-house account team is assigned to complete the sales process.
Portal has derived, and anticipates continuing to derive, a significant
portion of its revenues from customers that have significant relationships with
Portal's market and platform partners. Many of these partners also work with
competing software companies, and Portal's success will depend on their
willingness and ability to devote sufficient resources and efforts to marketing
Portal's products. Portal's agreements with these parties typically are in the
form of non-exclusive referral fee or reseller agreements that may be
terminated by either party without cause or penalty and with limited notice.
Therefore, there is no guarantee any
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single party will continue to market Portal's products. If these relationships
fail, Portal will have to devote substantially more resources to the
distribution, sales and marketing, implementation and support of Infranet.
Portal intends to establish additional indirect channels in the future.
However, there can be no assurance that Portal will be able to establish
relationships with additional partners on a timely basis or at all, or that
such relationships will be successful.
Marketing
Portal's marketing programs are targeted at providers of Internet-based
services and are currently focused on creating awareness of, and generating
interest in, Infranet. Portal engages in a variety of marketing activities,
including:
. managing and maintaining its Web site;
. conducting direct mailings and ongoing public relations campaigns;
. conducting seminars;
. creating and placing advertisements; and
. establishing and maintaining close relationships with recognized industry
analysts.
Portal is an active participant in technology-related conferences and
demonstrates its products at trade shows targeted at providers of Internet-
based services. Portal also focuses on a range of joint marketing strategies
and programs with its partners in order to leverage their existing strategic
relationships and resources.
Customers
Portal's typical customers are providers of Internet-based services that
benefit from a scalable CM&B software solution. As of January 31, 1999, Portal
had licensed Infranet to approximately 80 customers worldwide, including:
BellSouth, Concentric Network, CyberCash, Inc., FlashNet Communications, Inc.,
France Telecom, Grolier Incorporated, Juno Online Services, Microsoft, NTT
Soft, OzeMail, Palm.net, Sage Networks, Inc., SegaSoft Networks, Inc., Shanghai
Online, USinternetworking, U S West, UUNET and Viag Interkom.
In fiscal year 1999, no customer accounted for 10% or more of Portal's total
revenues. In the fiscal years 1998 and 1997, respectively, Compuserve and
Sprint each individually accounted for more than 10% of Portal's total
revenues.
Although Portal's customers include both small and large providers of
Internet-based services, a substantial portion of Portal's license and services
revenues in any given quarter has, and is expected to continue to be, generated
from a limited number of customers with large financial commitment contracts.
As a result, if a contract is cancelled or deferred or an anticipated contract
does not materialize, Portal's revenues would be materially adversely affected.
Research and Development
Portal believes that strong product development capabilities are essential to
its strategy of enhancing its core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of its product and service offerings. Portal has invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within Portal and is designed to provide a framework for defining and
addressing the activities required to bring product concepts and development
projects to market successfully. In addition, Portal has recruited key
engineers and software developers with experience in the CM&B, enterprise,
database and operating system software markets and has complemented these
individuals by hiring senior management with experience in software used by
providers of Internet-based services.
Portal's research and development expenses totaled approximately $11.3
million for the fiscal year ended January 31, 1999, $5.6 million for the fiscal
year ended January 31, 1998 and $2.5 million for the fiscal year ended January
31, 1997. As of April 1, 1999, approximately 109 employees were engaged in
research and development activities.
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Competition
Portal competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Portal competes on the basis of performance,
scalability, extensibility, ease of integration and price. Portal faces
competition from providers of traditional CM&B software such as Amdocs, Kenan
Systems (recently acquired by Lucent), LHS Group and Saville Systems; emerging
providers of Internet-specific billing software, such as Belle Systems, Solect
Technology and TAI; and providers of Internet-based services that develop
proprietary systems. Portal also competes with systems integrators and with
internal MIS departments of large telecommunications carriers. Portal is aware
of numerous other major ISPs, software developers and smaller entrepreneurial
companies that are focusing significant resources on developing and marketing
products and services that will compete with Infranet.
Portal believes it competes favorably in performance, scalability,
extensibility, ease of integration and price, particularly due to Infranet's
ability to run on a wide range of systems, Infranet's ability to integrate with
existing applications, Infranet's comprehensive functionality and ease of use,
and its flexibility. The failure of Portal to develop products that compete
successfully with those of other suppliers in the market would harm our
business.
Portal anticipates continued growth and competition in the telecommunications
industry and the entrance of new competitors into the CM&B software market, and
that the market for its products and services will remain intensely
competitive. Many of Portal's current and future competitors have significantly
more personnel and greater financial, technical, marketing and other resources
than Portal.
Intellectual Property
Portal relies upon a combination of patent, copyright, trade secret and
trademark law to protect its intellectual property. Portal currently has three
U.S. patent applications pending related to its relational database and real-
time billing technology. In addition, Portal has two U.S. registered trademarks
and four U.S. trademark applications pending. While Portal relies on patent,
copyright, trade secret and trademark law to protect its technology, Portal
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to Portal's technology.
Portal generally enters into confidentiality or license agreements with its
employees, consultants and corporate partners, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite Portal's efforts to protect proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology or to develop products with the same functionality as
Portal's products. Policing unauthorized use of its products is difficult, and
Portal cannot be certain that the steps it has taken will prevent
misappropriation of its technology, particularly in foreign countries where the
laws may not protect proprietary rights as fully as do the laws of the United
States. In addition, certain of Portal's license agreements require it to place
the source code for Infranet into escrow. Such agreements generally provide
that these parties will have a limited, non-exclusive right to use this code
if:
. there is a bankruptcy proceeding by or against Portal;
. Portal ceases to do business without a successor; or
. Portal discontinues providing maintenance and support.
Substantial litigation regarding intellectual property rights exists in the
software industry. Portal expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in its
industry segments grows and the functionality of products in different industry
segments
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overlaps. Some of Portal's competitors in the market for CM&B software may have
filed or may intend to file patent applications covering aspects of their
technology that they may claim Portal's technology infringes. Portal cannot be
certain that any of these competitors will not make a claim of infringement
against it with respect to its products and technology.
Portal's success and ability to compete are substantially dependent upon its
internally developed technology. However, portions of Infranet incorporate
software developed and maintained by third-party software vendors, such as
operating systems, tools and database vendors. Portal may have to rely on
third-party software vendors and developers to a larger degree in future
products. Although Portal believes it could find other sources for these
products, any significant interruption in the supply of these products could
adversely impact Portal's sales unless and until it can secure another source.
Employees
As of April 1, 1999, Portal had 303 full-time employees, 59 of whom were
engaged in customer service and support, 89 in sales and marketing, 109 in
engineering, and 46 in finance, administration and operations. Portal's future
performance depends in significant part upon the continued service of its key
technical, sales and senior management personnel, none of whom is bound by an
employment agreement requiring service for any defined period of time. The loss
of the services of one or more of Portal's key employees could harm its
business. Portal's future success also depends on its continuing ability to
attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, particularly in the
San Francisco Bay Area where Portal is headquartered, due to the limited number
of people available with the necessary technical skills and understanding of
the Internet, and there can be no assurance that Portal can retain or attract
key personnel in the future. None of Portal's employees are represented by a
labor union. Portal has not experienced any work stoppages and considers its
relations with its employees to be good.
Facilities
Portal leases an aggregate of approximately 47,000 square feet in two
separate offices in an office complex located in Cupertino, California. Portal
occupies these premises under two leases expiring in May 2000 and October 2003.
In addition to its principal office space in Cupertino, California, Portal also
leases facilities and offices domestically in Westport, Connecticut; Boston,
Massachusetts; New York, New York; McLean, Virginia; Dallas, Texas; Chicago,
Illinois and internationally in North Sydney, New South Wales, Australia;
Slough, United Kingdom; and Hong Kong. These leases are for terms expiring from
March 1999 to October 2003. Portal believes that the facilities it currently
leases are sufficient to meet its needs through at least the next twelve
months. However, Portal believes it will require up to 50,000 additional square
feet of office space after that time and is currently seeking facilities
totaling 100,000 square feet in the same geographic area as Cupertino,
California.
Legal Proceedings
Portal is not currently a party to any legal proceeding.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Portal as of April 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
---------------------------- --- --------------------------------------------
<C> <C> <S>
John E. Little.............. 41 Chief Executive Officer, President and
Chairman of the Board of Directors
Jack L. Acosta.............. 51 Chief Financial Officer, Vice President,
Finance and Secretary
David S. Labuda............. 35 Chief Technology Officer and Vice President,
Engineering
Steven R. Sommer............ 44 Vice President, Marketing and Business
Development
Kevin P. Mosher............. 42 Vice President, Sales
Annette D. Surtees.......... 43 Vice President, Human Resources
Michael E. Regan............ 42 Vice President, Professional Services
Arthur C. Patterson(1)(2)... 55 Director
Edward J. Zander(2)......... 52 Director
David C. 51 Director
Peterschmidt(1)(2).........
William T. Coleman III(2)... 51 Director
</TABLE>
- --------
(1) Member of audit committee
(2) Member of compensation committee
John E. Little. Mr. Little founded Portal in March 1985 and has been Chief
Executive Officer and a Director since its inception. In addition, Mr. Little
served as President from inception to March 1996 and has served as President
since November 1996. Prior to founding Portal, Mr. Little was an independent
consultant for a number of companies including Knight-Ridder Inc., AT&T Corp.,
Raytheon Company, Dow Jones News Retrieval, a subsidiary of Dow Jones &
Company, Inc., Victor Company of Japan (JVC) and Sun Microsystems, Inc.
Jack L. Acosta. Mr. Acosta joined Portal in February 1999 as Chief Financial
Officer, Vice President, Finance and Secretary. 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, an enterprise database company. From February 1990 until
April 1993, Mr. Sommer served as Vice President, Marketing for
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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.
Arthur C. Patterson. Mr. Patterson has been a Director of Portal since March
1996. Mr. Patterson is a founder and General Partner of Accel Partners, a
venture capital firm. Mr. Patterson invests in enterprise software and
communications services companies. Mr. Patterson also serves as a director of
PageMart Wireless, Inc., a communications services company, Unify Corporation,
an enterprise software company, Actuate Software Corporation, an enterprise
reporting software company, Viasoft, Inc., a software tools company, as well as
several private enterprise software and communications companies.
Edward J. Zander. Mr. Zander has been a Director of Portal since August 1997.
Since January 1998, Mr. Zander has served as Chief Operating Officer of Sun
Microsystems. From February 1995 until January 1998, Mr. Zander served as
President of Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems. From January 1991 to February 1995, Mr. Zander was President of
SunSoft, Inc., the software subsidiary of Sun Microsystems. From October 1987
to January 1991, Mr. Zander was Vice President of Marketing at Sun
Microsystems. Mr. Zander also serves as a director of Documentum, Inc., a
developer of Internet and client/server software-based solutions, Rhythms Net
Connections, Inc. and the Jason Foundation for Education.
David C. Peterschmidt. Mr. Peterschmidt has served as a Director of Portal
since April 1998. Mr. Peterschmidt has been President, Chief Executive Officer
and a Director of Inktomi Corporation, an internet search engine company, since
July 1996. He was appointed Chairman of the Board of Directors of Inktomi in
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
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<PAGE>
various positions at Sun Microsystems, most recently as Vice President and
General Manager of the Sun Integration Division.
Board of Directors and Committees
Portal currently has authorized five directors. Following this offering, the
board will consist of five directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Messrs. Patterson and Coleman
are Class I directors whose terms will expire in 2000, Mr. Zander is a Class II
director whose term will expire in 2001, and Messrs. Little and Peterschmidt
are Class III directors whose terms will expire in 2002. The officers serve at
the discretion of the board.
Portal has established an audit committee, which reviews and supervises
Portal's financial controls, including the selection of its auditors, reviews
the books and accounts, meets with its officers regarding its financial
controls, acts upon recommendations of auditors and takes further actions as
the audit committee deems necessary to complete an audit of Portal's books and
accounts. The audit committee also evaluates potential conflicts of interest
between Portal and its executive officers and directors and serves to evaluate
any transactions or events which could be deemed improper, as well as other
matters which may come before it or as directed by the board. The audit
committee currently consists of two directors, Messrs. Patterson and
Peterschmidt.
Portal has established a compensation committee, which reviews and approves
the compensation and benefits for Portal's executive officers, administers its
stock plans and performs other duties as may from time to time be determined by
the board. The compensation committee currently consists of four directors,
Messrs. Patterson, Zander, Peterschmidt and Coleman.
Compensation Committee Interlocks and Insider Participation
None of Portal's executive officers serve on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of Portal's board or compensation committee.
Director Compensation
Portal currently does not compensate any non-employee member of the board.
Members of the board will be eligible to receive discretionary option grants
and stock issuances under the 1999 Stock Incentive Plan. In addition, under the
1999 Stock Incentive Plan, non-employee directors will receive automatic option
grants on the date of each annual meeting of stockholders. The 1999 Stock
Incentive Plan also contains a director fee option grant program. Should this
program be activated in the future, each non-employee board member will have
the opportunity to apply all or a portion of any annual retainer fee otherwise
payable in cash to the acquisition of a below-market option grant. At this
time, Portal does not anticipate paying any annual retainer fee or other cash
compensation to any non-employee members of the board of directors. See
"Management--Benefit Plans".
50
<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, Vice President,
Finance and Secretary
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 remains an employee of Portal.
(2) Ms. Ha resigned as Vice President, Client Services on October 31, 1998 but
remains an employee of Portal. Ms. Ha earned $150,000 in the fiscal year
ended January 31, 1999 based on an annual salary of $180,000.
The bonus component of an executive officer's annual compensation is based on
the compensation committee's assessment of Portal's financial performance, such
as revenue growth, for the fiscal year and the individual officer's
contribution to that performance, as well as the achievement of individual and
corporate milestones.
Under a letter agreement dated December 24, 1998, Mr. Jack L. Acosta,
Portal's Chief Financial Officer, Vice President, Finance and Secretary, is to
receive an annual salary of $200,000 for the fiscal year ending January 31,
2000, has received a one-time signing bonus of $25,000 and is eligible to
receive up to an aggregate of $80,000 upon the achievement of certain
performance milestones. Mr. Acosta was granted an option to purchase 1,080,000
shares of common stock, of which 216,000 shares will vest upon consummation of
this offering and the balance will vest monthly from the date of grant over
four years of Mr. Acosta's continued employment with Portal.
Under a letter agreement dated January 31, 1999, Mr. Michael E. Regan,
Portal's Vice President, Professional Services, is to receive an annual salary
of $200,000 for the fiscal year ending January 31, 2000 and receive a one-time
signing bonus of $25,000 and is eligible to receive up to an aggregate of
$80,000 upon the achievement of certain performance milestones. Mr. Regan was
granted an option to purchase 750,000 shares of common stock, twenty-five
percent of which will vest one year from the date of grant and the balance of
which will vest in thirty-six equal monthly installments of Mr. Regan's
continued employment with Portal.
51
<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 assumed
offering price is based on the assumed initial public offering price of $11.00
per share, less the exercise price payable for such shares.
Option Exercises in the Fiscal Year Ended January 31, 1999 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money
Shares Options at FY-End Options at FY-End
Acquired on Value ------------------------- -------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable($) 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 -- $666,670 --
<CAPTION>
Value of Unexercised
in-the-Money
Options at the
Assumed Offering Price
-------------------------------
Name Exercisable($) Unexercisable($)
- ---- -------------- ----------------
<S> <C> <C>
John E. Little.. -- --
Richard C. Spalding -- --
David S.
Labuda......... -- --
Steven R. Sommer.. -- --
Kevin P. Mosher.. -- --
Dong Joo (Karen) Ha $2,066,667 --
</TABLE>
The options held by Ms. Ha are immediately exercisable for all the option
shares, but any shares purchased under the options will be subject to
repurchase by Portal at the original exercise price per share upon the
optionee's cessation of service prior to vesting in these shares. As of January
31, 1999, Portal's repurchase right had lapsed as to all 99,999 shares which
Ms. Ha had exercised.
Benefit Plans
1999 Stock Incentive Plan.
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to Portal's 1995 Stock Option/Stock Issuance Plan. Portal's
1999 Stock Incentive Plan was adopted by the board in February 1999 and
approved by the stockholders in April 1999. The 1999 Stock Incentive Plan will
become effective when the underwriting agreement for this offering is signed.
At that time, all outstanding options under Portal's existing 1995 Stock
Option/Stock Issuance Plan will then be transferred to the 1999 Stock Incentive
Plan, and no further option grants will be made under the 1995 Stock
Option/Stock Issuance Plan. The transferred options will continue to be
governed by their existing terms, unless Portal's compensation committee
decides to extend one or more features of the 1999 Stock Incentive Plan to
those options. Except as otherwise noted below, the transferred options have
substantially the same term as will be in effect for grants made under the
discretionary option grant program of Portal's 1999 Stock Incentive Plan.
Share Reserve. 16,122,042 shares of Portal's common stock have been
authorized for issuance under the 1999 Stock Incentive Plan. This share reserve
consists of the number of shares Portal estimates will be carried over from the
1995 Stock Option/Stock Issuance Plan plus an additional increase of 3,600,000
shares. The share reserve under Portal's 1999 Stock Incentive Plan will
automatically increase on the first trading day of February each year,
beginning February 1, 2000, by an amount equal to four percent of the total
number of
52
<PAGE>
shares of common stock outstanding on the last trading day of the prior month,
but in no event will this annual increase exceed 5,250,000 shares. In addition,
no participant in Portal's 1999 Stock Incentive Plan may be granted stock
options or direct stock issuances for more than 1,000,000 shares of common
stock in total in any calendar year.
Programs. Portal's 1999 Stock Incentive Plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in Portal's employ may be granted options to purchase shares of Portal's
common stock at an exercise price not less than the fair market value of
those shares on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or upon the completion of a period of service or
as a bonus for past services;
. the salary investment option grant program, under which Portal's
executive officers and other highly compensated employees may be given
the opportunity to apply a portion of their base salary to the
acquisition of special below market stock option grants;
. the automatic option grant program, under which option grants will be
made at periodic intervals to eligible non-employee board members to
purchase shares of common stock at an exercise price equal to the fair
market value of those shares on the grant date; and
. the director fee option grant program, under which Portal's non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
The individuals eligible to participate in Portal's 1999 Stock Incentive Plan
include Portal's officers and other employees, Portal's board members and any
consultants Portal hires.
Administration. The discretionary option grant and stock issuance programs
will be administered by Portal's compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under federal tax laws, the vesting schedule to be in
effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
Plan Features. Portal's 1999 Stock Incentive Plan will include the following
features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of Portal's common stock valued at fair market value on
the exercise date. The option may also be exercised through a same-day
sale program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from Portal's 1995 Stock Option/Stock Issuance Plan,
in return for the grant of new options for the same or different number
of option shares with an exercise price per share based upon the fair
market value of Portal's common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election to
surrender their outstanding options for a payment from Portal equal to
the fair market value
53
<PAGE>
of the shares subject to the surrendered options less the exercise price
payable for those shares. Portal may make the payment in cash or in shares
of Portal's common stock. None of the options under Portal's 1995 Stock
Option/Stock Issuance Plan have any stock appreciation rights.
Change in Control. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
. In the event that Portal is acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent that Portal's
repurchase rights with respect to those shares are to be assigned to the
successor corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with Portal or the acquiring entity is subsequently terminated.
The vesting of any outstanding shares under Portal's 1999 Stock Incentive
Plan may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of Portal's outstanding voting stock or a change
in the majority of Portal's board through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
. The options currently outstanding under Portal's 1995 Stock Option/Stock
Issuance Plan will immediately vest upon an acquisition of Portal by
merger or asset sale, unless Portal's repurchase rights with respect to
the unvested shares subject to those options are assigned to the
successor entity. There are no other change in control provisions
currently in effect for those options. However, the compensation
committee may extend the acceleration provisions of Portal's 1999 Stock
Incentive Plan to any or all of those options.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of Portal's executive officers and other highly compensated
employees may elect to reduce his or her base salary for the calendar year by
an amount not less than $10,000 nor more than $50,000. Each selected
individual who makes such an election will automatically be granted, on the
first trading day in January of the calendar year for which his or her salary
reduction is to be in effect, an option to purchase that number of shares of
common stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Portal's common stock on the grant date.
The option will have an exercise price per share equal to one-third of the
fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares
on the grant date less the exercise price payable for those shares will be
equal to the amount of the salary reduction. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the salary reduction is to be in effect.
Automatic Option Grant Program. On the date of each annual stockholders
meeting following this offering, each individual who is to continue to serve
as a non-employee board member will automatically be granted an option to
purchase 6,000 shares of Portal's common stock, provided he or she has served
on the
54
<PAGE>
board for at least six months. Each grant will have a term of ten years,
subject to earlier termination following the optionee's cessation of board
service, and will be immediately exercisable for all the option shares.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the
number of shares subject to the option will be determined by dividing the
amount of the retainer fee applied to the program by two-thirds of the fair
market value per share of Portal's common stock on the grant date. As a
result, the option will be structured so that the fair market value of the
option shares on the grant date less the exercise price payable for those
shares will be equal to the portion of the retainer fee applied to that
option. The option will become exercisable in a series of twelve equal monthly
installments over the calendar year for which the election is in effect.
However, the option will become immediately exercisable for all the option
shares upon the death or disability of the optionee while serving as a board
member.
Additional Program Features. Portal's 1999 Stock Incentive Plan will also
have the following features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if Portal is acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
Portal's outstanding voting stock or a change in the majority of Portal's
board through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to Portal upon the successful completion of a
hostile tender offer for more than 50% of Portal's outstanding voting
stock. In return for the surrendered option, the optionee will be
entitled to a cash distribution from Portal in an amount per surrendered
option share based upon the highest price per share of Portal's common
stock paid in that tender offer.
. The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive
Plan will terminate no later than February 23, 2009.
