<PAGE>
As filed with the Securities and Exchange Commission on May 15, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ValiCert, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7371 77-0421072
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
339 North Bernardo Avenue
Mountain View, California 94043
(650) 567-5400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Joseph (Yosi) Amram
President and Chief Executive Officer
ValiCert, Inc.
339 North Bernardo Avenue
Mountain View, California 94043
(650) 567-5400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
JAMES M. KOSHLAND, ESQ. ERIC S. HAUETER, ESQ.
Gray Cary Ware & Freidenrich LLP MICHAEL F. TAYLOR, ESQ.
400 Hamilton Avenue Brown & Wood LLP
Palo Alto, California, 94301-1825 555 California Street
(650) 833-2000 San Francisco, California 94104
(415) 772-1200
</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 only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, check the following
box: [_]
If any of 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 (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,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<S> <C> <C>
Proposed Maximum
Title of Each Class of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee
- ------------------------------------------------------------------------------
Common Stock ($0.001 par value)....... $60,000,000 $15,840
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(a) promulgated under the Securities Act.
---------------
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 or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+preliminary prospectus is not an offer to sell securities and we are not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated May 15, 2000.
[ValiCert Logo]
[Logo of ValiCert Appears Here]
- --------------------------------------------------------------------------------
Shares
Common Stock
- --------------------------------------------------------------------------------
This is the initial public offering of ValiCert, Inc. and we are offering
shares of our common stock. We anticipate that the price will be between
$ and $ per share. We have applied to list our common stock
on the Nasdaq Stock Market's National Market under the symbol "VLCT".
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds to
Public Commissions ValiCert
------ ------------- -----------
<S> <C> <C> <C>
Per share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to
additional shares to cover over-allotments.
Joint Bookrunners
Deutsche Banc Alex. Brown Merrill Lynch & Co.
-----------
Donaldson, Lufkin & Jenrette
Wit SoundView
The date of this prospectus is 2000
<PAGE>
The inside front gatefold is a diagram. Across the top of the diagram, in all
capitalized letters, are the words VALIDATE, SECURE and PROVE. Beneath each
word is a brief description of ValiCert's products and services and the
functions they perform.
Along the right-hand side of the diagram is the ValiCert logo and a brief
statement regarding ValiCert's products and services.
In