1999 Employee Stock Purchase Plan.
Introduction. Portal's 1999 Employee Stock Purchase Plan was adopted by the
board in February 1999 and approved by the stockholders in April 1999. The
plan will become effective immediately upon the execution of the underwriting
agreement for this offering. The plan is designed to allow eligible employees
of Portal and its participating subsidiaries to purchase shares of common
stock, at semi-annual intervals, with their accumulated payroll deductions.
Share Reserve. 1,800,000 shares of common stock will initially be reserved
for issuance. The reserve will automatically increase on the first trading day
in February each year, beginning February 1, 2000, by an amount equal to two
percent of the total number of Portal's outstanding shares of common stock on
the last trading day of the prior month. In no event will any such annual
increase exceed 2,000,000 shares.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering
period will start on the date the underwriting agreement for the offering
covered
55
<PAGE>
by this prospectus is signed and will end on the last business day in May 2001.
The next offering period will start on the first business day in June 2001, and
subsequent offering periods will set by Portal's compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per week
for more than five calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of June and December each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her cash
earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and November
each year. In no event, however, may any participant purchase more than 1,250
shares on any purchase date, and not more than 300,000 shares may be purchased
in total by all participants on any purchase date.
Reset Feature. If the fair market value per share of Portal's common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Change in Control. Should Portal be acquired by merger or sale of
substantially all of Portal's assets or more than fifty percent of Portal's
voting securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to 85% of the market value per share on the
participant's entry date into the offering period in which an acquisition
occurs or, if lower, 85% of the fair market value per share immediately prior
to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of May 2009.
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
Employment Contracts,
Termination of Employment Agreements
and Change in Control Arrangements
Portal does not currently have any employment agreements or severance
programs in effect for any of the Named Executive Officers. Portal provides
incentives such as salary, cash bonuses and option grants (which typically vest
over a four-year period) to attract and retain qualified executives and other
members of senior management.
In the event that the employment of Mr. Acosta, Portal's Chief Financial
Officer, Vice President, Finance and Secretary, is terminated by Portal or its
successor for any reason other than for cause, Mr. Acosta will receive one year
of severance pay based on his base salary for that year. In addition, if Mr.
Acosta is terminated, or his role is materially diminished, within 18 months of
a change in control or acquisition of Portal, all of his unvested options will
vest in full.
In connection with an acquisition of Portal by merger or asset sale, Portal's
repurchase right with respect to the shares of common stock acquired by Mr.
Spalding (pursuant to an incentive stock issuance), Mr. Mosher (pursuant to the
exercise of stock options) and Mr. Regan (pursuant to the exercise of stock
options) issued under the 1995 Stock Option/Stock Issuance Plan will
automatically lapse and the shares will vest in full, unless the repurchase
56
<PAGE>
right is assigned to the successor entity. In addition, Mr. Sommer, Portal's
Vice President, Marketing and Business Development, will vest in the lesser of
(i) twenty-five percent of the purchased shares or (ii) fifty percent of his
unvested shares upon a merger or asset sale. In addition, the compensation
committee as plan administrator of the 1999 Stock Incentive Plan will have the
authority to grant options and to structure repurchase rights under that plan
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a change in control of Portal, whether by
merger, asset sale, successful tender offer for more than fifty percent of the
outstanding voting stock or by a change in the majority of the board by reason
of one or more contested elections for board membership, with this vesting to
occur either at the time of this change in control or upon the subsequent
involuntary termination of the individual's service within a designated
period, not to exceed 18 months, following a change in control.
Limitation of Liability and Indemnification
Portal's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, subject to certain
exceptions, directors' personal liability to Portal or its stockholders for
monetary damages for breaches of fiduciary duties. The certificate of
incorporation does not, however, eliminate or limit the personal liability of
a director for the following:
. any breach of the director's duty of loyalty to Portal or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
Portal's bylaws provide that Portal shall indemnify its directors and
executive officers to the fullest extent permitted under the Delaware General
Corporation Law and may indemnify its other officers, employees and other
agents as set forth in the Delaware General Corporation Law. In addition,
Portal has entered into an indemnification agreement with each of its
directors and officers. The indemnification agreements contain provisions that
require Portal, among other things, to indemnify its directors and executive
officers against certain liabilities (other than liabilities arising from
intentional or knowing and culpable violations of law) that may arise by
reason of their status or service as directors or executive officers of Portal
or other entities to which they provide service at the request of Portal and
to advance expenses they may incur as a result of any proceeding against them
as to which they could be indemnified. Portal believes that these bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified directors and officers. Prior to the consummation of the offering,
Portal will obtain an insurance policy covering directors and officers for
claims they may otherwise be required to pay or for which Portal is required
to indemnify them, subject to certain exclusions.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Portal where indemnification will be
required or permitted, and Portal is not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
57
<PAGE>
CERTAIN TRANSACTIONS
Options to Purchase Common Stock
The following table summarizes the option grants made to Portal's executive
officers, directors and 5% stockholders since February 1, 1996.
<TABLE>
<CAPTION>
Number of Securities Exercise
Underlying Options Price Date of
Name Granted (#) ($/Sh) Grant
---- -------------------- -------- --------
<S> <C> <C> <C>
Jack L. Acosta...................... 1,080,000 $2.67 12/23/98
Steven R. Sommer.................... 1,079,796 $0.02 07/28/97
Kevin P. Mosher..................... 675,000 $0.02 03/12/97
................... 450,000 $10.00 04/01/99
Annette D. Surtees.................. 75,000 $1.33 08/10/98
................... 45,000 $1.33 08/10/98
................... 60,000 $4.00 01/27/99
Michael E. Regan.................... 750,000 $10.00 02/22/99
Edward J. Zander.................... 150,000 $0.02 08/15/97
.................... 83,334 $0.02 01/20/98
David C. Peterschmidt............... 150,000 $0.33 04/17/98
Richard C. Spalding................. 1,508,436 $0.02 02/07/97
Dong Joo (Karen) Ha................. 600,000 $0.02 05/15/97
................. 300,000 $0.67 05/22/98
</TABLE>
Sales of Preferred Stock
In March 1996, Portal sold an aggregate of 13,544,895 shares of Series A
Preferred Stock at a price of $0.17 per share (after giving effect to a 5-for-1
stock split effected by Portal in June 1996) to entities affiliated with Accel
Partners. In January 1997, upon the exercise of Series A Preferred Stock
Warrants, Portal issued 3,075,000 shares of Series A Preferred Stock for an
aggregate consideration of $512,500 to entities affiliated with Accel Partners.
In January, May and August 1998, Portal sold an aggregate of 10,235,997 shares
of Series B Preferred Stock at a price of $1.50 per share. The following table
summarizes the shares of preferred stock purchased by Portal's executive
officers, directors and 5% percent stockholders and persons associated with
them since March 1996. The number of total shares on an as-converted basis
reflects a one-to-one conversion to common stock ratio for each share of Series
A and Series B Preferred Stock and a three-for-one stock split to be effected
prior to effectiveness of this offering.
<TABLE>
<CAPTION>
Total Shares
Series A Series B on an As- Total
Preferred Preferred Converted Aggregate
Investor Stock Stock Basis Consideration
- -------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Entities affiliated with Accel
Partners(/1/)................. 5,539,965 1,000,000 19,619,895 $7,269,982
David C. Peterschmidt.......... -- 22,222 66,666 $ 99,999
Edward J. Zander............... -- 22,222 66,666 $ 99,999
William T. Coleman III......... -- 22,222 66,666 $ 99,999
</TABLE>
- --------
(1) Represents shares held by Accel Internet/Strategic Technology Fund LP,
Accel Investors '96 LP, Accel Keiretsu V LP, Accel V LP and Ellmore C.
Patterson Partners. Mr. Arthur C. Patterson, a director of Portal, is a
general partner of Accel Partners.
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Holders of shares of preferred stock are entitled to certain registration
rights with respect to the common stock issued or issuable upon conversion
thereof. See "Description of Capital Stock--Registration Rights".
Other Related Party Transactions
Portal has entered into an Indemnification Agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors, other than liabilities arising from willful misconduct of a culpable
nature, and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified. See "Management--Limitation on
Liability and Indemnification".
Portal believes that all of the transactions set forth above were made on
terms no less favorable to Portal than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between Portal and its officers, directors and principal stockholders and their
affiliates and any transactions between Portal and any entity with which its
officers, directors or 5% stockholders are affiliated will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors of the board of directors and will be on terms
no less favorable to Portal than could be obtained from unaffiliated third
parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to Portal with respect to
the beneficial ownership of its common stock as of March 31, 1999 by:
. each stockholder known by Portal to own beneficially more than 5% of
common stock;
. each director of Portal;
. each of the Named Executive Officers; and
. all current directors and executive officers of Portal as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable. As of March 31, 1999, there were
67,955,478 shares of common stock outstanding.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned(2)
Number of Shares ------------------------
Name and Address of Beneficial Beneficially Prior to After the
Owner(1) Owned(2) Offering Offering
- ------------------------------ ---------------- ---------- ----------
<S> <C> <C> <C>
Entities affiliated with Accel
Partners(/3/)
One Palmer Square
Princeton, NJ 08542............. 21,138,756 31.1% 28.1%
John E. Little................... 18,983,580 27.9 25.2
David S. Labuda(/4/)............. 6,503,256 9.6 8.6
Steven R. Sommer(/5/)............ 1,079,796 1.6 1.4
Kevin P. Mosher(/6/)............. 675,000 * *
Arthur C. Patterson(/3/)......... 21,138,756 31.1 28.1
Edward J. Zander(/7/)............ 300,000 * *
David C. Peterschmidt(/8/)....... 216,666 * *
William T. Coleman III(/9/)...... 216,666 * *
Richard C. Spalding(/10/)........ 1,508,436 2.2 2.0
Dong Joo (Karen) Ha(/11/)........ 900,000 1.3 1.2
All current directors and
executive officers as a group
(eleven persons)(/12/).......... 50,313,720 72.9% 65.8%
</TABLE>
- --------
* Less than 1%.
(1) 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.
(2) Assumes no exercise of the underwriters' over-allotment option. Includes a
maximum of 3,400,000 shares sold in the concurrent placement. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options currently
exercisable or exercisable within sixty days of the date of this
prospectus are deemed to be outstanding and to be beneficially owned by
the person holding these options for the purpose of computing the number
of shares beneficially owned and the percentage of this person or entity
holding these securities but are not outstanding for the purpose of
computing the percentage of any other person or entity.
(3) 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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(4) 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 1,500,000 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.
(5) Includes 75,000 shares held in trust for Allison Sommer, 75,000 shares
held in trust for Julia Sommer and 75,000 shares held in trust for Rachel
Sommer. Mr. Sommer disclaims beneficial ownership of all of these
225,000 shares. Includes 629,880 shares of common stock subject to
Portal's right of repurchase. This repurchase right lapses with respect to
22,497 shares per month.
(6) Includes 337,482 shares of common stock subject to Portal's right of
repurchase. This repurchase right lapses with respect to 14,064 shares per
month.
(7) Includes 140,979 shares of common stock subject to Portal's right of
repurchase. This repurchase right lapses with respect to 4,860 shares per
month.
(8) Includes 150,000 shares of common stock which are subject to Portal's
right of repurchase. Such repurchase right lapses as to 37,500 shares on
April 16, 1999 and as to 3,126 shares per month from April 17, 1999
through April 16, 2002.
(9) Includes 150,000 shares of common stock which are subject to Portal's
right of repurchase. Such repurchase right lapses as to 37,500 shares on
April 16, 1999 and as to 3,126 shares per month from April 17, 1999
through April 16, 2002.
(10) Includes 722,793 shares of common stock subject to Portal's right of
repurchase. This repurchase right lapses with respect to 31,425 shares per
month. Also 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.
(11) Includes 540,000 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. Also includes 200,001 shares of
common stock issuable upon exercise of immediately exercisable options.
(12) Includes 1,200,000 shares of common stock issuable upon exercise of
immediately exercisable options, and 1,408,341 shares of common stock
subject to Portal's right of repurchase. This repurchase right lapses with
respect to 41,421 shares per month.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of Portal will
consist of 250,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value, after giving effect to the
amendment of Portal's certificate of incorporation to delete references to the
preferred stock following conversion of the stock. The following description of
capital stock gives effect to the certificate of incorporation to be filed upon
closing of this offering. Immediately following the completion of this
offering, and assuming no exercise of the underwriters' over-allotment option,
an aggregate of 75,235,730 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 January 31, 1999, there were warrants outstanding to purchase a total of
583,698 shares of common stock on an as-converted basis. Warrants to purchase
12,501 shares of common stock at $0.02 per share will expire in January 2003.
Warrants to purchase 341,100 shares of Series A Preferred Stock at $0.17 per
share will expire in April 1999. Warrants to purchase 230,097 shares of Series
B Preferred Stock at $1.50 per share will expire in September 2003.
Concurrent Private Placement
In April 1999, Portal entered into strategic alliances and stock purchase
agreements with both Andersen Consulting and Cisco. Portal has agreed to sell
3,000,000 shares of
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<PAGE>
common stock to Cisco and the lesser of 400,000 shares of common stock or
$4,950,000 divided by the initial public offering price less the underwriting
discount to Andersen Consulting, for a per share price equal to the initial
public offering price less the underwriting discount. The stock purchase
agreements further provide the following:
Transfer Restrictions. Andersen Consulting and Cisco have agreed not to sell,
transfer, encumber or otherwise dispose of any of the common stock acquired in
the concurrent placement in a public or private sale for a period of one year
following the closing of the concurrent placement, except that Andersen
Consulting has certain registration rights in connection with any subsequent
registration by Portal of its securities prior to the second anniversary of the
closing of the concurrent placement.
In addition, Andersen Consulting has agreed that it will:
. notify Portal of and jointly announce any sale of Portal common stock;
and
. vote all shares of common stock owned by it on the sale of all or
substantially all of the assets of Portal or a merger in which Portal is
not the surviving entity and take action with respect to a third-party
tender offer, other than a hostile tender offer, in accordance with the
direction of Portal's chief executive officer.
Cisco has agreed that it will:
. notify Portal of any sale of Portal common stock; and
. at any time after it owns in excess of 9.5% of Portal's outstanding
common stock and Portal's board of directors approves a sale of
substantially all of Portal's assets or a merger in which Portal is not
the surviving entity, vote its shares of Portal common stock in the same
proportion as the other stockholders of Portal.
Control Provisions. In the event that Portal enters into negotiation with
certain third parties regarding a potential merger, acquisition or other
business combination, Portal must notify Cisco of its intent to enter into such
transaction, no later than seven days prior to executing a definitive
agreement. Cisco has seven days from the date of Portal's notification to
prepare its own offer for consideration by Portal and its board of directors.
This right of notification terminates if:
. Cisco sells or transfers more than 25% of the common stock acquired in
the concurrent placement; or
. Cisco announces or otherwise indicates its intention to acquire a
controlling interest in Portal.
Registration Rights. After the closing of the concurrent placement, Andersen
Consulting and Cisco will have the following rights with respect to the
registration of their shares of common stock under the Securities Act. During
the period between the first anniversary and second anniversary of the closing
of the concurrent placement, Cisco may require Portal to register all but not
less than all of its shares of common stock on Form S-3 under the Securities
Act, provided that such form is available to Portal. Through the second
anniversary of the closing of the concurrent placement, if Portal proposes to
register any of its securities under the Securities Act either for its own
account or the account of other securityholders, Andersen Consulting is
entitled to receive notice of the registration and in general to include its
shares of common stock in the registration statement. Portal has agreed to pay
all expenses related to such registrations, except for underwriting discounts
and commissions.
Registration Rights
Under the Amended and Restated Investor Rights Agreement dated as of
January 29, 1998, as amended on March 3, 1998 and April 17, 1998, among Portal
and certain holders of its securities, the holders of approximately 30,171,948
shares of common stock, or Registrable Securities, after this offering will be
entitled to certain rights with respect to the registration of the Registrable
Securities under
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<PAGE>
the Securities Act. Under the Investor Rights Agreement, if Portal proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other stockholders, the holders of Registrable
Securities are entitled to notice of such registration and are entitled to
include their Registrable Securities in the registration. In addition, if at
any time beginning three months after the date of this prospectus, Portal
receives a request from certain holders of at least 20% of the Registrable
Securities, Portal is obligated to cause these shares to be registered under
the Securities Act, provided that the offering size would exceed $10,000,000.
Certain holders of Registrable Securities have the right to cause three demand
registrations. Further, holders of Registrable Securities may require Portal to
register all or a portion of their Registrable Securities on Form S-2 or Form
S-3 under the Securities Act, provided that the offering size would exceed
$1,000,000, when these forms become available for use by Portal, and subject to
certain other conditions and limitations. The holders' rights with respect to
all these registrations are subject to certain conditions, including the right
of the underwriters of any of these offerings to limit the number of shares
included in any of these registrations. Portal has agreed to pay all expenses
related to certain of these registrations, except for underwriting discounts
and commissions, to effect the registration and sale of the Registrable
Securities.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws,
Delaware Law and Certain Provisions of a Strategic Partner Agreement
Portal's certificate of incorporation authorizes the board to establish one
or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance. See "--Preferred Stock". The
certificate of incorporation also provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by a consent in
writing. In addition, the certificate of incorporation and bylaws do not permit
stockholders of Portal to call a special meeting of stockholders. Only Portal's
Chief Executive Officer, President, Chairman of the Board or a majority of the
board are permitted to call a special meeting of stockholders. The certificate
of incorporation also provides that the board is divided into three classes,
with each director assigned to a class with a term of three years, and that the
number of directors may only be determined by the board of directors. The
bylaws also require that stockholders give advance notice to Portal's Secretary
of any nominations for director or other business to be brought by stockholders
at any stockholders' meeting, and that the Chairman has the authority to
adjourn any such meeting. The bylaws also require a supermajority vote of
stockholders or a majority vote of the board of directors to amend the bylaws.
These provisions of the restated certificate of incorporation and the bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of Portal. These provisions also may have the effect of
preventing changes in the management of Portal. See "Risk Factors--Our officers
and directors will be able to exert significant control on Portal" and "--We
are subject to anti-takeover provisions that could delay or prevent an
acquisition of our company".
Portal is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
(i) prior to that date, the board of directors of the corporation
approved either the business combination or the transaction that resulted
in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding for purposes of
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<PAGE>
determining the number of shares outstanding those shares owned:
(x) by persons who are directors and also officers; and
(y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
(iii) on or subsequent to that date, the business combination is approved
by the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
If Portal enters into negotiation with certain third parties regarding a
potential merger, acquisition or other business combination, Portal must notify
Cisco of its intent to enter into such transaction no later than seven days
prior to executing a definitive agreement. Cisco has seven days from the date
of Portal's notification to prepare its own offer for consideration by Portal
and its board of directors. This right of notification terminates if:
. Cisco sells or transfers more than 25% of the common stock acquired in
the concurrent placement; or
. Cisco announces or otherwise indicates its intention to acquire a
controlling interest in Portal.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is EquiServe.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the common
stock. Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options or warrants, in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of a substantial amount of common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price and the ability of Portal to raise equity capital in the future.
Upon completion of this offering and the concurrent placement, Portal will
have 75,235,730 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of options and warrants
after January 31, 1999. Of these shares, the 4,000,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
Portal, as that term is defined in Rule 144 under the Securities Act, may
generally only be sold pursuant to an effective registration statement under
the Securities Act or in compliance with the limitations of Rule 144 as
described below.
The remaining 71,235,730 shares of common stock are "Restricted Securities"
as that term is defined in Rule 144. Of these shares, 67,835,730 restricted
shares will be available for sale in the public market following the expiration
of the one hundred eighty (180) day lock-up agreement further described below
and up to 3,400,000 shares will be available for sale to the public following
the expiration of the one-year lock-up period under the stock purchase
agreements entered into in connection with the concurrent placement, subject in
each case to restrictions on these sales. In addition, the holders of warrants
for 583,698 shares of common stock can exercise these warrants at any time, but
these shares cannot be sold until the expiration of the 180 day lockup period
following the date of this prospectus. Beginning six months after the date of
this prospectus the holders of 33,571,948 restricted shares and the holders of
warrants for 583,698 shares of common stock are entitled to certain rights with
respect to registration of these shares for sale in the public market. If these
holders sell in the public market these sales would have a material adverse
effect on the market price of the common stock.
All of the officers and directors and certain stockholders and optionholders
of Portal have entered into lock-up agreements generally providing that they
will not offer, pledge, sell, offer to sell, contract to sell, sell any option
or contract to purchase, purchase any option to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of common stock or any securities convertible
into, or exercisable or exchangeable for, common stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Goldman, Sachs & Co. subject to certain limited exceptions. Goldman,
Sachs & Co. may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. Goldman,
Sachs & Co. currently has no plans to release any portion of the securities
subject to lock-up agreements. When determining whether to release shares from
the lock-up agreements, Goldman, Sachs & Co. will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time. Following the expiration of the 180-day lock-up period, all 67,835,730
shares of common stock will be available for sale in the public market subject
to compliance with Rule 144 or Rule 701.
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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 752,357 shares after giving effect to this offering
and the concurrent placement) and the average weekly trading volume of the
common stock on The Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 notice with respect to this sale. Sales
under Rule 144 of the Securities Act are subject to certain restrictions
relating to manner of sale, notice and the availability of current public
information about Portal. Under Rule 144(k), a person who is not an affiliate
of Portal at any time during the ninety days preceding a sale, and who has
beneficially owned shares for at least two years including the holding period
of any prior owner other than a person who may be deemed an affiliate of
Portal, would be entitled to sell those shares immediately following this
offering without regard to the volume limitations, manner of sale provisions or
notice or other requirements of Rule 144 of the Securities Act. However, the
transfer agent may require an opinion of counsel that a proposed sale of shares
comes within the terms of Rule 144 of the Securities Act prior to effecting a
transfer of these shares.
Portal intends to file, after consummation of this offering, a registration
statement on Form S-8 under the Securities Act covering all shares of common
stock reserved for issuance under its 1999 Stock Incentive Plan and its 1999
Employee Stock Purchase Plan. See "Management--Benefit Plans". Shares
registered under such registration statement would be available for sale in the
open market in the future unless these shares are subject to vesting
restrictions with Portal or the contractual restrictions described above.
Lock-up Agreements
Holders of substantially all shares of common stock and options and warrants
to purchase common stock have agreed that they will not, without the prior
written consent of Goldman, Sachs & Co. offer, sell, contract to sell or
otherwise dispose of any shares of common stock beneficially owned by them or
any shares issuable upon exercise of stock options or warrants for a period of
180 days from the effective date of this offering. See "Underwriting". In
addition, Andersen Consulting and Cisco have agreed that they will not, without
the prior written consent of Portal, sell, contract to sell or otherwise
dispose of the common stock beneficially owned by them for a period of one year
from the closing date of the concurrent placement.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Portal by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Members of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 12,000 shares
of Portal's common stock. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Portal's consolidated
financial statements at January 31, 1998 and 1999 and for each of the three
years in the period ended January 31, 1999, as set forth in their report, which
is included in this prospectus. Portal's consolidated financial statements are
included in this prospectus in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
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ADDITIONAL INFORMATION
We have filed with the SEC, Washington, D.C. 20549, under the Securities Act,
as amended, a registration statement on Form S-1 relating to the common stock
offered in this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information with respect to Portal and the shares Portal
is offering pursuant to this prospectus you should refer to the registration
statement, including its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of
that contract or other document filed as an exhibit to the registration
statement or any other document. You may inspect a copy of the registration
statement without charge at the Public Reference Section of the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the SEC's
regional offices at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The SEC maintains an Internet site that contains reports,
proxy information statements and other information regarding registrants that
file electronically with the SEC. The SEC's world wide Web address is
www.sec.gov.
Portal intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. Portal intends to furnish these other reports as
it may determine or as may be required by law.
68
<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 fourth paragraph of Note 8,
as to which the date is April , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the
effectiveness of the stock split and approval of the Certificate of
Incorporation in the state of Delaware as discussed in Note 8 to the
consolidated financial statements.
/s/ Ernst & Young LLP
Palo Alto, California
February 24, 1999
Except for the fourth paragraph of Note 8,
as to which the date is April , 1999
F-2
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity (Net
January 31, Capital Deficiency)
------------------ at January 31,
1998 1999 1999
-------- -------- -------------------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 14,646 $ 11,809
Accounts receivable, net of allowance
for doubtful accounts of $50 and $940
at January 31, 1998 and 1999......... 5,697 14,474
Other current assets.................. 100 1,440
-------- --------
Total current assets................. 20,443 27,723
Property and equipment, net............ 2,537 4,417
Other assets........................... 145 204
-------- --------
$ 23,125 $ 32,344
======== ========
Liabilities and Stockholders' Equity
(Net Capital Deficiency)
Current liabilities:
Accounts payable...................... $ 1,542 $ 2,567
Accrued compensation.................. 903 1,147
Other accrued liabilities............. 1,076 5,214
Current portion of long-term debt..... 1,500 4,122
Current portion of capital lease
obligations.......................... -- 479
Deferred revenue...................... 8,841 23,344
-------- --------
Total current liabilities............ 13,862 36,873
Long-term debt......................... 1,500 --
Long-term portion of capital lease
obligations........................... -- 2,022
Commitments
Stockholders' equity (net capital
deficiency):
Convertible preferred stock, no par
value, issuable in series: 28,311 and
28,652 shares issued and outstanding
at January 31, 1998 and 1999 (none
pro forma); aggregate liquidation
preference of $18,423 at January 31,
1999 (none pro forma)................ 18,117 18,482 $ --
Common stock, no par value, 35,000
shares authorized (250,000 shares pro
forma, $0.001 par value per share);
39,184 and 42,594 shares issued and
38,172 and 39,183 shares outstanding
at January 31, 1998 and 1999 (67,836
pro forma)........................... 177 927 19,409
Additional paid-in capital............ -- 16,753 16,753
Notes receivable from stockholders.... -- (318) (318)
Deferred stock compensation........... -- (14,456) (14,456)
Accumulated deficit................... (10,531) (27,939) (27,939)
-------- -------- --------
Stockholders' equity (net capital
deficiency)......................... 7,763 (6,551) $ (6,551)
-------- -------- ========
$ 23,125 $ 32,344
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
License fees..................................... $ 3,944 $ 6,892 $ 13,536
Services......................................... 1,101 2,524 13,133
------- ------- --------
Total revenues.................................. 5,045 9,416 26,669
------- ------- --------
Costs and expenses:
Cost of license fees............................. 62 970 458
Cost of services................................. 518 2,152 9,425
Research and development......................... 2,527 5,628 11,252
Sales and marketing.............................. 2,371 5,436 14,112
General and administrative....................... 1,821 2,616 6,253
Amortization of deferred stock compensation...... -- -- 2,297
------- ------- --------
Total costs and expenses........................ 7,299 16,802 43,797
------- ------- --------
Loss from operations.............................. (2,254) (7,386) (17,128)
Interest and other income, net.................... 20 39 540
Gain on sale of investment........................ -- -- 311
Interest expense.................................. (40) (240) (416)
------- ------- --------
Loss before income taxes.......................... (2,274) (7,587) (16,693)
Provision for income taxes........................ -- -- (715)
------- ------- --------
Net loss.......................................... $(2,274) $(7,587) $(17,408)
======= ======= ========
Basic and diluted net loss per share.............. $ (0.18) $ (0.37) $ (0.59)
======= ======= ========
Shares used in computing basic and diluted net
loss per share................................... 12,432 20,786 29,531
======= ======= ========
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.30)
========
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 58,084
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Convertible Note Stockholders'
Preferred Stock Common Stock Additional Receivable Deferred Equity
------------------ ----------------- Paid-In From Stock Accumulated (Net Capital
Shares Amount Shares Amount Capital Stockholder Compensation Deficit Deficiency)
---------- ------- ---------- ------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January
31, 1996............ -- $ -- 26,322,105 $ 19 $ -- $ -- $ -- $ (670) $ (651)
Issuance of Series A
preferred stock for
cash and note
receivable.......... 11,520,000 1,920 -- -- -- (20) -- -- 1,900
Conversion of
convertible
promissory notes and
accrued interest
into Series A
preferred stock..... 3,616,590 603 -- -- -- -- -- -- 603
Issuance of Series A
preferred stock upon
exercise of
warrants............ 3,075,000 512 -- -- -- -- -- -- 512
Issuance of common
stock upon exercise
of stock options.... -- -- 226,500 4 -- -- -- -- 4
Issuance of common
stock for cash, net
of repurchases...... -- -- 1,616,511 17 -- -- -- -- 17
Issuance of common
stock upon exercise
of warrants......... -- -- 1,500,000 1 -- -- -- -- 1
Net loss............ -- -- -- -- -- -- -- (2,274) (2,274)
---------- ------- ---------- ---- ------- ----- -------- -------- -------
Balances at January
31, 1997............ 18,211,590 3,035 29,665,116 41 -- (20) -- (2,944) 112
Payment received on
notes receivable.... -- -- -- -- -- 20 -- -- 20
Issuance of Series A
preferred stock upon
exercise of
warrants............ 100,050 17 -- -- -- -- -- -- 17
Issuance of Series B
preferred stock net
of issuance costs of
$39................. 9,999,999 14,961 -- -- -- -- -- -- 14,961
Issuance of common
stock upon exercise
of options, net of
repurchases......... -- -- 8,297,670 136 -- -- -- -- 136
Issuance of Series B
preferred stock
warrants in
connection with
long-term debt...... -- 104 -- -- -- -- -- -- 104
Net loss............ -- -- -- -- -- -- -- (7,587) (7,587)
---------- ------- ---------- ---- ------- ----- -------- -------- -------
Balances at January
31, 1998............ 28,311,639 18,117 37,962,786 177 -- -- -- (10,531) 7,763
Issuance of Series A
preferred stock upon
exercise of
warrants............ 104,550 17 -- -- -- -- -- -- 17
Issuance of Series B
preferred stock..... 235,998 348 -- -- -- -- -- -- 348
Issuance of common
stock upon exercise
of stock options,
net of repurchases.. -- -- 1,201,896 749 -- (318) -- -- 431
Issuance of common
stock upon exercise
of warrants......... -- -- 18,861 1 -- -- -- -- 1
Deferred stock
compensation........ -- -- -- -- 16,753 -- (16,753) -- --
Amortization of
deferred stock
compensation........ -- -- -- -- -- -- 2,297 -- 2,297
Net loss............ -- -- -- -- -- -- -- (17,408) (17,408)
---------- ------- ---------- ---- ------- ----- -------- -------- -------
Balances at January
31, 1999............ 28,652,187 $18,482 39,183,543 $927 $16,753 $(318) $(14,456) $(27,939) $(6,551)
========== ======= ========== ==== ======= ===== ======== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(2,274) $(7,587) $(17,408)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 236 525 940
Amortization of deferred stock compensation....... -- -- 2,297
Issuance of preferred stock upon conversion of
interest payable................................. 56 -- --
Changes in operating assets and liabilities:
Accounts receivable, net......................... (682) (4,966) (8,777)
Other current assets............................. (35) (52) (1,340)
Other assets..................................... (10) (39) (59)
Accounts payable................................. 193 1,222 1,025
Accrued compensation............................. (1) 569 244
Other accrued liabilities........................ 724 232 4,138
Deferred revenue................................. 1,420 7,421 15,625
------- ------- --------
Net cash used in operating activities........... (373) (2,675) (3,315)
------- ------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment............... (943) (1,855) --
------- ------- --------
FINANCING ACTIVITIES:
Payment received on stockholder note receivable... -- 20 --
Repayment of convertible notes.................... (250) -- --
Issuance of long-term debt........................ 400 3,000 --
Repayment of long-term debt....................... (56) (498) --
Principal payments under capital lease
obligations...................................... -- -- (319)
Proceeds from issuance of common stock, net of
repurchases...................................... 22 136 432
Proceeds from issuance of preferred stock......... 2,412 14,978 365
------- ------- --------
Net cash from financing activities.............. 2,528 17,636 478
------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 1,212 13,106 (2,837)
Cash and cash equivalents at beginning of year..... 328 1,540 14,646
------- ------- --------
Cash and cash equivalents at end of year........... $ 1,540 $14,646 $ 11,809
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest............ $ 40 $ 43 $ 361
======= ======= ========
Supplemental disclosures of noncash financing
activity:
Conversion of principal portion of convertible
notes into shares of Series A preferred stock.... $ 547 $ -- $ --
======= ======= ========
Issuance of Series A preferred stock for
stockholder note receivable....................... $ 20 $ -- $ --
======= ======= ========
Issuance of Series B preferred stock warrants in
connection with long-term debt.................... $ -- $ 104 $ --
======= ======= ========
Issuance of debt upon conversion of customer
deposit included in deferred revenue.............. $ -- $ -- $ 1,122
======= ======= ========
Equipment acquired under capital lease
obligations....................................... $ -- $ -- $ 2,820
======= ======= ========
Deferred stock compensation related to options
granted........................................... $ -- $ -- $ 14,136
======= ======= ========
Issuance of common stock for stockholder notes
receivable........................................ $ -- $ -- $ 318
======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1999
(1) Significant Accounting Policies:
Nature of Business and Basis of Presentation
Portal Software, Inc. or Portal, formerly Portal Information Network, Inc., a
California corporation, was incorporated in 1994. Portal markets and supports
real-time customer management and billing software, or CM&B software, for
providers of Internet-based services. Portal's software is a comprehensive
solution that is designed to meet the complex, mission-critical provisioning,
accounting, reporting and marketing needs of providers of Internet-based
services. Portal markets its products worldwide through a combination of a
direct sales force and distribution partners. Substantially all of Portal's
license revenues are derived from sales of its Infranet product.
Portal has incurred operating losses to date and, at January 31, 1999, had an
accumulated deficit of $27.9 million and a working capital deficit of $9.2
million. Portal's activities have been primarily financed through private
placements of equity securities. Portal may need to raise additional capital
through the issuance of debt or equity securities. Such financing may not be
available on terms satisfactory to Portal, if at all.
Principles of Consolidation
The consolidated financial statements include the accounts of Portal and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
License revenues are comprised of fees for multiyear or perpetual licenses
which are primarily derived from contracts with corporate customers and
resellers. Revenue from license fees is recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
Portal obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable. For electronic delivery, the
software is considered to have been delivered when Portal has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee
is collected. Revenue on arrangements with customers who are not the ultimate
users (primarily resellers) is not recognized until the product is delivered to
the end user.
Services revenues are primarily comprised of revenue from systems integration
or other consulting fees, maintenance agreements and training. Arrangements
that include software services are evaluated to determine whether those
services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software services are
not considered essential, the revenue allocable to the software services is
recognized as the services are performed. Portal generally considers software
services essential, unless the software is paid for before the services
commence and the services are limited to training or minimal installation.
Maintenance agreements provide technical support and include the right to
unspecified upgrades on an if-and-when-available basis. Maintenance revenue is
deferred and recognized on a straight-line basis as services revenue over the
life of the related agreement, which is typically one year. Customer advances
and billed amounts due from customers in excess of revenue recognized are
recorded as deferred revenue.
F-7
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Revenue Recognition (continued)
Portal adopted Statement of Position 97-2, Software Revenue Recognition, or
SOP 97-2, and Statement of Position 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition, or SOP 98-4, as of
February 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing
revenue on software transactions and supersede SOP 91-1, Software Revenue
Recognition. The adoption of SOP 97-2 and SOP 98-4 did not have a material
impact on Portal's financial results. However, full implementation guidelines
for this standard have not yet been issued. Once available, the current revenue
accounting practices may need to change and such changes could affect Portal's
future revenues and results of operations.
In December 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, or SOP 98-9. SOP 98-
9 amends SOP 98-4 to extend the deferral of the application of certain passages
of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before
March 15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. Portal has not yet
determined the effect of the final adoption of SOP 98-9 on its future revenues
and results of operations.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on Portal's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by Portal between the completion
of the working model and the point at which the product is ready for general
release have been insignificant. Therefore, through January 31, 1999, Portal
has charged all such costs to research and development expense in the period
incurred.
Concentration of Credit Risk
Portal sells its software and services to customers consisting mainly of
North American and European Internet service providers and enhanced service
developers. Portal performs ongoing credit evaluations of its customers and
does not require collateral. Portal maintains an allowance for potential credit
losses and such losses have been within management's expectations. During the
years ended January 31, 1998 and 1999, Portal added approximately $50,000 and
$1.4 million to its allowance for doubtful accounts. Write-offs of
uncollectible accounts totaled $0.5 million for the year ended January 31,
1999. There were no bad debt charges or credits during the year ended
January 31, 1997.
Two different customers accounted for 36% and 47% of total revenue during the
years ended January 31, 1997 and 1998. No individual customer accounted for
greater than 10% of total revenue for the year ended January 31, 1999.
Segment Information
In June 1997, the Financial Accounting Standards Board or FASB issued
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information," or FAS 131, effective for
financial statements for periods beginning after December 15,
F-8
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Segment Information (continued)
1997. FAS 131 establishes standards for the way that public business
enterprises report financial and descriptive information about reportable
operating segments in annual financial statements and interim financial reports
issued to stockholders. Portal adopted FAS 131 effective February 1, 1998.
Portal operates solely in one segment, the development and marketing of CM&B
software, and therefore Portal is not impacted by the adoption of FAS 131.
Portal's foreign offices consist of sales, marketing and support activities
through its foreign subsidiaries and an overseas reseller network. Operating
losses generated by the foreign operations of Portal and their corresponding
identifiable assets were not material in any period presented.
Portal's export revenue represented 13%, 15% and 27% of total revenues in the
years ending January 31, 1997, 1998 and 1999. All of the export sales to date
have been denominated in U.S. dollars and were derived from sales to Europe and
Asia-Pacific. Total export revenues for these years were $0.4 million, $1.1
million and $4.4 million to customers in Europe and $0.3 million, $0.4 million
and $2.7 million to customers in the Asia-Pacific region.
Fair Value of Financial Instruments
The fair value of notes receivable is estimated by discounting the future
cash flows using the current interest rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The carrying value of the notes receivable approximated its fair
value.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to Portal for debt
instruments with similar terms, degrees of risk, and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
Cash and Cash Equivalents
Portal considers all highly liquid, low-risk debt instruments with an
original maturity at the date of purchase of three months or less to be cash
equivalents. The carrying amount for cash and cash equivalents approximates
their fair value at January 31, 1998 and 1999. Portal generally invests its
cash in money market accounts with major financial institutions.
Portal classifies, at the date of acquisition, its marketable securities into
available-for-sale categories in accordance with the provisions of the FASB's
Statement of Financial Accounting Standards No.115, "Accounting for Certain
Investments in Debt and Equity Securities". Currently, Portal classifies its
securities as available-for-sale, which are reported at fair market value, with
the related unrealized gains and losses included in stockholders' equity.
Unrealized and realized gains and losses were not material in the periods
presented.
Depreciation and Amortization
Depreciation on office and computer equipment and furniture is computed using
the straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the related lease term or their estimated useful lives, typically
four years.
F-9
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those estimates.
Net Loss Per Common Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", or FAS 128, for all periods presented.
Following the guidance given by the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock that
has been issued or granted for nominal consideration prior to the anticipated
effective date of the initial public offering must be included in the
calculation of basic and diluted net loss per common share as if these shares
had been outstanding for all periods presented. To date, Portal has not issued
or granted shares for nominal consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the consolidated
statements of operations, has been computed for the year ended January 31, 1999
as described above, and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss........................................... $(2,274) $(7,587) $(17,408)
======= ======= ========
Basic and diluted:
Weighted-average shares of common stock
outstanding...................................... 27,587 34,087 38,902
Less: Weighted-average shares subject to
repurchase....................................... (15,155) (13,301) (9,371)
------- ------- --------
Weighted-average shares used in computing basic and
diluted net loss per share........................ 12,432 20,786 29,531
======= ======= ========
Basic and diluted net loss per share............... $ (0.18) $ (0.37) $ (0.59)
======= ======= ========
Pro forma:
Net loss.......................................... $(17,408)
========
Shares used above................................. 29,531
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)...................................... 28,553
--------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 58,084
========
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.30)
========
</TABLE>
F-10
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Net Loss Per Common Share (continued)
Portal has excluded all convertible preferred stock, warrants for convertible
preferred stock, outstanding stock options, and shares subject to repurchase
from the calculation of diluted loss per common share because all such
securities are antidilutive for all periods presented. The total numbers of
shares excluded from the calculations of diluted net loss per share was
31,971,954, 38,259,900, and 40,185,846 for the years ended January 31, 1997,
1998 and 1999. Such securities, had they been dilutive, would have been
included in the computations of diluted net loss per share using the treasury
stock method. See Note 6 for further information on these securities.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by this prospectus is consummated, all of the
redeemable convertible preferred stock outstanding will automatically be
converted into common stock. Unaudited pro forma stockholders' equity at
January 31, 1999, as adjusted for the assumed conversion of convertible
preferred stock based on the shares of convertible preferred stock outstanding
at January 31, 1999, is disclosed on the consolidated balance sheet.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", or FAS 123, encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. Portal has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for its stock options plans. See the pro forma
disclosures of applying FAS 123 included in Note 6.
Comprehensive Loss
Portal adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", or FAS 130, at January 31, 1999. Under FAS
130, Portal is required to display comprehensive income and its components as
part of the financial statements. Other comprehensive income includes certain
changes in equity that are excluded from net income (loss). Specifically, FAS
130 requires unrealized holding gains and losses on available-for-sale
securities, to be included in accumulated other comprehensive income. Portal
has no material components of other comprehensive loss and, accordingly, the
comprehensive loss is the same as net loss for all periods presented.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", or FAS
133. Portal is required to adopt FAS 133 for the year ending January 31, 2001.
FAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because Portal currently holds no derivative financial instruments
and does not currently engage in hedging activities, adoption of FAS 133 is
expected to have no material impact on Portal's financial condition or results
of operations.
F-11
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", or SOP 98-1. SOP 98-
1 requires that entities capitalize certain costs related to internal use
software once certain criteria have been met. Portal is required to implement
SOP 98-1 for the year ending January 31, 2000. Adoption of SOP 98-1 is expected
to have no material impact on financial condition or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," or SOP 98-5, SOP 98-5 requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all start-
up costs that were capitalized in the past must be written off when SOP 98-5 is
adopted. Portal expects that the adoption of SOP 98-5 will not have a material
impact on its financial position or results of operations. Portal will be
required to implement SOP 98-5 for the year ending January 31, 2000.
(2) Property and Equipment
Property and equipment is recorded at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
January 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Office and computer equipment............................... $2,947 $4,970
Furniture................................................... 576 1,237
Leasehold improvements...................................... 212 348
------ ------
3,735 6,555
Less accumulated depreciation and amortization.............. 1,198 2,138
------ ------
Property and equipment, net................................. $2,537 $4,417
====== ======
</TABLE>
Included in property and equipment at January 31, 1998 and 1999 were assets
acquired under capital lease obligations with a cost of approximately $25,000
and $2.8 million. Accumulated depreciation related to the assets acquired under
capital lease totaled $3,000 and $0.3 million at January 31, 1998 and January
31, 1999.
(3) Long-Term Debt
In July 1997, Portal entered into a $3.0 million note payable agreement with
a financial institution to finance working capital. The agreement was
subsequently amended in February 1999 to change the installment payment dates.
The note, bearing an interest rate at 10.75% per annum, is payable in three
installments of $1.5 million, $0.5 million, and $1.0 million on February 19,
1999, March 31, 1999, and April 30, 1999. In connection with these notes,
Portal issued warrants to the lender to purchase 230,097 shares of Series B
preferred stock at an exercise price of $1.50 per share (see Note 6).
(4) Convertible Promissory Notes
In February through December 1995, Portal issued convertible promissory notes
in the aggregate principal amount of $0.8 million to private investors. In
April through June 1996, convertible notes in the amount of $0.5 million plus
accrued interest of $55,765 were exchanged for
F-12
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Convertible Promissory Notes (continued)
3,616,590 shares of Series A preferred stock at a price of $0.17 per share and
convertible notes in the amount of $0.3 million plus accrued interest of
$16,163 were repaid.
Warrants to purchase 1,500,000 shares of common stock at an exercise price of
$0.001 per share were issued in connection with the original issuance of the
convertible notes in 1995 (see Note 6).
In December 1998, Portal entered into an agreement with a customer to convert
$1.1 million from a deposit into a note payable. The note, bearing an interest
rate of 10% per annum, is due on November 30, 1999.
(5) Commitments
Operating Leases
Portal leases eight office facilities under noncancelable operating leases
that expire at various dates through March 2000. Portal also rents certain
property and equipment under operating leases. Rental expense for all operating
leases was $386,000, $740,000, and $1,610,000 for fiscal 1997, 1998, and 1999.
Future minimum lease payments as of January 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending January 31,
2000................................................................ $1,474
2001................................................................ 1,049
2002................................................................ 1,044
2003................................................................ 1,070
2004................................................................ 732
------
Total minimum lease payments......................................... $5,369
======
</TABLE>
Capital Lease Obligations
Portal leases certain furniture, computers, and equipment under noncancelable
capital leases. Obligations under capital leases represent the present value of
future noncancelable rental payments under various lease agreements.
Future minimum lease payments under capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending January 31,
2000................................................................ $ 668
2001................................................................ 856
2002................................................................ 902
2003................................................................ 496
------
Total minimum payments............................................... 2,922
Less amount representing interest.................................... (421)
------
Present value of future payments..................................... 2,501
Less current portion................................................. (479)
------
Long-term portion.................................................... $2,022
======
</TABLE>
F-13
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity
Convertible Preferred Stock
A summary of convertible preferred stock is as follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------------------------- ----------------------------------
Liquidation Liquidation
Authorized Outstanding Preference Authorized Outstanding Preference
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 18,900,000 18,311,640 $ 3,051,940 18,900,000 18,416,190 $ 3,069,365
Series B................ 10,800,000 9,999,999 14,999,998 10,800,000 10,235,997 15,353,995
---------- ---------- ----------- ---------- ---------- -----------
29,700,000 28,311,639 $18,051,938 29,700,000 28,652,187 $18,423,360
========== ========== =========== ========== ========== ===========
</TABLE>
At January 31, 1999, 20,000,000 shares of preferred stock were authorized.
Subsequent to the offering, 5,000,000 shares of preferred stock will be
authorized. (See Note 8).
The holders of Series A and B preferred stock are entitled to noncumulative
dividends of 8% of original issue price per share, per annum in preference and
priority to any payment of any dividend on common stock, when and as declared
by the board of directors. The holders of Series A and B preferred stock are
also entitled to liquidation preferences of $0.17 and $1.50 per share and all
declared but unpaid dividends in preference to common stock in the event of any
liquidation, dissolution, or winding up of Portal. No dividends have been
declared as of January 31, 1999.
Each share of preferred stock is convertible into one share of common stock,
subject to certain antidilution provisions, and will automatically convert upon
a public offering of Portal's common stock if the aggregate proceeds exceed
$7.5 million and the offering price is at least $10.00 per share.
Each share of preferred stock votes equally with shares of common stock on an
as-converted basis. Under certain protective provisions, a majority vote of the
existing preferred stockholders, voting together as one class, is required to
make certain capitalization adjustments, such as modifying the authorization,
preference, or class of stock or to effect a significant corporate transaction
such as a merger or dissolution of Portal.
Common Stock
Portal has issued shares of common stock which are subject to Portal's right
to repurchase at the original issuance price upon the occurrence of certain
events, as defined in the agreement relating to the sale of such stock. The
repurchase rights lapse ratably over a period of one to four years from the
date of issuance. At January 31, 1998 and 1999, approximately 14,713,647 and
6,510,846 shares were subject to repurchase. Of the shares subject to
repurchase, 8,428,914 and 5,947,011 shares were issued upon the exercise of
options under the 1995 Stock Option Plan. In the event that a stockholder
negotiates to sell all or part of the stock to a third party, Portal has a
right of first refusal to repurchase that stock at the negotiated price.
At January 31, 1999, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock................................. 28,652,187
Exercise of outstanding stock options......................... 5,596,200
Shares of common stock available for grant under the 1995
Stock Option/Stock Issuance Plan............................. 925,842
Exercise of preferred and common stock warrants outstanding... 583,698
----------
35,757,927
==========
</TABLE>
F-14
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity (continued)
Warrants
Warrants to purchase 31,362 shares of common stock for a price of $0.017 per
share were issued in connection with bridge loan financing in December 1995. As
of January 31, 1998, warrants to purchase 18,861 shares were exercised and
warrants to purchase 12,501 shares are outstanding. The warrants expire in
January 2003 and the value ascribed to the warrants is immaterial for financial
statement purposes.
Warrants to purchase 3,620,700 shares of Series A preferred stock at a price
of $0.17 per share were issued in connection with the issuance of Series A
preferred stock in March 1996. During the years ended January 31, 1997, 1998
and 1999, 3,075,000, 100,050 and 104,550 shares were exercised. At January 31,
1999, there were warrants outstanding to purchase 341,100 shares of Series A
preferred stock which expire in April 1999. The value ascribed to these
warrants is immaterial for financial statement purposes.
Warrants to purchase 230,097 shares of Series B preferred stock for a price
of $4.50 per share were issued in connection with the issuance of notes payable
in July 1997. None of these warrants have been exercised and all shares were
outstanding at January 31, 1999. The Series B preferred stock warrants expire
in September 2003. The warrants were appraised at the date of issuance and
additional interest expense of $104,000 was recorded. This amount was deferred
and is being amortized to interest expense over the term of the notes. During
the year ended January 31, 1999, $38,310 of the additional interest expense was
amortized.
Stock Options
During the year ended January 31, 1996, Portal adopted its 1995 Stock
Option/Stock Issuance Plan, or the Plan which authorizes the board of directors
to grant incentive stock options or nonqualified stock options to employees,
officers, and directors of Portal. The Plan allows for the grant of incentive
stock options to employees and grant of nonstatutory stock options to eligible
participants.
The option price is not less than 100% or 85% of the fair value on the date
of the grant as determined by the board of directors for incentive stock
options and nonqualified stock options, respectively, except for options
granted to a person owning greater than 10% of the total voting power of
Portal, for which the exercise price of the options must not be less than 110%
of the fair value at the time of grant. Options generally become exercisable
upon grant subject to repurchase rights in favor of Portal until vested. Shares
generally vest over a period of no more than five years. Options may be granted
with different vesting terms at the discretion of the board of directors.
Options are exercisable for a term of ten years after the date of grant except
those options granted to a person owning greater than 10% of the total voting
power of stock of Portal, which are exercisable for a term of five years after
the date of grant. In the event of a change in control in which options granted
under the Plan are not assumed, the options will accelerate and vest in full
and existing repurchase rights will lapse.
F-15
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity (continued)
Stock Options (continued)
A summary of Portal's stock option activity and related information follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 1,667,268 $0.01 891,684 $0.02
Options granted.................. 9,270,915 $0.02 6,891,000 $1.39
Options exercised................ (9,211,974) $0.02 (2,036,484) $0.43
Options canceled................. (834,525) $0.02 (150,000) $1.28
----------- ----------
Outstanding at end of year....... 891,684 $0.02 5,596,200 $1.53
=========== ==========
Exercisable at end of year....... 891,684 $0.02 5,596,200 $1.53
=========== ==========
Weighted-average fair value of
options granted................. $0.01 $0.36
</TABLE>
At January 31, 1998 and 1999, 8,428,914 and 5,947,011 shares which had been
issued upon exercise of options were subject to repurchase. At January 31, 1998
and 1999, options to acquire 50,193 and 139,473 shares were vested but not
exercised.
Exercise prices for options outstanding as of January 31, 1999 and the
weighted-average remaining contractual life are as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
------------------------------------
Weighted-
Average
Number Remaining Weighted-
Range of Outstanding at Contractual Average
Exercise January 31, Life Exercise
Prices 1999 (In years) Price
-------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
$0.001-$0.02 410,349 8.7 $0.02
$0.02-$0.33 484,500 9.2 $0.33
$0.34-$0.67 1,556,601 9.3 $0.67
$0.68-$1.33 762,000 9.5 $1.33
$1.34-$1.67 361,650 9.7 $1.67
$1.68-$2.67 1,768,950 9.8 $2.67
$2.68-$4.00 252,150 9.9 $4.00
---------
5,596,200 9.5 $1.53
=========
</TABLE>
During the year ended January 31, 1999, in connection with the grant of
certain share options to employees, Portal recorded deferred stock compensation
of $16.8 million representing the difference between the exercise price and the
deemed fair value of Portal's common stock on the date such stock options were
granted. Such amount is included as a reduction of stockholders' equity (net
capital deficiency) and is being amortized by charges to operations on a graded
vesting method. In fiscal 1999, Portal recorded amortization of deferred stock
compensation expense of approximately $2.3 million. At January 31, 1999, Portal
had a total of approximately $14.5 million remaining to be amortized over the
corresponding vesting period of each respective option, generally four years.
The amortization expense relates to options awarded to employees in all
operating expense categories. This amount has not been separately allocated to
these categories.
F-16
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Stockholders' Equity (continued)
Accounting for Stock-Based Compensation
As discussed in Note 1, Portal has elected to follow APB Opinion No. 25 and
related interpretations in accounting for its employee and director stock-based
awards because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock-based awards. Under APB Opinion
No. 25, Portal does not recognize compensation expense with respect to such
awards if the exercise price equals or exceeds the fair value of the underlying
security on the date of grant and other terms are fixed.
The fair value for these awards was estimated at the date of grant using the
minimum value options pricing model. This model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because Portal's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. The fair value of
options granted during the years ended January 31, 1997, 1998, and 1999 was
determined using the minimum value method with a risk-free interest rate of
6.0%, an expected life of six years, and a dividend yield of zero.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Portal's pro
forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported..................................... $(2,274) $(7,587) $(17,408)
Pro forma ...................................... (2,277) (7,607) (17,861)
Basic and diluted net loss per share:
As reported..................................... $ (0.18) $ (0.37) $ (0.59)
Pro forma....................................... (0.18) (0.37) (0.60)
</TABLE>
(7) Income Taxes
Portal's provision for income taxes of approximately $0.7 million for the
year ended January 31, 1999 consists of alternative minimum taxes, foreign
withholding and local income taxes. The reconciliation of income tax expense
(benefit) attributable to continuing operations computed at the U.S. federal
statutory rates to income tax expense (benefit) for the fiscal years ended
January 31, 1997, 1998, and 1999 is as follows (in thousands):
F-17
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Income Taxes (continued)
<TABLE>
<CAPTION>
Year Ended January
31,
-----------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate.... $(773) $(2,579) $(5,676)
Loss for which no tax benefit is currently
recognizable..................................... 773 2,579 5,676
Alternative minimum tax........................... -- -- 500
Foreign income and withholding taxes.............. -- -- 215
----- ------- -------
Total............................................. $ -- $ -- $ 715
===== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of Portal's deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
January 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,275 $ --
Tax credit carryforwards................................ 396 1,053
Deferred revenue........................................ 2,437 8,980
Accruals and reserves not currently deductible.......... 292 1,679
Other, net.............................................. -- 848
------- --------
Total deferred tax assets................................ 4,400 12,560
Valuation allowance...................................... (4,400) (12,560)
------- --------
Net deferred tax assets.................................. $ -- $ --
======= ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the deferred tax assets as of January 31, 1999
and 1998, has been established to reflect these uncertainties. The change in
the valuation allowance was a net increase of approximately $8.2 million and
$3.1 million for the years ended January 31, 1999 and 1998.
As of January 31, 1999, Portal had federal research and development tax
credit carryforwards of approximately $0.5 million, which will expire at
various dates from 2012 through 2019, if not utilized. In addition, Portal had
federal alternative minimum tax credit carryforwards of approximately $0.5
million which have an unlimited carryforward period.
Utilization of tax credit carryforwards may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in expiration of tax credit carryforwards before
full utilization.
F-18
<PAGE>
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Subsequent Events (Unaudited)
1995 Stock Option/Stock Issuance Plan
In February 1999, the board of directors approved an amendment to the 1995
Stock Option/Stock Issuance Plan to increase the number of shares authorized
for issuance by 6,000,000 shares. This increase was subsequently approved by
the stockholders in April 1999.
1999 Stock Incentive Plan
In February 1999, the board of directors approved the adoption of the 1999
Stock Incentive Plan. This was approved by the stockholders in April 1999. A
total of 16,122,042 shares of common stock have been reserved for issuance
under the 1999 Stock Incentive Plan based on the number of shares of common
stock available for grant under the 1995 Stock Option/Stock Issuance Plan at
January 31, 1999; the number of options outstanding under the 1995 Stock
Option/Stock Issuance Plan as of January 31, 1999; and an additional 3,600,000
shares of common stock available for future issuance. The price at which the
options to purchase common stock may be issued is the fair market value of
Portal's common stock at the close of the previous business day.
1999 Employee Stock Purchase Plan
In February 1999, the board of directors approved the adoption of Portal's
1999 Employee Stock Purchase Plan. This was approved by the stockholders in
April 1999. A total of 1,800,000 shares of common stock has been reserved for
issuance under the 1999 Purchase Plan. The 1999 Purchase Plan permits eligible
employees to acquire shares of Portal's common stock through periodic payroll
deductions of up to 15% of total compensation. No more than 1,250 shares may be
purchased on any purchase date per employee. Each offering period will have a
maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of Portal's common
stock on the first day of the applicable offering period or on the last day of
the respective purchase period. The initial offering period will commence on
the effectiveness of the initial public offering and will end on the last
business day of May, 2001.
Reincorporation, Amendment to the Articles of Incorporation and Stock Split
During February 1999, Portal's board of directors authorized the
reincorporation of the Company in the state of Delaware. This reincorporation
is to be effective upon shareholder approval which is anticipated to occur
prior to Portal's initial public offering. Upon reincorporation, Portal will be
authorized to issue 250,000,000 shares of common stock, $0.001 par value and
5,000,000 shares of undesignated preferred stock, $0.001 par value. The board
of directors will have the authority to determine the price, rights,
preferences, privileges and restrictions of the preferred stock.
In April 1999, Portal's board of directors approved a three-for-one split of
Portal's common and preferred stock. The stock split will become effective upon
Portal's reincorporation in Delaware immediately prior to effectiveness of this
offering. All share and per share amounts in the accompanying consolidated
financial statements have been adjusted retroactively.
F-19
<PAGE>
UNDERWRITING
Portal and the underwriters named below will enter into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter will severally agree to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse
First Boston Corporation, BancBoston Robertson Stephens Inc. and Hambrecht &
Quist LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. ..............................................
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens Inc. ................................
Hambrecht & Quist LLC..............................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 600,000
shares from Portal to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Portal. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
Paid by Portal
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price.
Any of these securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to
$ per share from the initial public offering price. If all the shares
are not sold at the initial offering price, the representatives may change the
offering price and the other selling terms.
Portal has agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This agreement does not apply to
any existing employee benefit plans. See "Shares Eligible for Future Sale" for
a discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Portal and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Portal's historical performance, estimates of the business
potential and earnings prospects of Portal, an assessment of Portal's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The common stock is expected to be quoted on the Nasdaq National Market under
the symbol "PRSF".
U-1
<PAGE>
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
At the request of Portal, the underwriters have reserved up to 400,000 shares
of common stock for sale, at the initial public offering price, to directors,
officers, employees and friends of Portal through a directed share program. The
number of shares of common stock available for sale to the general public in
the public offering will be reduced to the extent these persons purchase these
reserved shares.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
Portal estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
Portal has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
[DESCRIPTION OF ARTWORK]
[FAST TIME-TO-MARKET WITH NEW SERVICES DIAGRAM]
[A diagram, in the shape of steps, depicting Portal's Infranet Platform
representing Object APIs; Access Services, including Basic Dial-Up, ISDN,
xDSL, Roaming, Dedicated Internet Protocol Access, ATM and Frame Relay and
Cable Modem; Consumer Services, including Personal Web Pages, Online Gaming,
IP Telephony, Information Services and Content and Personal Finance Services;
and Business Services, including Web Site Hosting, VPN, IP Fax, Audio/Video
Conference and Application Hosting.]
INSIDE BACK COVER
The inside back cover of the prospectus has a caption centered across the
top of the page which reads "Infrastructure Software for Internet-Based
Services." Directly below the caption is a sentence which reads, "Portal
offers the software foundation for providers of Internet-based services to
rapidly deploy a wide range of new services, speeding time to market."
Along the right side of the back cover reading from bottom to top vertically
is the phrase "No Limits." "No Limits" is embedded in a red stripe which runs
from the bottom to the top of the page vertically.
In the center of the back cover there is a large blue circle. Contained
within the large blue circle is a medium red circle. Contained within the
medium red circle is a small white circle. Each smaller circle cuts out a
portion of the next large size circle. The medium and small circles are not
centered within the large circle; rather, they move further towards the top of
the circle towards what would be 12 o'clock if it were a clock. The small
white circle contains the Portal logo with the phrase "Real Time No Limits"
below the Portal logo. The medium red circle is cut into four parts, each part
which contains one type of Portal's customers and which reads counterclockwise
within the medium red circle: "Internet Service Providers," "Emerging
Communications Providers," "Traditional Telecommunications Providers" and
"Content Providers." The large blue circle is divided into three parts, each
part which contains a description of three main types of providers which
deploy Portal's software and which reads counterclockwise within the large
blue circle: "Access Services," "Consumer Services" and "Business Services."
Below each of the captions is a horizontal list which details which specific
services may be deployed by Internet-based service providers within that main
type of service. The bullet points below "Access Services" read: "Dial-Up,"
"Leased-Line," "xDSL," "Roaming" and "Cable Modem." The bullet points below
"Consumer Services" read "Personal Web Pages," "On-line Gaming," "IP
Telephony," "Information Services" and "Financial Services." The bullet points
below "Business Services" read "Web Site Hosting," "Virtual Private Networks,"
"IP Fax," "Video Conference" and "Application Hosting."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or any other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 33
Management............................................................... 48
Certain Transactions..................................................... 58
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 66
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information................................................... 68
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
----------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 Shares
Portal Software, Inc.
Common Stock
----------------
[LOGO OF PORTAL SOFTWARE, INC. APPEARS HERE]
----------------
Goldman, Sachs & Co.
Credit Suisse First Boston
BancBoston
Robertson Stephens
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............................................. $ 19,600
NASD Filing Fee.................................................. $ 7,500
Nasdaq National Market Listing Fee............................... $ 17,500
Printing and Engraving Expenses.................................. $ 200,000
Legal Fees and Expenses.......................................... $ 500,000
Accounting Fees and Expenses..................................... $ 350,000
Blue Sky Fees and Expenses....................................... $ 1,000
Transfer Agent Fees.............................................. $ 12,000
Miscellaneous.................................................... $ 142,400
Total.......................................................... $1,250,000
</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 7 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 11,057,958 shares of its Common Stock to
employees and consultants for an aggregate purchase price of $1,079,991
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.
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
II-2
<PAGE>
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., Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens and Hambrecht & Quist LLC.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2** Amended and Restated Investors' Rights Agreement, among the Registrant
and the investors and founders named therein, dated January 29, 1998.
4.3** Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement, dated March 3, 1998.
4.4** 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** 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** 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** Loan and Security Agreement by and between Registrant and Lighthouse
Capital Partners, L.P., dated as of July 24, 1997, as amended.
10.4 Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits.
10.5 Registrant's 1999 Stock Incentive Plan.
10.6 Registrant's 1999 Employee Stock Purchase Plan.
10.7** Form of Directors' and Officers' Indemnification Agreement.
10.8** Form of Registrant's Software License and Support Agreement.
10.9** Form of Registrant's Business Alliance Agreement.
10.10 Stock Purchase Agreement with Cisco Systems, Inc., dated April 13,
1999.
10.11 Stock Purchase Agreement with Andersen Consulting LLP, dated April 12,
1999.
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 its 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
** Previously filed
II-3
<PAGE>
(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 Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Cupertino, State of California, on this 14th day of April, 1999.
PORTAL SOFTWARE, INC.
/s/ Jack L. Acosta
By: _________________________________
Jack L. Acosta
Chief Financial Officer, Vice
President, Finance
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive April 14, 1999
____________________________________ Officer (Principal
John E. Little Executive Officer) and
Chairman of the Board of
Directors
/s/ Jack L. Acosta Chief Financial Officer, April 14, 1999
____________________________________ Vice President, Finance
Jack L. Acosta (Principal Financial and
Accounting Officer) and
Secretary
* Director April 14, 1999
____________________________________
Arthur C. Patterson
* Director April 14, 1999
____________________________________
Edward J. Zander
* Director April 14, 1999
____________________________________
David C. Peterschmidt
* Director April 14, 1999
____________________________________
William T. Coleman III
*By: /s/ Jack L. Acosta
- ----------------------------------------------------
(Jack L. Acosta)
Attorney-in-Fact
</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., Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens and Hambrecht & Quist LLC.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2** Amended and Restated Investors' Rights Agreement, among the Registrant
and the investors and founders named therein, dated January 29, 1998.
4.3** Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement, dated March 3, 1998.
4.4** 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** 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** 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** Loan and Security Agreement by and between Registrant and Lighthouse
Capital Partners, L.P., dated as of July 24, 1997, as amended.
10.4 Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits.
10.5 Registrant's 1999 Stock Incentive Plan.
10.6 Registrant's 1999 Employee Stock Purchase Plan.
10.7** Form of Directors' and Officers' Indemnification Agreement.
10.8** Form of Registrant's Software License and Support Agreement.
10.9** Form of Registrant's Business Alliance Agreement.
10.10 Stock Purchase Agreement with Cisco Systems, Inc., dated April 13,
1999.
10.11 Stock Purchase Agreement with Andersen Consulting LLP, dated April 12,
1999.
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
** Previously filed
<PAGE>
Exhibit 1.1
DRAFT OF APRIL 13, 1999
PORTAL SOFTWARE, INC.
Common Stock, par value $.001 per share
Underwriting Agreement
----------------------
_____________, 1999
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Portal Software, Inc., a Delaware upon reincorporation corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of _________ shares and, at the election of the
Underwriters, up to ________ additional shares of Common Stock par value $.001
per share ("Stock") of the Company. The aggregate of ___________ shares to be
sold by the Company is herein called the "Firm Shares" and the aggregate of
_____________ additional shares to be sold by the Company is herein called the
"Optional Shares". The Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-72999) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, for each of
the other Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any post-
effective amendment thereto or the Rule 462(b) Registration Statement, if any,
has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and
<PAGE>
Draft of April 1, 1999
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under
the Act to be part of the Initial Registration Statement at the time it was
declared effective or such part of the Rule 462(b) Registration Statement, if
any, became or hereafter becomes effective, each as amended at the time such
part of the Initial Registration Statement became effective, are hereinafter
collectively called the "Registration Statement"; and such final prospectus,
in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter
called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries (as defined
in Rule 405 of the rules and regulations under the Act), taken as a whole, has
sustained since the date of the latest audited financial statements included
in the Prospectus any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the capital
stock or long-term debt of the Company or any of its subsidiaries, there have
been no transactions entered into by the Company or any of its subsidiaries,
other than those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one enterprise,
there has been no dividend or distribution of any kind declared, paid or made
by the Company on any class of its capital stock (other than the repurchase of
shares of its Common Stock in accordance with its 199_ Stock Option Plan) or
any material adverse change, or any development which could reasonably be
expected to result in a prospective material adverse change, in or affecting
the general affairs, management, financial position, stockholders' equity or
results of operations
<PAGE>
Draft of April 1, 1999
of the Company and its subsidiaries taken as a whole (a "Material Adverse
Effect"), otherwise than as set forth or contemplated in the Prospectus;
(e) Neither the Company nor its subsidiaries own any real
property and the Company and its subsidiaries have good and marketable title
to all personal property owned by them, in each case free and clear of all
liens, encumbrances and defects except such as are described in the Prospectus
or such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its subsidiaries;
(f) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any infringement
of or conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any Intellectual
Property invalid or inadequate to protect the interest of the Company or any
of its subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.
(g) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties and conduct
its business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such qualification,
except where the failure to so qualify would not in the aggregate have a
Material Adverse Effect; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation;
(h) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Stock contained in the
Prospectus; and all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are fully
paid and non-assessable and (except for directors' qualifying shares or as
otherwise set forth in the Prospectus) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equitable interests or
claims;
(i) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
<PAGE>
Draft of April 1, 1999
(j) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its subsidiaries
or any of their properties; and no filing, consent, approval, authorization,
order, registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, the approval
by the National Association of Securities Dealers, Inc. (the "NASD") of the
terms of the sale of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters;
(k) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound except where any such default would not have a
Material Adverse Effect;
(l) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting",
insofar as they purport to describe the provisions of the documents referred
to therein, are accurate summaries and descriptions of such terms and
provisions in all material respects;
(m) Other than as described in the Prospectus, there are no persons
with registration rights to have any securities registered pursuant to the
Registration Statement.
(n) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a
Material Adverse Effect; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(o) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act");
(p) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
<PAGE>
Draft of April 1, 1999
(q) The financial statements included in the Registration
Statement and the Prospectus, together with the related schedules and notes,
present fairly the financial position of the Company and its consolidated
subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in accordance
with GAAP the information required to be stated therein. The selected
financial data and the summary financial information included in the
Prospectus present fairly the information shown therein and have been compiled
on a basis consistent with that of the audited financial statements included
in the Registration Statement. The pro forma financial statements and the
related notes thereto included in the Registration Statement and the
Prospectus present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit timely preparation of financial
statements in conformity in all material respects with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(s) Ernst & Young LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder; and
(t) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which the
business or operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Issue. As a result of such review, the Company has no
reason to believe, and does not believe, that the Year 2000 Issue will have a
material adverse effect on the general affairs, management, the current or
future consolidated financial position, business prospects, stockholders' equity
or results of operations of the Company and its subsidiaries or result in any
material loss or interference with the Company's business or operations. The
"Year 2000 Issue" as used herein means any significant risk that computer
hardware or software used in the receipt, transmission, processing,
manipulation, storage, retrieval, retransmission or other utilization of data or
in the operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $___________, the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) set forth opposite the
name of such Underwriter in
<PAGE>
Draft of April 1, 1999
Schedule I hereto and (b) in the event and to the extent that the Underwriters
shall exercise the election to purchase Optional Shares as provided below, the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at the purchase price per share set forth in clause (a) of this Section 2,
that portion of the number of Optional Shares as to which such election shall
have been exercised (to be adjusted by you so as to eliminate fractional
shares) determined by multiplying such number of Optional Shares by a
fraction, the numerator of which is the maximum number of Optional Shares
which such Underwriter is entitled to purchase as set forth opposite the name
of such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Shares that all of the Underwriters are entitled to
purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ____________ Optional Shares, at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on ___________, 1999 or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York City
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents
<PAGE>
Draft of April 1, 1999
requested by the Underwriters pursuant to Section 7(j) hereof, will be
delivered at the offices of Brobeck, Phleger & Harrison LLP, 2200 Geng Road,
Palo Alto, California 94303 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at such Time of Delivery. A meeting
will be held at the Closing Location at _________ p.m., New York City time, on
the New York Business Day next preceding suchTime of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to
advise you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes effective or
any supplement to the Prospectus or any amended Prospectus has been filed and
to furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop order or
of any order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Promptly following the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in New York
City in such quantities as you may reasonably request, and, if the delivery of
a prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Prospectus in order to comply with the Act,
to notify you and upon your request to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many
<PAGE>
Draft of April 1, 1999
copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such statement
or omission or effect such compliance, and in case any Underwriter is required
to deliver a prospectus in connection with sales of any of the Shares at any
time nine months or more after the time of issue of the Prospectus, upon your
request but at the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Act and the rules and
regulations thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities
(other than pursuant to employee stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities outstanding
as of, the date of this Agreement), without the prior written consent of
Goldman, Sachs & Co.;
(f) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public accountants)
and, as soon as practicable after the end of each of the first three quarters
of each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), to make available to its
stockholders consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b)
<PAGE>
Draft of April 1, 1999
Registration Statement with the Commission in compliance with Rule 462(b) by
10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the
Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the
Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery
of the Shares; (iii) all reasonable expenses in connection with the
qualification of the Shares for offering and sale under state securities laws
as provided in Section 5(b) hereof, including the fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey (iv) all fees and expenses in connection
with listing the Shares on the NASDAQ; (v) the filing fees incident to, and
the fees and disbursements of counsel for the Underwriters in connection with,
securing any required review by the National Association of Securities
Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of
preparing stock certificates; (vii) the cost and charges of any transfer agent
or registrar; and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that, except as
provided in this Section, and Sections 8 and 11 hereof, the Underwriters will
pay all of their own costs and expenses, including the fees of their counsel,
stock transfer taxes on resale of any of the Shares by them, and any
advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on
the part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, shall have furnished to you such written opinion
or opinions (a draft of each such opinion is attached as Annex II(a) hereto),
dated such Time of Delivery, with respect to the matters covered in paragraphs
(i), (ii), (vii), (xi) and (xx) of subsection (c) below as well as such other
related matters as you
<PAGE>
Draft of April 1, 1999
may reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Brobeck, Phleger & Harrison LLP, counsel for the Company,
shall have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state of
Delaware, with corporate power and authority to own its properties and conduct
its business as described in the Prospectus;
(ii) The authorized, issued and outstanding capital stock
as of __________[the closing date] is as set forth under the heading
"Capitalization" in the Prospectus, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and issued and to
our knowledge are fully paid and non-assessable;
(iii) The Shares have been duly authorized and, when issued
and delivered by the Underwriters in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and nonassessable;
(iv) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification except where the
failure to so register or qualify would not have a Material Adverse Effect
(such counsel being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel shall
state that they believe that both you and they are justified in relying upon
such opinions and certificates);
(v) Each subsidiary of the Company, based solely on
certificates of public officials of each applicable jurisdiction, has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the issued
shares of capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except for
directors' qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims (such counsel
being entitled to rely in respect of the opinion in this clause upon opinions
of local counsel and in respect to matters of fact upon certificates of
officers of the Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in relying upon
such opinions and certificates);
(vi) The Company and its subsidiaries do not own any real
property;
(vii) To such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is the subject which
are required to be described in the Registration Statement that are not so
described; and, to the best of such counsel's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened
<PAGE>
Draft of April 1, 1999
by others;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company;
(ix) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a material
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
is bound or to which any of the property or assets of the Company or any of
its subsidiaries is subject, nor will such action result in any violation of
the provisions of the Certificate of Incorporation or By-laws of the Company
or any existing federal, California or Delaware statute or any order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any of
their properties and to our knowledge the issuance of the Shares is not
subject to preemptive rights arising under the Certificate of Incorporation or
the Delaware General Corporation Law or to our knowledge similar rights that
entitle or would entitle any person or entity to acquire any shares of capital
stock of the Company upon the sale and issuance of the Shares by the Company;
(x) No filing, consent, approval, authorization, order,
registration or qualification of or with any such court or governmental agency
or body is required for the issue and sale of the Shares or the consummation
by the Company of the transactions contemplated by this Agreement, except the
registration under the Act and the Exchange Act of the Shares, and such
consents, approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(xi) To our knowledge, neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation or By-laws or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to constitute
a summary of the terms of the Stock, and under the caption "Legal Proceedings"
to the extent that it constitutes matters of law, summaries of legal matters,
the Company's charter and by-laws or legal proceedings, or legal conclusions,
has been reviewed by us and are correct in all material respects;
(xiii) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no persons with registration rights
or other similar rights to have any securities registered pursuant to the
Registration Statement;
(xiv) To our knowledge, based upon oral advice of the staff
of the Commission, the Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, based upon oral advice of the staff of the Commission, no stop
order suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the 1933 Act and no
<PAGE>
Draft of April 1, 1999
proceedings for that purpose have been instituted or are pending or threatened
by the Commission;
(xv) The Company is not an "investment company", as such
term is defined in the Investment Company Act;
(xvi) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Act and the rules and
regulations thereunder; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as required; and
(xvii) In addition, such counsel shall state that it has
participated in conferences with certain officers and other representatives of
the Company, its independent public accountants, the Underwriters and the
Underwriters' counsel at which the contents of the Registration Statement, the
Prospectus and related matters were discussed. Such counsel may further
specify that it is not, however, passing upon, and does not assume any
responsibility for, and has not independently checked or verified, the
accuracy, completeness or fairness of the information contained in the
Registration Statement and the Prospectus. Such counsel shall state, however,
that based upon its participation as described in the foregoing, (i) it
confirms that it has no reason to believe that (other than the consolidated
financial statements, including the notes and schedules thereto and the other
financial and statistical data derived therefrom, as to which it need express
no belief) at the time the Registration Statement or any further amendment or
supplement thereto made by the Company, prior to such Time of Delivery, became
effective, the Registration Statement contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and (ii)
it shall confirm that it has no reason to believe that (other than the
consolidated financial statements, including the notes and schedules thereto,
and the other financial and statistical data derived therefrom, as to which it
need express no belief) the Prospectus or any further amendment or supplement
thereto made by the Company, prior to such Time of Delivery, on the date
hereof, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration Statement
filed subsequent to the date of this Agreement and also at each Time of
Delivery, Ernst & Young LLP shall have furnished to you a letter or letters,
dated the respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto (the executed
copy of the letter delivered prior to the execution of this Agreement is
attached as Annex I(a) hereto and a draft of the form of letter to be
delivered on the effective date of any post-effective amendment to the
Registration Statement and as of each Time of Delivery is attached as Annex
I(b) hereto);
(e) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus, and (ii) since
the respective dates as of which information is given in the Prospectus there
shall
<PAGE>
Draft of April 1, 1999
not have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development involving
a prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
described in Clause (i) or (ii), is in the judgment of the Representatives so
material and adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities or preferred
stock by any "nationally recognized statistical rating organization", as that
term is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that it has
under surveillance or review, with possible negative implications, its rating
of any of the Company's debt securities or preferred stock;
(g) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities declared
by either Federal or New York or California State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the effect
of any such event specified in this Clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have
been duly listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each stockholder of the Company,
substantially to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(j) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and warranties
of the Company herein at and as of such Time of Delivery, as to the
performance by the Company of all of its obligations hereunder to be performed
at or prior to such Time of Delivery, as to the matters set forth in
subsections (a) and (e) of this Section and as to such other matters as you
may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement
<PAGE>
Draft of April 1, 1999
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified
party, effect the settlement or compromise of, or consent to the entry of any
judgment with respect to, any pending or threatened action or claim in respect
of which indemnification or contribution may be sought hereunder (whether or
not the indemnified party is an actual or potential party to such action or
claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability arising out
of such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient
<PAGE>
Draft of April 1, 1999
to hold harmless an indemnified party under subsection (a) or (b) above in
respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering of
the Shares. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party failed
to give the notice required under subsection (c) above, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission, and the extent any such
party is prejudiced by the failure of an Indemnified party to provide notice
as specified in Section 8(c) above. The Company and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party
<PAGE>
Draft of April 1, 1999
or other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In
the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the
Company notifies you that it has so arranged for the purchase of such Shares,
you or the Company shall have the right to postpone such Time of Delivery for
a period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or
in any other documents or arrangements, and the Company agrees to file
promptly any amendments to the Registration Statement or the Prospectus which
in your opinion may thereby be made necessary. The term "Underwriter" as used
in this Agreement shall include any person substituted under this Section with
like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each non-
defaulting Underwriter to purchase its pro rata share (based on the number of
Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require non-
defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company
to sell the Optional Shares) shall thereupon terminate, without liability on
the part of any non-defaulting Underwriter or the Company, except for the
expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the
Company will reimburse the Underwriters through you for all reasonable out-of-
pocket expenses approved in writing by you, including fees and disbursements
of counsel, reasonably incurred by the Underwriters in making
<PAGE>
Draft of April 1, 1999
preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company shall then be under no further liability to any
Underwriter except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9/th/ Floor, New York, New York 10005, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
<PAGE>
Draft of April 1, 1999
If the foregoing is in accordance with your understanding, please sign and
return to us one for the Company and each of the Representatives plus one for
each counsel counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
PORTAL SOFTWARE, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Accepted as of the date hereof [at ...., ...............:]
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
By: Goldman, Sachs & Co.
By: ______________________________
Name: ____________________________
Title: ___________________________
On behalf of each of the Underwriters
<PAGE>
Draft of April 1, 1999
SCHEDULE I
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
- -----------------------------------------------------------------------------
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
[Names of other Underwriters]
Total
<PAGE>
Draft of April 1, 1999
Annex I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and
the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives")and are
attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited consolidated statements of operations data included in
the Prospectus as indicated in their reports thereon copies of which
have been separately furnished to the Representatives and are attached
hereto and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and
accounting matters regarding whether the unaudited consolidated
statements of operations data referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations, nothing came to their attention that cause them to believe
that the unaudited consolidated statements of operations data do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the four most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such four fiscal years which were included or not included in the
Prospectus;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302,
402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
<PAGE>
Draft of April 1, 1999
(A) (i) the unaudited consolidated statements of
operations and consolidated balance sheets included in the
Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related published rules and regulations, or (ii) any material
modifications should be made to the unaudited consolidated
statements of operations and consolidated balance sheets
included in the Prospectus if any for them to be in conformity
with generally accepted accounting principles;
(B) any other unaudited statements of operations data and
balance sheet items included in the Prospectus if any do not
agree with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited statements of operations data and balance
sheet items included in the Prospectus and referred to in Clause
(B) were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated financial
statement data included in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital
stock upon exercise of options and stock appreciation rights,
upon earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt
of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared
with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
[(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or
per share amounts of consolidated net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
the comparable period of the preceding year and with any other
period of corresponding length specified by the Representatives,
except in each case for decreases or increases which the
Prospectus discloses have occurred or may occur or which are
described in such letter;] and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives,
which are derived from the general accounting records of the Company
and its subsidiaries, which appear in the Prospectus, or in Part II of,
or in exhibits and schedules to, the Registration Statement specified
by the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
the Company and its subsidiaries and have found them to be in
agreement.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PORTAL SOFTWARE, INC.
The undersigned, John E. Little and Jack L. Acosta, hereby certify
that:
ONE: They are the duly elected and acting President and Secretary,
---
respectively, of said corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on March 26, 1999.
THREE: The Certificate of Incorporation of said corporation shall be
-----
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is Portal Software, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is the
Corporation Trust Corporation.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is Two Hundred
Fifty-Five Million (255,000,000). Two Hundred Fifty Million (250,000,000)
shares shall be Common Stock, par value $0.001 per share, and Five Million
(5,000,000) shares shall be Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and
<PAGE>
the designation thereof, or of any of them. The rights, privileges,
preferences and restrictions of any such additional series may be subordinated
to, pari passu with (including, without limitation, inclusion in provisions
----------
with respect to liquidation and acquisition preferences, redemption and/or
approval of matters by vote), or senior to any of those of any present or
future class or series of Preferred Stock or Common Stock. The Board of
Directors is also authorized to increase or decrease the number of shares of
any series prior or subsequent to the issue of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
Upon the filing of this Amended and Restated Certificate of
Incorporation, each outstanding share of Common Stock shall be converted into
two (1) shares of Common Stock or Preferred Stock, as the case may be (the
"Stock Split"). No fractional shares of Common Stock or Preferred Stock, as
the case may be, shall be issued upon the Stock Split. In lieu of any
fractional shares to which the holder would otherwise be entitled (after
aggregating all such shares of Common Stock, to which such holder is
entitled), the Corporation shall pay such holder such amount in cash as such
fractional share represents based on the fair market value of the Common Stock
as of the date hereof.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by
<PAGE>
a resolution of the Board of Directors. At the first annual meeting of
stockholders following the closing of the initial public offering of the
Corporation's Common Stock, the term of office of the Class I directors shall
expire and Class I directors shall be elected for a full term of three (3)
years. At the second annual meeting of stockholders following the closing of
the initial public offering of the Corporation's Common Stock, the term of
office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three (3) years. At the third annual meeting of
stockholders following the initial public offering of the Corporation's Common
Stock, the term of office of the Class III directors shall expire and Class
III directors shall be elected for a full term of three (3) years. At each
succeeding annual meeting of stockholders, directors shall be elected for a
full term of three (3) years to succeed the directors of the class whose terms
expire at such annual meeting. If the number of directors is hereafter
changed, each director then serving as such shall nevertheless continue as a
director of the Class of which he is a member until the expiration of his
current term and any newly created directorships or decrease in directorships
shall be so apportioned among the classes as to make all classes as nearly
equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any
provision contained in the statutes) outside the State of Delaware at such
place or places as may be designated from time to time by the Board of
Directors or in the Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.
<PAGE>
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or limitation
of the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving
<PAGE>
that the claimant has not met the standards of conduct for permissible
indemnification set forth in the GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
_______ __, 1999.
___________________________________
John E. Little
President
___________________________________
Jack L. Acosta
Secretary
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
PORTAL SOFTWARE, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
---------
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
---------
both within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
---------
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State
of Delaware as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting. Meetings of stockholders for any
other purpose may be held at such time and place, within or without the State
of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
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and time as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting. At each annual meeting, the
stockholders shall elect directors to succeed those directors whose terms
expire in that year and shall transact such other business as may properly be
brought before the meeting.
<PAGE>
Section 3. Written notice of the annual meeting stating the place,
---------
date and hour of the meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten (10) nor more than sixty (60) days
before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
---------
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
---------
purposes, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place, date
---------
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
---------
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
---------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all
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meetings of the stockholders for the transaction of business except as
otherwise provided by statute or by the certificate of incorporation. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, either the Chairman of the Board, or the stockholders entitled
to vote thereat, present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or represented
any business may be transacted that might have been transacted at the meeting
as originally notified. If the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
---------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable
statute or of the certificate of incorporation, a different vote is required,
in which case such express provision shall govern and control the decision of
such question.
Section 10. Unless otherwise provided in the certificate of
----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. Nominations for election to the Board of Directors
----------
must be made by the Board of Directors or by a committee appointed by the Board
of Directors for such purpose
3
<PAGE>
or by any stockholder of any outstanding class of capital stock of the
corporation entitled to vote for the election of directors. Nominations by
stockholders must be preceded by notification in writing received by the
secretary of the corporation not less than one-hundred twenty (120) days prior
to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to
serve as a director if so elected and the following information as to each
proposed nominee and as to each person, acting alone or in conjunction with
one or more other persons as a partnership, limited partnership, syndicate or
other group, who participates or is expected to participate in making such
nomination or in organizing, directing or financing such nomination or
solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business
address of each proposed nominee and of each such person;
(b) the principal occupation or employment, the
name, type of business and address of the corporation or other organization in
which such employment is carried on of each proposed nominee and of each such
person;
(c) the amount of stock of the corporation owned
beneficially, either directly or indirectly, by each proposed nominee and each
such person; and
(d) a description of any arrangement or
understanding of each proposed nominee and of each such person with each other
or any other person regarding future employment or any future transaction to
which the corporation will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
4
<PAGE>
Section 12. At any meeting of the stockholders, only such business
----------
shall be conducted as shall have been brought before the meeting (a) pursuant
to the corporation's notice of meeting, (b) by or at the direction of the
Board of Directors or (c) by any stockholder of the corporation who is a
stockholder of record at the time of giving of the notice provided for in this
Bylaw, who shall be entitled to vote at such meeting and who complies with the
notice procedures set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (b) the name and address, as they
appear on the corporation's books, of the stockholder proposing such business,
and the name and address of the beneficial owner, if any, on whose behalf the
proposal is made, (c) the class and number of shares of the corporation which
are owned beneficially and of record by such stockholder of record and by the
beneficial owner, if any, on whose behalf of the proposal is made and (d) any
material interest of such stockholder of record and the beneficial owner, if
any, on whose behalf the proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the
5
<PAGE>
meeting that business was not properly brought before the meeting and in
accordance with the procedures prescribed by this Section 12, and if such
person should so determine, such person shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section 12.
Section 13. Effective upon the closing of the corporation's
----------
initial public offering of securities pursuant to a registration statement filed
under the Securities Act of 1933, as amended, the stockholders of the
Corporation may not take action by written consent without a meeting but must
take any such actions at a duly called annual or special meeting in accordance
with these Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
---------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors
shall have the effect of shortening the term of an incumbent director. The
Board of Directors shall be classified, with respect to the time for which
they severally hold office, into three classes, as nearly equal in number as
possible, as determined by the Board of Directors, one class to hold office
initially for a term expiring at the annual meeting to be held in 2000,
another class to hold office initially for a term expiring at the annual
meeting of stockholders held in 2001 and another class to hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 2002, with the members of each
6
<PAGE>
class to hold office until their successors are elected and qualified. At each
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Section 2. Vacancies and newly created directorships resulting from
---------
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the
next election of the class for which such directors were chosen and until
their successors are duly elected and qualified or until earlier resignation
or removal. If there are no directors in office, then an election of directors
may be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
---------
under the direction of its Board of Directors which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
---------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
---------
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of
the stockholders to fix the time or place of such first meeting of the newly
elected Board of Directors, or in the event such meeting is not held at the
time and place so fixed by the
7
<PAGE>
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of
the Board of Directors, or as shall be specified in a written waiver signed by
all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
---------
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the Chairman
---------
of the Board or the president on twelve (12) hours' notice to each director by
phone, fax or electronic mail; special meetings shall be called by the
Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of a majority of the Board unless the Board
consists of only one director, in which case special meetings shall be called
by the Chairman of the Board, the president or secretary in like manner and on
like notice on the written request of the sole director.
Section 8. At all meetings of the board a majority of the directors
---------
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present.
Section 9. Unless otherwise restricted by the certificate of
---------
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or
8
<PAGE>
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors, or any committee, by means of conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
9
<PAGE>
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
---------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or
10
<PAGE>
stockholder, it shall not be construed to mean personal notice (except as
provided in Section 7 of Article III of these Bylaws), but such notice may be
given in writing, by mail, addressed to such director or stockholder, at his
address as it appears on the records of the corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Notice to directors may also be
given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
---------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board
---------
of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman of
the Board. The Board of Directors may also choose one or more vice-presidents,
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person, unless the certificate of incorporation or these bylaws
otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
---------
meeting of stockholders shall choose a president, a chief financial officer, and
a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
---------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
11
<PAGE>
Section 4. The salaries of all officers of the corporation shall be
---------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any
vice-president of the corporation.
Section 5. The officers of the corporation shall hold office until their
---------
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
---------
meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the president,
---------
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He shall have and may exercise such powers as are,
from time to time, assigned to him by the Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
---------
corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
12
<PAGE>
Section 9. The president or any vice president shall execute bonds,
---------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody of
the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
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<PAGE>
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one, the
----------
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
----------
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may be
----------
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the corporation.
Section 15. If required by the Board of Directors, he/she shall give the
----------
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his/her office and for the restoration
to the corporation, in case of his/her death,
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<PAGE>
resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his/her control belonging to the corporation.
Section 16. The treasurer or an assistant treasurer, in the order
----------
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Chief Financial
Officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to
---------
have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case upon
the face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent
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<PAGE>
such class or series of stock, provided that, except as otherwise provided in
section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate that the corporation shall issue to represent such class or series
of stock, a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
it may be issued by the corporation with the same effect as if he/she were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
---------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
16
<PAGE>
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
---------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
---------
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the exclusive
---------
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
17
<PAGE>
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
---------
to the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
---------
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
---------
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
---------
resolution of the Board of Directors.
18
<PAGE>
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
---------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized under
---------
the laws of the State of Delaware, as those laws may be amended and supplemented
from time to time, indemnify any director made, or threatened to be made, a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of being a director of the corporation or a predecessor
corporation or, at the corporation's request, a director or officer of another
corporation, provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 6 shall: (i) not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 6 shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil
or criminal action, suit or proceeding by reason of the fact that he is or was a
director of the corporation (or
19
<PAGE>
was serving at the corporation's request as a director or officer of another
corporation) shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized by relevant sections of the General Corporation Law of Delaware.
Notwithstanding the foregoing, the corporation shall not be required to
advance such expenses to an agent who is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board
of Directors of the corporation which alleges willful misappropriation of
corporate assets by such agent, disclosure of confidential information in
violation of such agent's fiduciary or contractual obligations to the
corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been
20
<PAGE>
"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, Section 145 of the General Corporation Law of Delaware
shall, for the purposes of this Section 6, be interpreted as follows: an
"other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of
1974," as amended from time to time; the corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to
an employee benefit plan pursuant to such Act of Congress shall be deemed
"fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
---------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred upon
the Board of Directors by the certificate of incorporation it shall not divest
or limit the power of the stockholders to adopt, amend or repeal bylaws.
21
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
PORTAL SOFTWARE, INC.
The undersigned, Jack L. Acosta, hereby certifies that he is the duly
elected and acting Secretary of Portal Software, Inc., a Delaware corporation
(the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws
of said Corporation as duly adopted by the Board of Directors on February 24,
1999 and the Stockholders on ________, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of _______, 1999.
---------------------------------------
Jack L. Acosta
Secretary
22
<PAGE>
EXHIBIT 5.1
April 14, 1999
Goldman, Sachs & Co.
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
As Representatives of the
Several Underwriters
c/o Goldman, Sachs & Co.
Ladies and Gentlemen:
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 February 26, 1999, as thereafter amended or
supplemented (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 4,000,000
shares of the Company's Common Stock (the "Shares"). The Shares include an
over-allotment option granted to the Underwriters to purchase 600,000
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 this 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 10.4
PORTAL SOFTWARE, INC.
1995 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
(Amended and Restated as of February 24, 1999)
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan is intended to promote the
interests of Portal Software, Inc., a California corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary).
B. The provisions of Articles One and Four shall apply to both the
equity programs under the Plan and shall accordingly govern the interests
of all persons under the Plan.
C. Except as otherwise specifically noted, all share numbers in this
document reflect the 3-for-1 split of the Common Stock, authorized by the
Board in April, 1999 and approved by the shareholders in April, 1999.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be
delegated to the Committee. Members of the Committee shall serve for such
period of time as the Board may determine and shall be subject to removal
by the Board at any time. The Board may also at any time terminate the
functions of the Committee and reassume all powers and authority previously
delegated to the Committee.
<PAGE>
B. Plan Administrator shall have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance
thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants who provide services to the Corporation
(or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the option grants under the Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times at which each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed
24,000,000 shares.
_________________________
/1/ Reflects a 5-for-1 stock split effected on June 24, 1996 and the 3-for-1
stock split adopted by the Board in April, 1999 and approved by the
shareholders in April, 1999. Includes the 6,000,000-share (2,000,000 pre-
split) increase authorized by the Board of Directors on February 24, 1999,
subject to shareholder approval.
2
<PAGE>
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. All shares issued under the Plan, whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan.
C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan and (ii) the number and/or class of securities and the exercise price per
share in effect under each outstanding option in order to prevent the dilution
or enlargement of benefits thereunder. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive. In no event shall any such
adjustments be made in connection with the conversion of one or more outstanding
shares of the Corporation's preferred stock into shares of Common Stock.
3
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
1. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written instructions
(a) to a Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required to
be withheld by the Corporation by reason of such exercise and (b) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale transaction.
4
<PAGE>
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. Effect of Termination of Service. The following provisions shall
--------------------------------
govern the exercise of any options held by the Optionee at the time of cessation
of Service or death:
(i) Should the Optionee cease to remain in Service for
any reason other than Disability or death, then the Optionee shall have a
period of three (3) months following the date of such cessation of Service
during which to exercise each outstanding option held by such Optionee.
(ii) Should such Service terminate by reason of
Disability, then the Optionee shall have a period of six (6) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee. However, should such
Disability be deemed to constitute Permanent Disability, then the period
during which each outstanding option held by the Optionee is to remain
exercisable shall be extended by an additional six (6) months so that the
exercise period shall be the twelve (12)-month period following the date of
the Optionee's cessation of Service by reason of such Permanent Disability.
(iii) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the Optionee's estate
or the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution shall
have a period of twelve (12) months following the date of the Optionee's death
during which to exercise each such option.
(iv) Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent it is not exercisable for vested shares on
the date of such cessation of Service.
5
<PAGE>
D. Shareholder Rights. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the discretion
---------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, all or (at the discretion of the Corporation and with the consent of the
Optionee) any of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
any option grant or any shares of Common Stock subject to the option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur one (1) year after the option grant date. However, this minimum
vesting requirement shall not be applicable with respect to any option granted
to a director, officer or consultant.
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Option Grant Program. Such right of first refusal shall be exercisable
in accordance with the terms established by the Plan Administrator and set forth
in the document evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become
6
<PAGE>
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with such
Corporate Transaction.
B. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in the consummation of such Corporate Transaction,
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.
C. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
and to grant in substitution therefor new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new option grant date.
V. ADDITIONAL AUTHORITY
The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service or death from the
limited period otherwise in effect for that option to such greater period of
time as the Plan Administrator shall deem appropriate, but in no event beyond
the expiration of the option term.
7
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The purchase price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the stock issuance date.
(ii) If the person to whom the stock issuance is made is a
10% Shareholder, then the purchase price per share shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the stock issuance date.
2. Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for one or both of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
8
<PAGE>
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Disability or other event
designated by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement. The Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, beginning one (1) year
after the stock issuance date. However, this minimum vesting requirement shall
not be applicable with respect to any stock issued to a director, officer or
consultant.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further shareholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
C. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
9
<PAGE>
II. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
10
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such person
under the Plan by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. Promissory notes may be authorized with or without
security or collateral. However, any promissory notes delivered by a consultant
must be secured by property other than the purchased shares of Common Stock. In
all events, the maximum credit available to the Optionee or Participant may not
exceed the sum of (i) the aggregate option exercise price or purchase price
payable for the purchased shares plus (ii) any Federal, state and local income
and employment tax liability incurred by the Optionee or the Participant in
connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan became effective when adopted by the Board on December
22, 1995 and was approved by the Corporation's shareholders on March 8, 1996.
The Plan was restated and amended on July 18, 1997 to increase the number of
shares issuable thereunder (the "1997 Restatement"). The 1997 Restatement was
adopted by the Board on July 18, 1997 and approved by the Corporation's
shareholders on July 18, 1997. The Plan was amended on April 17, 1998 to
increase the number of shares issuable thereunder by an additional 1,140,000
shares of Common Stock (the "April 1998 Amendment"). The April 1998 Amendment
was approved by the Corporation's shareholders on June 22, 1998. The Plan was
amended on August 25, 1998 to increase the number of shares issuable thereunder
by an additional 1,250,000 shares of Common Stock (the "August 1998 Amendment").
The August 1998 Amendment was approved by the Corporation's shareholders on
August 31, 1998. The foregoing information has been provided on a historical
basis and does not reflect the 3-for-1 split of the Common Stock authorized by
the Board in April, 1999 and approval by the shareholders in April, 1999.
B. On February 24, 1999, the Board amended the Plan to increase the
number of shares reserved for issuance under the Plan by an additional 6,000,000
shares of Common Stock (the "February 1999 Amendment"). No options shall be
granted, and no shares shall be issued, on the basis of the February 1999
Amendment, unless and until the such Amendment is approved by the shareholders.
Should such shareholder approval not be obtained by February 23, 2000, then such
share increase shall not be implemented. Subject to the foregoing limitations,
the Plan Administrator may make option grants under the Plan at any time before
the date fixed herein for the termination of the Plan.
C. The Plan shall terminate upon the earliest of (i) December 21,
2005, (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of options or the issuance of
shares (whether vested or unvested) under the Plan or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Upon such
Plan termination, all options and unvested stock issuances outstanding under
the Plan shall continue to have full force and effect in accordance with the
provisions of the documents evidencing such options or issuance.
11
<PAGE>
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan,
unless the Optionee or the Participant consents to such amendment or
modification. In addition, the Board shall not, without the approval of the
Corporation's shareholders, (i) increase the maximum number of shares issuable
under the Plan, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) materially modify the
eligibility requirements for Plan participation or (iii) materially increase the
benefits accruing to Plan participants.
B. Options to purchase shares of Common Stock may be granted under
the Plan and shares of Common Stock may be issued under the Plan that are in
each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under the Plan are
held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short-Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
12
<PAGE>
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of any
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under and
each Participant in the Plan, unless such individual is a key Employee whose
duties in connection with the Corporation (or any Parent or Subsidiary) assure
such individual access to equivalent information.
13
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as amended.
----
C. Committee shall mean a committee of two (2) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
F. Corporation shall mean Portal Software, Inc., a California
-----------
corporation.
G. Disability shall mean the inability of the Optionee or the
----------
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances. Disability shall be
deemed to constitute Permanent Disability in the event that such Disability is
expected to result in death or has lasted or can be expected to last for a
continuous period of twelve (12) months or more.
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
A-1
<PAGE>
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
K. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
L. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
M. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
N. Option Grant Program shall mean the option grant program in effect
--------------------
under the Plan.
O. Optionee shall mean any person to whom an option is granted under the
--------
Option Grant Program.
P. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
Q. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
R. Plan shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan, as set forth in this document.
A-2
<PAGE>
S. Plan Administrator shall mean either the Board or the Committee, to
------------------
the extent the Committee is at the time responsible for the administration of
the Plan.
T. Service shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non--
employee member of the board of directors or a consultant, except to the extent
otherwise specifically provided in the documents evidencing the option grant or
stock issuance.
U. Stock Exchange shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
V. Stock Issuance Agreement shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
W. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
X. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
Y. 10% Shareholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-3
<PAGE>
EXHIBIT 10.5
PORTAL SOFTWARE, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Portal Software, Inc., a Delaware corporation, by providing eligible persons in
the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,
- the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special option grant.
<PAGE>
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
C. All share numbers in this document reflect the 3-for-1 split of
the Common Stock authorized by the Board in April, 1999 and approved by the
stockholders in April, 1999.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee shall be made by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
<PAGE>
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors
of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such option grants, the time or
times when the grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when the
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration for such shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to those individuals who
continue to serve as non-employee Board members at one or more Annual
Stockholders Meetings held after the Underwriting Date, whether or not those
individuals may have previously been in the employ of the Corporation (or any
Parent or Subsidiary).
F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed 16,275,000
shares. Such reserve shall consist of (i) the number of shares estimated to
remain available for issuance, as of the Plan Effective Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to outstanding options under that Predecessor Plan and the
6,000,000-share increase to such plan approved by the stockholders in April
1999, (ii) plus an additional increase of approximately 3,600,000 shares to be
approved by the Corporation's stockholders prior to the Plan Effective Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each fiscal
year during the term of the Plan, beginning with fiscal year 2001 (the fiscal
year beginning February 1, 2000), by an amount equal to four percent (4%) of the
shares of Common Stock outstanding on the last trading day of the immediately
preceding fiscal year, but in no event shall any such annual increase exceed
5,250,000 shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
<PAGE>
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities by which the share reserve is to increase each fiscal year pursuant
to the automatic share increase provisions of Section V.B of this Article One,
(iii) the maximum number and/or class of securities for which any one person may
be granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year, (iv) the number and/or
class of securities for which grants are subsequently to be made under the
Automatic Option Grant Program to new and continuing non-employee Board members,
(v) the number and/or class of securities and the exercise price per share in
effect under each outstanding option under the Plan and (vi) the number and/or
class of securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution or by the Optionee's designated
beneficiary or beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
<PAGE>
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also
designate one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).
<PAGE>
To the extent the Employee holds two (2) or more such options which become
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
the total number of shares of Common Stock at the time subject to such option
and may be exercised for any or all of those shares as fully vested shares of
Common Stock. However, an outstanding option shall not become exercisable on
such an accelerated basis if and to the extent: (i) such option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on any shares for which the
option is not otherwise at that time exercisable and provides for subsequent
payout in accordance with the same exercise/vesting schedule applicable to those
option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.
<PAGE>
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of
such Corporate Transaction, become fully exercisable for the total number of
shares of Common Stock at the time subject to those options and may be exercised
for any or all of those shares as fully vested shares of Common Stock, whether
or not those options are to be assumed in the Corporate Transaction. In
addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall not be assignable
in connection with such Corporate Transaction and shall accordingly terminate
upon the consummation of such Corporate Transaction, and the shares subject to
those terminated rights shall thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become fully exercisable for the total
number of shares of Common Stock at the time subject to those options in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
-------
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may structure one or more of the Corporation's repurchase
rights so that those rights shall immediately terminate with respect to any
shares held by the Optionee at the time of his or her Involuntary Termination,
and the shares subject to those terminated repurchase rights shall accordingly
vest in full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of a
Change in Control, become fully exercisable for the total number of shares of
Common Stock at the time subject to those options and may be exercised for any
or all of those shares as fully vested shares of Common Stock. In addition, the
Plan Administrator shall have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall terminate automatically upon the consummation
of such Change in Control, and the shares subject to those terminated rights
shall thereupon vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully vested shares until the earlier
-------
of (i) the expiration of the option term or (ii) the expiration of the one (1)
year period measured from the effective date of Optionee's cessation of Service.
<PAGE>
H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then
the distribution to which the Optionee shall be entitled may be made in
shares of Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a)
-----
<PAGE>
five (5) business days after the receipt of the rejection notice or (b) the
last day on which the option is otherwise exercisable in accordance with
the terms of the documents evidencing such option, but in no event may such
rights be exercised more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each individual
holding one or more options with such a limited stock appreciation right
shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Take-Over) to surrender each such option to
the Corporation. In return for the surrendered option, the Optionee shall
receive a cash distribution from the Corporation in an amount equal to the
excess of (A) the Take-Over Price of the shares of Common Stock at the time
subject to such option (whether or not the Optionee is otherwise vested in
those shares) over (B) the aggregate exercise price payable for those
shares. Such cash distribution shall be paid within five (5) days
following the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall terminate immediately following the Corporate Transaction, except
to the extent assumed by the successor corporation (or parent thereof) in such
Corporate Transaction. Any option so assumed and shall remain exercisable for
the fully-vested shares until the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the expiration of the three (3)-year period measured
from the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable for the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock.
<PAGE>
The option shall remain so exercisable until the earliest to occur of (i) the
--------
expiration of the ten (10)-year option term, (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Service,
(iii) the termination of the option in connection with a Corporate Transaction
or (iv) the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
<PAGE>
3. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the non-
attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance Program
shall automatically terminate, and no shares of Common Stock shall actually be
issued in satisfaction of those awards, if the performance goals established for
such awards are not attained. The Plan Administrator, however, shall have the
discretionary authority to issue shares of Common Stock under one or more
outstanding share right awards as to which the designated performance goals have
not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service
<PAGE>
should subsequently terminate by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those repurchase rights are
assigned to the successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. On the date of each Annual Stockholders Meeting held
-----------
after the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 6,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 6,000 share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service. Stockholder approval of the Plan shall also
constitute pre-approval of each option subsequently granted under the Automatic
Option Grant Program and the subsequent exercise of that option in accordance
with the provisions of this Article Five.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares as fully-vested shares of Common
Stock.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as
the beneficiary or beneficiaries of his or her outstanding
<PAGE>
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution) shall have a twelve
(12)-month period following the date of such cessation of Board service in
which to exercise each such option.
(ii) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any shares
for which the option has not been exercised.
II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. Immediately following the consummation of a Corporate Transaction,
each automatic option grant shall terminate and cease to be outstanding, except
to the extent assumed by the successor corporation (or parent thereof).
B. Following any Change in Control, each automatic option grant shall
remain exercisable for the shares at the time subject to that option until the
expiration or sooner termination of the option term or the surrender of the
option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option over (ii) the aggregate exercise price
payable for such shares. Such cash distribution shall be paid within five (5)
days following the surrender of the option to the Corporation. Stockholder
approval of the Plan shall constitute pre-approval of the grant of each such
limited cash-out right and the subsequent exercise of that right in accordance
with the terms of this Paragraph D. Accordingly, no approval or consent of the
Board or any Plan Administrator shall be required at the time of the actual
option surrender and cash distribution.
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the Program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board for that year to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to first day of the calendar year
for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
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1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
<PAGE>
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each month of Board service over the twelve (12)-month period
measured from the grant date. Each option shall have a maximum term of ten (10)
years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
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Article Six may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as
the beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as a
-----------------------------
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
<PAGE>
whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
-------
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall terminate immediately following the Corporate Transaction, except
to the extent assumed by the successor corporation (or parent thereof) in such
Corporate Transaction. Any option so assumed and shall remain exercisable for
the fully-vested shares until the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the expiration of the three (3)-year period measured
from the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable for the total number of shares of
Common Stock at the time subject to such option and may be exercised for any or
all of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the earliest to occur of (i) the expiration of the
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ten (10)-year option term, (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Board service, (iii) the
termination of the option in connection with a Corporate Transaction or (iv)
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. Stockholder approval of the Plan shall constitute
pre-approval of the grant of each such limited cash-out right and the subsequent
exercise of that right in accordance with the terms of this Paragraph C.
Accordingly, no approval or consent of the Board or any Plan Administrator shall
be required at the time of the actual option surrender and cash distribution.
<PAGE>
D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
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I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders.
If such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i)
--------
February 23, 2009, (ii) the date on which all shares available for issuance
under the Plan shall have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Should the Plan terminate on February 23, 2009, then all option
grants and unvested stock issuances outstanding at that time shall continue to
have force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained
within twelve (12) months after the date the first such excess issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
<PAGE>
APPENDIX
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The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under the Plan.
B. Board shall mean the Corporation's Board of Directors.
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C. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
F. Corporate Transaction shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
<PAGE>
G. Corporation shall mean Portal Software, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Portal Software, Inc. which shall by appropriate
action adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under the Plan.
J. Eligible Director shall mean a non-employee Board member eligible
-----------------
to participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
-----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
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embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
<PAGE>
U. Parent shall mean any corporation (other than the Corporation) in
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an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
-------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plan shall mean the Corporation's 1995 Stock
----------------
Option/Stock Issuance Plan in effect immediately prior to the Plan Effective
Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or
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the New York Stock Exchange.
HH. Stock Issuance Agreement shall mean the agreement entered into by
------------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
JJ. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market
--------------- -------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. Taxes shall mean the Federal, state and local income and
-----
employment tax withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
MM. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
NN. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
OO. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
<PAGE>
EXHIBIT 10.6
PORTAL SOFTWARE, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Portal Software, Inc., a Delaware Corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
All share numbers in the document reflect the 3-for-1 split of the
Common Stock authorized by the Board in April 1999 and approved by the
shareholders in April 1999.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to 1,800,000
shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of February each
year during the term of the Plan, beginning February 1, 2000, by an amount equal
to two percent (2%) of the total number of shares of Common Stock outstanding on
the last trading day of the immediately preceding January, but in no event shall
any such annual increase exceed 2,000,000 shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable by all Participants in the aggregate on any one Purchase
Date (iv) the number and class of securities and the price per share in effect
under each outstanding purchase right in order
<PAGE>
to prevent the dilution or enlargement of benefits thereunder and (v) the
maximum number and/or class of securities by which the share reserve is to
increase automatically each calendar year pursuant to the provisions of Section
III.B.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of that offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in May
2001. The next offering period shall commence on the first business day in June
2001, and subsequent offering periods shall commence as designated by the Plan
Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in June to the last business day in November each year and from the
first business day in December each year to the last business day in May in the
following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and end on the last
business day in November 1999.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new
offering period shall have a duration of twenty (24) months, unless a shorter
duration is established by the Plan Administrator within five (5) business days
following the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator.
The Participant may not, however, effect more than one (1) such reduction
per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum) shall become effective on the start date of the first
Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the
Participant's book account under the Plan, but no interest shall be paid on the
balance from time to time outstanding in such account. The amounts collected
from the Participant shall not be required to be held in any segregated account
or trust fund and may be commingled with the general assets of the Corporation
and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed one thousand two hundred fifty (1,250) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum aggregate number of shares of Common Stock purchasable
by all Participants on any one Purchase Date shall not exceed three hundred
thousand (300,000) shares, subject to periodic adjustments in the event of
certain changes in the Corporation's capitalization. However, the Plan
Administrator shall have the discretionary authority, exercisable prior to the
start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in the aggregate by all Participants on each Purchase Date during that
offering period.
4.
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in the
aggregate on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not resume participation in the offering period for
which the terminated purchase right was granted unless he or she re-enrolls
in the Plan (by making a timely filing of the prescribed enrollment forms)
on or before a regularly-scheduled Entry Date into that offering period.
In such event, the Participant shall be granted a new purchase right with a
new purchase price based upon the Fair Market Value per share on Common
Stock on his or her new Entry Date.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (x) within ninety (90) days
following the commencement of such leave or (y) prior to the expiration of
any longer period for which such Participant's right to reemployment with
the Corporation is guaranteed by either statute or contract,
5.
<PAGE>
his or her payroll deductions under the Plan shall automatically
resume at the rate in effect at the time the leave began, unless the
Participant withdraws from the Plan prior to his or her return. An
individual who returns to active employment following a leave of absence
which exceeds in duration the applicable (x) or (y) time period will be
treated as a new Employee for purposes of subsequent participation in the
Plan and must accordingly re-enroll in the Plan (by making a timely filing
of the prescribed enrollment forms) on or before his or her scheduled Entry
Date into the offering period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
-----
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in the
aggregate.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000.00) worth of Common Stock (determined on the
basis of the Fair Market Value per share on the date or dates of grant) for
each calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on February 24, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in May, 2009, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction.
No further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan or the
maximum number of shares purchasable per Participant or in the aggregate on any
one Purchase Date, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) alter the purchase price
formula so as to reduce the purchase price payable for the shares of Common
Stock purchasable under the Plan or (iii) modify the eligibility requirements
for participation in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
Schedule A
----------
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Portal Software, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Cash Earnings shall mean the (i) regular base salary paid to a
-------------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, profit-sharing distributions and other
incentive-type payments received during such period. Such Cash Earnings shall
be calculated before deduction of (A) any income or employment tax withholdings
or (B) any and all contributions made by the Participant to any Code Section
401(k) salary deferral plan or Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall not include any contributions made on the Participant's
behalf by the Corporation or any Corporate Affiliate to any employee benefit or
welfare plan now or hereafter established (other than Code Section 401(k) or
Code Section 125 contributions).
C. Change in Control shall mean a change in ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by an person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. Corporation shall mean Portal Software, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Portal Software, Inc. which shall by appropriate
action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering. Any Corporate Affiliate which becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be November 30, 1999.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in June
----------------------
and December each year on which an Eligible Employee may first enter an offering
period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
EXHIBIT 10.10
PORTAL SOFTWARE, INC.
STOCK PURCHASE AGREEMENT
April 13, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. Purchase and Sale of Stock.......................... 1
1.1 Sale and Issuance of Stock..................... 1
1.2 The Closing.................................... 1
2. Representations and Warranties of the Company....... 2
2.1 Organization and Good Standing................. 2
2.2 Authorization.................................. 2
2.3 Valid Issuance of Stock........................ 2
2.4 Litigation..................................... 2
2.5 Properties..................................... 2
2.6 Compliance with Other Documents................ 2
3. Representations and Warranties of the Investor...... 2
3.1 Authorization.................................. 2
3.2 Investigation.................................. 3
3.3 Accredited Investor............................ 3
3.4 Purchase Entirely for Own Account.............. 3
4. Conditions to the Investor's Obligation at Closing.. 3
4.1 Representations and Warranties................. 3
4.2 Securities Laws................................ 3
4.3 Authorizations................................. 3
4.4 Initial Public Offering of Common Stock........ 3
5. Conditions to the Company's Obligations at Closing.. 3
5.1 Representations and Warranties................. 3
5.2 Securities Laws................................ 3
5.3 Authorizations................................. 4
5.4 Initial Public Offering of Common Stock........ 4
5.5 Payment of Purchase Price...................... 4
6. Covenants of the Company and the Investor........... 4
6.1 Agreement Not to Transfer...................... 4
6.2 Market Stand-Off............................... 4
6.3 Notice of Intention to Transfer................ 4
6.4 Voting Agreements.............................. 5
6.5 Registration of Stock.......................... 5
i
<PAGE>
7. Miscellaneous....................................... 5
7.1 Governing Law................................. 5
7.2 Survival; Additional Securities............... 5
7.3 Successors and Assigns........................ 6
7.4 Entire Agreement.............................. 6
7.5 Notices....................................... 6
7.6 Amendments and Waivers........................ 6
7.7 Legal Fees.................................... 6
7.8 Expenses...................................... 6
7.9 Titles and Subtitles.......................... 6
7.10 Counterparts.................................. 6
7.11 Severability.................................. 7
7.12 Confidentiality............................... 7
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 13th day of April
1999, by and between Portal Software, Inc., a California corporation (the
"Company") and Cisco Systems, Inc., a California corporation (the "Investor").
- -------- --------
WHEREAS, the Investor has indicated a desire to purchase 3,000,000
shares of Common Stock from the Company.
WHEREAS, the Company has indicated a desire to sell 3,000,000 shares
of Common Stock to the Investor and has agreed to register such shares under the
Securities Act of 1933, as amended (the "Securities Act") on the terms set forth
herein.
WHEREAS, the Company and the Investor have agreed that this Agreement
shall constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Stock. Subject to the terms and conditions of
--------------------------
this Agreement, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company 3,000,000 shares/1/ of the Company's Common
---
Stock (the "Stock"), having the rights, preferences, privileges and restrictions
-----
set forth in the form of Amended and Restated Certificate of Incorporation of
the Company (the "Restated Certificate") to be filed with the Delaware Secretary
--------------------
of State prior to the Closing (as defined below).
1.2 The Closing. The purchase and sale of the Stock shall be held at
-----------
the Company's offices concurrently with the closing of the Company's initial
public offering (the "IPO") or, if later, upon satisfaction or waiver of each of
the conditions set forth in Sections 4 and 5 (the "Closing"). At the Closing,
-------
the Company will deliver the Stock to the Investor against payment of the
purchase price therefor by check payable to the order of the Company or by wire
transfer. The per share purchase price for the Stock shall be equal to the per
share price paid by the public for the Company's Common Stock in the IPO, less
any underwriter discounts and commissions.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investor that:
- -------------------------
/1/ The 3,000,000 shares have been calculated assuming the Company effects a
- ---
three-for-one split of its outstanding Common Stock prior to the Closing. In
the event that the Company does not effect this three-for-one stock split, the
number of shares to be purchased shall be adjusted accordingly.
<PAGE>
2.1 Organization and Good Standing. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to carry on its
business as now conducted.
2.2 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder, and the authorization, issuance and delivery of the Stock
has been taken or will be taken prior to the Closing, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and by
general principles of equity.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and
-----------------------
delivered in accordance with the terms hereof for the consideration expressed,
will be duly and validly issued, fully paid and nonassessable and, based in part
upon the representations of the Investor in this Agreement, will be issued in
compliance with all applicable federal and state securities laws.
2.4 Litigation. Except as set forth in the Company's registration
----------
statement prepared in connection with the IPO, as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
--- ------------
Statement"), there are no actions, proceedings or investigations pending or, to
- ---------
the best of Company's knowledge, any basis therefor or threat thereof, against
or affecting the Company, that, either in any case or in the aggregate, would
result in any material adverse change in the business, financial condition, or
results of operations of the Company.
2.5 Properties. To the best of the Company's knowledge (but without
----------
having conducted any special investigation), the Company has (i) good and
marketable title to its properties and assets and has good title to all its
leasehold interests, and (ii) sufficient title, license and/or ownership of all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for its business as now
conducted on the date hereof.
2.6 Compliance with Other Documents. The execution and delivery of
-------------------------------
this Agreement, consummation of the transactions contemplated hereby, and
compliance with the terms and provisions hereof will not conflict with or result
in a breach of the terms and conditions of, or constitute a default under the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
3. Representations and Warranties of the Investor. The Investor hereby
----------------------------------------------
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
-------------
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
2
<PAGE>
3.2 Investigation. The Investor acknowledges that it has had an
-------------
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's president. The Investor further acknowledges having
had access to information about the Company that it has requested or considers
necessary for purposes of purchasing the Stock.
3.3 Accredited Investor. The Investor is an "accredited investor" as
-------------------
such term is defined in Regulation D adopted by the SEC.
3.4 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Stock will be acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same.
4. Conditions to the Investor's Obligation at Closing. The obligation of
--------------------------------------------------
the Investor to purchase the Stock at the Closing is subject to the fulfillment
to the Investor's satisfaction on or prior to the Closing of the following
conditions:
4.1 Representations and Warranties. The representations and
------------------------------
warranties made by the Company in Section 2 hereof shall be true and correct
when made, and shall be true and correct as of the Closing with the same force
and effect as if they had been made on and as of such date, subject to changes
contemplated by this Agreement.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
---------------
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act and qualification requirements of all applicable state
securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The initial public
---------------------------------------
offering of the Company's Common Stock shall have occurred.
5. Conditions to the Company's Obligations at Closing. The obligation of
--------------------------------------------------
the Company to sell the Stock at the Closing is subject to the fulfillment to
the Company's satisfaction on or prior to the Closing of the following
conditions:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 hereof shall be true as of the
Closing with the same force and effect as if they had been made on and as of
such date, subject to changes contemplated by this Agreement.
5.2 Securities Laws. The offer and sale of the Stock to the Investor
---------------
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act qualification requirements of all applicable state securities
laws.
3
<PAGE>
5.3 Authorizations. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
5.4 Initial Public Offering of Common Stock. The initial public
---------------------------------------
offering of the Company's Common Stock shall have occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to
-------------------------
the Company the purchase price for the Stock as set forth in Section 1.2 hereof.
6. Covenants of the Company and the Investor.
-----------------------------------------
6.1 Agreement Not to Transfer.
-------------------------
(a) Prior to the first anniversary of the Closing, the Investor
shall not, directly or indirectly, Transfer or offer to Transfer any shares of
the Stock other than to affiliates who agree to be bound by the terms of this
Agreement, unless the Company consents to such Transfer and the transferee
agrees to be bound by this Agreement.
(b) In order to enforce the Transfer Restrictions, the Company
may impose stop-transfer instructions with respect to the Stock until the end of
the restricted period.
(c) As used in this Agreement, the term "Transfer" shall mean
any sale, transfer, assignment, hypothecation, encumbrance or other disposition,
whether voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by the secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the Transfer Restrictions (which
----------------
shall in no way be limited by the following), in connection with any
underwritten public offering by the Company of its equity securities pursuant to
an effective registration statement filed under the Securities Act, the Investor
shall not Transfer or offer to Transfer any shares of the Stock without the
prior written consent of the Company and its underwriters. Such restriction (the
"Market Stand-Off") shall be in effect for such period of time from and after
----------------
the effective date of the final prospectus for the offering as may be requested
by the Company or such underwriters; provided, however, that (i) such Market
-------- -------
Stand-Off shall not exceed one hundred eighty (180) days, and (ii) the Investor
shall be subject to the Market Stand-Off only if the officers, directors and
other stockholders of the Company are also subject to similar restrictions. In
order to enforce the Market Stand-Off, the Company may impose stop-transfer
instructions with respect to the Stock until the end of the applicable stand-off
period.
6.3 Notice of Intention to Transfer. In the event the Investor plans
-------------------------------
to Transfer shares of the Stock in one or more transactions, the Investor shall
inform the Company of such intention to Transfer such shares fifteen (15) days
prior to such Transfer. Investor shall agree that any transfer, sale or other
disposition of the Company's Common Stock shall be
4
<PAGE>
through an orderly disposition, including, at the request of the Company,
through a broker-dealer recommended by the Company.
6.4 Voting Agreements. The following provision will be applicable at
-----------------
any time the Investor owns or controls in excess of 9.5% of the Voting
Securities (as defined below): In the event that the Board of Directors of the
Company approves a sale of substantially all of the assets or capital stock of
the Company or a merger in which the Company would not be the surviving
corporation, the Investor agrees to vote all shares of Voting Securities owned
by it with respect to such sale of substantially all of the assets or capital
stock or merger in the same proportion as the votes cast by all other
shareholders of the Company entitled to vote on such matter (other than the
Investor) at such time as such matter is presented for a vote of the
shareholders of the Company. The Investor, as a holder of Voting Securities,
shall be present, in person or by proxy, at all meetings of shareholders of the
Company so that all shares of Voting Securities beneficially owned by it may be
counted for the purpose of determining the presence of a quorum at such
meetings. For purposes of this Agreement, (i) the term "Voting Securities" shall
refer to all securities of the Company entitled to vote generally for the
election of directors, and (ii) the term "beneficial ownership" shall have the
meaning set forth in Rule 13d-3 under the Exchange Act.
6.5 Registration of Stock. The Company agrees that, upon request by
---------------------
the Investor, it will effect registration of the Stock in accordance with the
provisions contained in Exhibit A attached hereto. The Investor understands and
---------
agrees that (i) the Stock will be characterized as "restricted securities" under
the federal securities laws inasmuch as it is being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances, and (ii) each
certificate representing the Stock and any other securities issued in respect of
the Stock upon any stock split, stock dividend, recapitalization, merger or
similar event (unless no longer required in the opinion of counsel for the
Company) shall be stamped or otherwise imprinted with appropriate legends
mandated by federal and state securities laws.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California, without
regard to the conflict of law provisions thereof.
7.2 Survival; Additional Securities. The representations and
-------------------------------
warranties set forth in Sections 2 and 3 shall survive until the Closing. The
covenants and agreements set forth in Section 6 shall survive in accordance with
their terms. Any new, substituted or additional securities which are by reason
of any stock split, stock dividend, recapitalization or reorganization
distributed with respect to the Stock ("Stock Distributions") shall be
-------------------
immediately subject to the covenants and agreements set forth in Section 6 to
the same extent the Stock is at such time covered by such provisions.
5
<PAGE>
7.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the parties hereto. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Notwithstanding anything to the
contrary contained herein, the covenants set forth in Section 6 shall not be
binding upon any entity (other than an affiliate of the Investor) which acquires
any shares of the Stock or a Stock Distribution in a transaction permitted
hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire
----------------
understanding and agreement between the parties with regard to the subject
matter hereof.
7.5 Notices. Except as otherwise provided, all notices and other
-------
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1) business day
after the day of deposit with Federal Express or similar overnight courier,
freight prepaid, if delivered by overnight courier or (iv) one (1) business day
after the day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed, (a) if
to the Investor, at the Investor's address set forth below its signature, or at
such other address as the Investor shall have furnished to the Company in
writing, or (b) if to the Company, at its address as set forth below its
signature, or at such other address as the Company shall have furnished to the
Investor in writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of the Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
7.7 Legal Fees. In the event of any action at law, suit in equity or
----------
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
--------
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be an original, but all of which together shall constitute
one instrument.
6
<PAGE>
7.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the
---------------
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish, or make accessible to anyone any
confidential information, knowledge, or data concerning or relating to the
business or financial affairs of such other party to which said party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, or the performance of its obligations hereunder.
[Signature Page to Follow]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year hereinabove first written.
PORTAL SOFTWARE, INC.
20883 Stevens Creek Boulevard
Cupertino, CA 95014
Attn: John E. Little, President
and Chief Executive Officer
/s/ Jack Acosta
- ------------------------------
By:
CISCO SYSTEMS, INC.
170 W. Tasman Drive
San Jose, CA 95134
Attn: Dan Scheinman, Vice President, Legal and Government Affairs
/s/ John Chambers
- ------------------------------
By:
8
<PAGE>
EXHIBIT A
---------
1. Registration Rights. The Company covenants and agrees as follows:
-------------------
1.1 Definitions. For purposes of this Exhibit A, capitalized terms
----------- ---------
used herein and not otherwise defined shall have the meanings ascribed to them
in the Stock Purchase Agreement between the Company and the Investor to which
this Exhibit A is attached. In addition, the following terms used herein shall
---------
have the following meanings:
(a) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(b) The term "1934 Act" means the Securities Exchange Act of
1934, as amended.
(c) The term "register", "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
1.2 Request for Registration.
------------------------
(a) If the Company shall receive a written request from the
Investor which request may be received commencing ten months after the Closing
date, that the Company effect a registration on a Form S-3 and any related
qualification or compliance with respect to the Stock, then the Company shall
promptly commence preparation of such registration statement, and as
expeditiously as reasonably possible when the Company is eligible to use Form S-
3, effect the registration of all, but not less than all, such Stock on Form S-3
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all of the Stock. The Company
shall have no obligation to effect any registration of less than all of the
Stock.
(b) Notwithstanding anything to the contrary in this Section
1.2, the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 1.2: (i) if the Company
shall furnish to the Investor a certificate signed by the President of the
Company stating that, in the good faith judgment of the Board of Directors of
the Company, such registration should be deferred due to material events
directly relating to the Company, in which event the Company shall have the
right to defer the filing of the Form S-3 for a period of not more than 90 days
after receipt of the request of the Investor under this Section 1.2 (provided,
however, that the Company may defer such registration only once); or (ii) in any
particular jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in effecting such
registration, qualification or compliance.
A-1
<PAGE>
(c) The Company shall not be obligated to effect, or to take any
action to effect, any registration pursuant to this Section 1.2 after the
earlier to occur of the following events: (i) the Company has effected one
registration pursuant to this Section 1.2, and such registration has been
declared or ordered effective and otherwise satisfies and continues to satisfy
the terms and conditions of this Section 1.2; (ii) the Company has voluntarily
effected the registration of all of the Stock without having first received a
request for such registration pursuant to this Section 1.2 (a "Voluntary
---------
Registration"), and such Voluntary Registration has been declared or ordered
- ------------
effective and otherwise satisfies and continues to satisfy the terms and
conditions of this Section 1.2; or (iii) if Form S-3 is not available for such
offering by the Investor.
1.3 Obligations of the Company. Whenever required under Section 1.2
--------------------------
to effect the registration on Form S-3 of the Stock, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a Form S-3 with respect to
such Stock and use its best efforts to cause such registration statement to
become effective as soon as reasonably practicable after the mailing of the
request for such registration but in no event later than ninety (90) days after
such mailing. The Company shall keep such registration statement effective until
the earlier of (i) two (2) years after the Closing, (ii) the distribution of all
of the Stock as contemplated in the registration statement has been completed,
and (iii) the date which all shares of the Stock held by the Investor may
immediately be sold under Rule 144 during any 90-day period.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Investor such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as the Investor may reasonably
request in order to facilitate the disposition of the Stock.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Investor;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) Notify the Investor covered by such registration statement
at any time when a prospectus relating thereto is required to be delivered under
the Act of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing.
A-2
<PAGE>
(f) Cause all such Stock registered pursuant hereunder to be
listed on each securities exchange on which similar securities issued by the
Company are then listed.
(g) Provide a transfer agent and registrar for all of the Stock
registered pursuant hereunder and a CUSIP number for all such Stock, in each
case not later than the effective date of such registration.
1.4 Investor Obligation to Furnish Information. It shall be a
------------------------------------------
condition precedent to the obligations of the Company to take any action
pursuant hereto with respect to the Stock that the Investor shall furnish to the
Company such information regarding itself, the Stock, and the intended method of
disposition of such securities as shall be required to effect the registration
of such Stock.
1.5 Expenses of Registration. All expenses incurred in connection
------------------------
with registrations, filings or qualifications pursuant hereto, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company
(including fees and disbursements of counsel for the Company in its capacity as
counsel to the Investor hereunder but excluding the fees and disbursements of
any other counsel for the Investor) shall be borne by the Company; provided,
however, that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant hereto if the registration request is
subsequently withdrawn at the request of the Investor, unless the Investor
agrees to forfeit its right to any demand registration pursuant hereto; provided
further, however, that if at the time of such withdrawal, the Investor has
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Investor at the time of its request and has
withdrawn the request with reasonable promptness following disclosure by the
Company of such material adverse change, then the Investor shall not be required
to pay any of such expenses and shall retain its right of registration pursuant
to Section 1.2.
1.6 Indemnification. In the event any Stock is included in a
---------------
registration statement under Section 1.2:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless the Investor, any underwriter (as defined in the Act) for the
Investor and each person, if any, who controls the Investor or underwriter
within the meaning of the Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
---------
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, the 1934 Act or any state
securities law; and the Company will pay to the Investor, or such underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or
A-3
<PAGE>
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection (a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by any such Investor, underwriter or controlling person.
(b) To the extent permitted by law, the Investor will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, and any controlling
person of any such underwriter, against any losses, claims, damages, or
liabilities (joint or several) to which any of the foregoing persons may become
subject, under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Investor expressly for use
in connection with such registration; and each such Investor will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection (b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection (b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Investor, which consent shall not be unreasonably withheld; provided, that, in
no event shall any indemnity under this subsection (b) exceed the gross proceeds
from the offering received by the Investor.
(c) Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.6, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.6.
A-4
<PAGE>
(d) If the indemnification provided for in this Section 1.6 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in an underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and the Investor under this
Section 1.6 shall survive the completion of any offering of the Stock in a
registration statement pursuant hereto, and otherwise.
1.7 Termination. The Company's obligation to register the Stock
-----------
pursuant to this agreement shall terminate on the earlier of (i) the second
anniversary of the Closing and (ii) the date on which all shares of the Stock
held by the Investor may immediately be sold under Rule 144 during any 90-day
period.
A-5
<PAGE>
PORTAL SOFTWARE, INC. EXHIBIT 10.11
STOCK PURCHASE AGREEMENT
April 12, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. Purchase and Sale of Stock................................ 1
1.1 Sale and Issuance of Stock........................... 1
1.2 The Closing.......................................... 1
2. Representations and Warranties of the Company............. 1
2.1 Organization and Good Standing....................... 2
2.2 Authorization........................................ 2
2.3 Valid Issuance of Stock.............................. 2
2.4 Litigation........................................... 2
2.5 Properties........................................... 2
2.6 Compliance with Other Documents...................... 2
3. Representations and Warranties of the Investor............ 2
3.1 Authorization........................................ 2
3.2 Investigation........................................ 3
3.3 Accredited Investor.................................. 3
3.4 Purchase Entirely for Own Account.................... 3
4. Conditions to the Investor's Obligation at Closing........ 3
4.1 Representations and Warranties....................... 3
4.2 Securities Laws...................................... 3
4.3 Authorizations....................................... 3
4.4 Initial Public Offering of Common Stock.............. 3
5. Conditions to the Company's Obligations at Closing........ 3
5.1 Representations and Warranties....................... 3
5.2 Securities Laws...................................... 3
5.3 Authorizations....................................... 4
5.4 Initial Public Offering of Common Stock.............. 4
5.5 Payment of Purchase Price............................ 4
6. Covenants of the Company and the Investor................. 4
6.1 Agreement Not to Transfer............................ 4
6.2 Market Stand-Off..................................... 4
6.3 Notice of Intention to Transfer...................... 4
6.4 Voting Agreements.................................... 5
6.5 Registration of Stock................................ 5
7. Miscellaneous............................................. 5
7.1 Governing Law........................................ 5
i
<PAGE>
7.2 Survival; Additional Securities...................... 5
7.3 Successors and Assigns............................... 6
7.4 Entire Agreement..................................... 6
7.5 Notices.............................................. 6
7.6 Amendments and Waivers............................... 6
7.7 Legal Fees........................................... 6
7.8 Expenses............................................. 6
7.9 Titles and Subtitles................................. 6
7.10 Counterparts......................................... 7
7.11 Severability......................................... 7
7.12 Confidentiality...................................... 7
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 12th day of April
1999, by and between Portal Software, Inc., a California corporation (the
"Company") and Andersen Consulting LLP, an Illinois Limited Liability
- --------
Partnership (the "Investor").
--------
WHEREAS, the Investor has indicated a desire to purchase shares of
Common Stock from the Company and the Company has indicated a desire to sell
shares of Common Stock to the Investor on the terms set forth herein.
WHEREAS, the Company and the Investor have agreed that this Agreement
shall constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Stock. Subject to the terms and conditions of
--------------------------
this Agreement, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company that number of shares of the Company's
Common Stock that is the lesser of (X) 400,000/1/ and (Y) $4,950,000 divided by
the initial public offering price less the underwriting discount in the IPO (as
defined below) (the "Stock"), having the rights, preferences, privileges and
-----
restrictions set forth in the form of Amended and Restated Certificate of
Incorporation of the Company (the "Restated Certificate") to be filed with the
--------------------
Delaware Secretary of State prior to the Closing (as defined below).
1.2 The Closing. The purchase and sale of the Stock shall be held at
-----------
the Company's offices concurrently with the closing of the Company's initial
public offering (the "IPO") or, if later, upon satisfaction or waiver of each of
the conditions set forth in Sections 4 and 5 (the "Closing"). At the Closing,
-------
the Company will deliver the Stock to the Investor against payment of the
purchase price therefor by check payable to the order of the Company or by wire
transfer. The per share purchase price for the Stock shall be equal to the per
share price paid by the public for the Company's Common Stock in the IPO, less
any underwriter discounts and commissions.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investor that:
- ------------------
/1/ The 400,000 shares have been calculated assuming the Company effects a
three for-one split of its outstanding Common Stock prior to the Closing. In
the event that the Company does not effect this three-for-one stock split, the
number of shares to be purchased shall be adjusted accordingly.
<PAGE>
2.1 Organization and Good Standing. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to carry on its
business as now conducted.
2.2 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder, and the authorization, issuance and delivery of the Stock
has been taken or will be taken prior to the Closing, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and by
general principles of equity.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and
-----------------------
delivered in accordance with the terms hereof for the consideration expressed,
will be duly and validly issued, fully paid and nonassessable and, based in part
upon the representations of the Investor in this Agreement, will be issued in
compliance with all applicable federal and state securities laws.
2.4 Litigation. Except as set forth in the Company's registration
----------
statement prepared in connection with the IPO, as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
--- ------------
Statement"), there are no actions, proceedings or investigations pending or, to
- ---------
the best of Company's knowledge, any basis therefor or threat thereof, against
or affecting the Company, that, either in any case or in the aggregate, would
result in any material adverse change in the business, financial condition, or
results of operations of the Company.
2.5 Properties. To the best of the Company's knowledge (but without
----------
having conducted any special investigation), the Company has (i) good and
marketable title to its properties and assets and has good title to all its
leasehold interests, and (ii) sufficient title, license and/or ownership of all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for its business as now
conducted on the date hereof.
2.6 Compliance with Other Documents. The execution and delivery of
-------------------------------
this Agreement, consummation of the transactions contemplated hereby, and
compliance with the terms and provisions hereof will not conflict with or result
in a breach of the terms and conditions of, or constitute a default under the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
3. Representations and Warranties of the Investor. The Investor hereby
----------------------------------------------
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
-------------
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
2
<PAGE>
3.2 Investigation. The Investor acknowledges that it has had an
-------------
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's president. The Investor further acknowledges having
had access to information about the Company that it has requested or considers
necessary for purposes of purchasing the Stock.
3.3 Accredited Investor. The Investor is an "accredited investor" as
-------------------
such term is defined in Regulation D adopted by the SEC.
3.4 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Stock will be acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same.
4. Conditions to the Investor's Obligation at Closing. The obligation of
--------------------------------------------------
the Investor to purchase the Stock at the Closing is subject to the fulfillment
to the Investor's satisfaction on or prior to the Closing of the following
conditions:
4.1 Representations and Warranties. The representations and
------------------------------
warranties made by the Company in Section 2 hereof shall be true and correct
when made, and shall be true and correct as of the Closing with the same force
and effect as if they had been made on and as of such date, subject to changes
contemplated by this Agreement.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
---------------
pursuant to this Agreement shall be exempt from the registration requirements of
the Act and qualification requirements of all applicable state securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The initial public
---------------------------------------
offering of the Company's Common Stock shall have occurred.
5. Conditions to the Company's Obligations at Closing. The obligation
--------------------------------------------------
of the Company to sell the Stock at the Closing is subject to the fulfillment to
the Company's satisfaction on or prior to the Closing of the following
conditions:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 hereof shall be true as of the
Closing with the same force and effect as if they had been made on and as of
such date, subject to changes contemplated by this Agreement.
5.2 Securities Laws. The offer and sale of the Stock to the Investor
---------------
pursuant to this Agreement shall be exempt from the registration requirements of
the Act qualification requirements of all applicable state securities laws.
3
<PAGE>
5.3 Authorizations. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
5.4 Initial Public Offering of Common Stock. The initial public
---------------------------------------
offering of the Company's Common Stock shall have occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to
-------------------------
the Company the purchase price for the Stock as set forth in Section 1.2 hereof.
6. Covenants of the Company and the Investor.
-----------------------------------------
6.1 Agreement Not to Transfer.
-------------------------
(a) Prior to the first anniversary of the Closing, the Investor
shall not, directly or indirectly, Transfer or offer to Transfer any shares of
the Stock unless the Company consents to such Transfer and the transferee agrees
to be bound by this Agreement. Notwithstanding the foregoing, Transfers may be
made by Investor to any other member of the Andersen Consulting worldwide
organization, provided such Transfers are in compliance with all applicable laws
and regulations.
(b) In order to enforce transfer restrictions under applicable
securities laws, the Company may impose stop-transfer instructions with respect
to the Stock until the end of the applicable Rule 144 holding period.
(c) As used in this Agreement, the term "Transfer" shall mean any
sale, transfer, assignment, hypothecation, encumbrance or other disposition,
whether voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by the secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the transfer restrictions
----------------
(which shall in no way be limited by the following), in connection with any
underwritten public offering by the Company of its equity securities pursuant to
an effective registration statement filed under the Act, the Investor shall not
Transfer or offer to Transfer any shares of the Stock, other than pursuant to
such registration statement, without the prior written consent of the Company
and its underwriters. Such restriction (the "Market Stand-Off") shall be in
----------------
effect for such period of time from and after the effective date of the final
prospectus for the offering as may be requested by the Company or such
underwriters; provided, however, that (i) such Market Stand-Off shall not
-------- -------
exceed one hundred eighty (180) days, and (ii) the Investor shall be subject to
the Market Stand-Off only if the officers, directors and other stockholders of
the Company are also subject to similar restrictions. In order to enforce the
Market Stand-Off, the Company may impose stop-transfer instructions with respect
to the Stock until the end of the applicable stand-off period.
6.3 Notice of Intention to Transfer. In the event the Investor plans
-------------------------------
to Transfer shares of the Stock in one or more transactions, the Investor shall
inform the Company
4
<PAGE>
of such intention to Transfer such shares five (5) days prior to such Transfer.
An announcement of any such Transfer shall be at the discretion of the Company
through a joint press release which is reasonably acceptable to the Company.
Investor shall agree that any transfer, sale or other disposition of the
Company's Common Stock shall be through an orderly disposition.
6.4 Voting Agreements. The Investor agrees to vote all shares of
-----------------
Voting Securities owned by it on the sale of all or substantially all of the
assets of the Company or a merger in which the Company is not the surviving
entity and take action with respect to any third party tender offer (a "Change
in Control Proposal"), in accordance with the direction of Portal's Chief
Executive Officer. The Investor, as a holder of Voting Securities, shall be
present, in person or by proxy, at all meetings of shareholders of the Company
at which a Change in Control Proposal is brought before the shareholders so that
all shares of Voting Securities beneficially owned by it may be counted for the
purpose of determining the presence of a quorum at such meetings. For purposes
of this Agreement, (i) the term "Voting Securities" shall refer to all
securities of the Company entitled to vote generally for the election of
directors, and (ii) the term "beneficial ownership" shall have the meaning set
forth in Rule 13d-3 under the Exchange Act.
Notwithstanding the foregoing, the voting agreements set forth in this
Section 6.4 shall terminate immediately if an unrelated third party has publicly
announced and is actively pursuing the purchase of all or substantially all of
the assets or capital stock of the Company or a merger in which the Company
would not be the surviving corporation.
6.5 Registration of Stock. The Company agrees that the Investor will
--------------------
be entitled to have the Stock registered in accordance with the provisions
contained in Exhibit A attached hereto. The Investor understands and agrees that
---------
(i) the Stock will be characterized as "restricted securities" under the federal
securities laws inasmuch as it is being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances, and (ii) each certificate
representing the Stock and any other securities issued in respect of the Stock
upon any stock split, stock dividend, recapitalization, merger or similar event
(unless no longer required in the opinion of counsel for the Company) shall be
stamped or otherwise imprinted with appropriate legends mandated by federal and
state securities laws.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California, without
regard to the conflict of law provisions thereof.
7.2 Survival; Additional Securities. The representations and
-------------------------------
warranties set forth in Sections 2 and 3 shall survive until the Closing.
The covenants and agreements set forth in Section 6 shall survive in
accordance with their terms. Any new, substituted or additional securities
which are by reason of any stock split, stock dividend, recapitalization or
reorganization distributed with respect to the Stock ("Stock Distributions")
----- -------------
shall be immediately
5
<PAGE>
subject to the covenants and agreements set forth in Section 6 to the same
extent the Stock is at such time covered by such provisions.
7.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the parties hereto. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Notwithstanding anything to the
contrary contained herein, the covenants set forth in Section 6 shall not be
binding upon any entity (other than an affiliate of the Investor) which acquires
any shares of the Stock or a Stock Distribution in a transaction permitted
hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire
----------------
understanding and agreement between the parties with regard to the subject
matter hereof.
7.5 Notices. Except as otherwise provided, all notices and other
-------
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1) business day
after the day of deposit with Federal Express or similar overnight courier,
freight prepaid, if delivered by overnight courier or (iv) one (1) business day
after the day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed, (a) if
to the Investor, at the Investor's address set forth below its signature, or at
such other address as the Investor shall have furnished to the Company in
writing, or (b) if to the Company, at its address as set forth below its
signature, or at such other address as the Company shall have furnished to the
Investor in writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of the Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
7.7 Legal Fees. In the event of any action at law, suit in equity or
----------
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
--------
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6
<PAGE>
7.10 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be an original, but all of which together shall constitute one
instrument.
7.11 Severability. If one or more provisions of this Agreement are held
------------
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the
---------------
prior written permission of the other party or in accordance with applicable
laws or regulations, it shall at all times keep confidential and not divulge,
furnish, or make accessible to anyone outside of their respective organizations
any confidential information, knowledge, or data concerning or relating to the
business or financial affairs of such other party to which said party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement.
[Signature Page to Follow]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year hereinabove first written.
PORTAL SOFTWARE, INC.
20883 Stevens Creek Boulevard
Cupertino, CA 95014
Attn: Jack Acosta, Vice President
and Chief Financial Officer
/s/ Jack Acosta
--------------------------------
By: Jack Acosta, Vice President
and Chief Financial Officer
ANDERSEN CONSULTING, LLP
1661 Page Mill Road
Palo Alto, CA 94304
Attn: General Counsel
/s/
--------------------------------
By:
8
<PAGE>
EXHIBIT A
---------
1. Registration Rights. The Company covenants and agrees as follows:
-------------------
1.1 Definitions. For purposes of this Exhibit A, capitalized
----------- ---------
terms used herein and not otherwise defined shall have the meanings ascribed
to them in the Stock Purchase Agreement (the "Agreement") between the Company
and the Investor to which this Exhibit A is attached. In addition, the following
---------
terms used herein shall have the following meanings:
(a) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(b) The term "1934 Act" means the Securities Exchange Act
of 1934, as amended.
(c) The term "register", "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
1.2 Company Registration. If (but without any obligation to do so) the
--------------------
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Investor) any of its stock or
other securities under the Act in connection with the public offering of such
securities solely for cash occurring not later than two years from the Closing
(other than a registration relating solely to the sale of securities to
participants in a Company stock plan, a registration on any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Stock or a registration in
which the only Common Stock being registered is Common Stock issuable upon
conversion of debt securities which are also being registered), the Company
shall, at such time, promptly give the Investor written notice of such
registration. Upon the written request of the Investor given within twenty (20)
days after mailing of such notice by the Company in accordance with Section 7.5
of the Agreement, the Company shall, subject to the provisions of Section 1.6,
cause to be registered under the Act up to all of the Stock that Investor has
requested to be registered.
1.3 Obligations of the Company. Whenever required under this Section 1
--------------------------
to effect the registration of any Stock, the Company shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such securities to be included in the registration statement
including the Stock (the "Registrable Securities"), and use its best efforts to
cause such registration statement to become effective, and, upon the request of
the holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for a period of up to one hundred
twenty (120) days or until the distribution contemplated in the Registration
Statement
A-1
<PAGE>
has been completed; provided, however, that (i) such one hundred twenty (120)
day period shall be extended for a period of time equal to the period the holder
of Registrable Securities refrains from selling any securities included in such
registration at the request of an underwriter of Common Stock (or other
securities) of the Company; and (ii) in the case of any registration of
Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such one hundred twenty (120) day period shall be
extended, if necessary, to keep the registration statement effective until all
such Registrable Securities are sold, provided that Rule 415, or any successor
rule under the Act, permits an offering on a continuous or delayed basis, and
provided further that applicable rules under the Act governing the obligation to
file a post-effective amendment permit, in lieu of filing a post-effective
amendment which (A) includes any prospectus required by Section 10(a)(3) of the
Act or (B) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of information required to be included in (A) and (B)
above to be contained in periodic reports filed pursuant to Section 13 of 15(d)
of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Investor such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as the Investor may reasonably
request in order to facilitate the disposition of the Stock.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Investor;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) Notify the Investor covered by such registration statement at
any time when a prospectus relating thereto is required to be delivered under
Securities the Act of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
(f) Cause all such Stock registered pursuant hereunder to be
listed on each securities exchange on which similar securities issued by the
Company are then listed.
(g) Provide a transfer agent and registrar for all of the Stock
registered pursuant hereunder and a CUSIP number for all such Stock, in each
case not later than the effective date of such registration.
A-2
<PAGE>
1.4 Investor Obligation to Furnish Information. It shall be a
------------------------------------------
condition precedent to the obligations of the Company to take any action
pursuant hereto with respect to the Stock that the Investor shall furnish to the
Company such information regarding itself, the Stock, and the intended method of
disposition of such securities as shall be required to effect the registration
of such Stock.
1.5 Expenses of Registration. All expenses incurred in connection with
------------------------
registrations, filings or qualifications pursuant hereto, including (without
limitation) all registration, filing and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Company (including
fees and disbursements of counsel for the Company in its capacity as counsel to
the Investor hereunder but excluding the fees and disbursements of any other
counsel for the Investor) shall be borne by the Company.
1.6 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of hares of the Company's capital stock, the Company
shall not be required under Section 1.2 to include any of the Investor's
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Stock requested by the Investor to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of Registrable Securities and shares of Stock which
the underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro rata
among the selling shareholders (including the Investor) according to the total
amount of securities entitled to be included therein owned by each selling
shareholder (including the Investor) or in such other proportions as shall
mutually be agreed to by such selling shareholders (including the Investor)) but
in no event shall the amount of securities of the selling shareholder (including
the Investor) included in the offering be reduced below thirty percent (30%) of
the total amount of securities included in such offering.
1.7 Delay of Registration. The Investor shall not have any right to
---------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.8 Indemnification. In the event any Stock is included in a
---------------
registration statement under Section 1.2:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless the Investor, any underwriter (as defined in the Act) for the
Investor and each person, if any, who controls the Investor or underwriter
within the meaning of the Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue
---------
A-3
<PAGE>
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Company of the Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the Act, the
1934 Act or any state securities law; and the Company will pay to the Investor,
or such underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection (a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by any such Investor, underwriter or controlling person.
(b) To the extent permitted by law, the Investor will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, and any controlling
person of any such underwriter, against any losses, claims, damages, or
liabilities (joint or several) to which any of the foregoing persons may become
subject, under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Investor expressly for use
in connection with such registration; and each such Investor will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection (b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection (b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Investor, which consent shall not be unreasonably withheld; provided, that, in
no event shall any indemnity under this subsection (b) exceed the gross proceeds
from the offering received by the Investor.
(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
A-4
<PAGE>
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.8.
(d) If the indemnification provided for in this Section 1.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in an underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and the Investor under this
Section 1.8 shall survive the completion of any offering of the Stock in a
registration statement pursuant hereto, and otherwise.
1.9 Termination. The Company's obligation to register the Stock
-----------
pursuant to this agreement shall terminate on the earlier of (i) the second
anniversary of the Closing and (ii) the date on which all shares of the Stock
held by the Investor may immediately be sold under Rule 144 during any 90-day
period.
A-5
<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 fourth paragraph of Note 8, as to which the
date is April , 1999 in Amendment No. 1 to the Registration Statement (Form
S-1 No. 333-72999) and related Prospectus of Portal Software, Inc. for the
registration of shares of its common stock.
Ernst & Young LLP
Palo Alto, California
April , 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
effectiveness of the stock split and approval of the Certificate of
Incorporation in the State of Delaware as discussed in Note 8 to the
consolidated financial statements.
/s/ Ernst & Young LLP
Palo Alto, California
April 12, 1999
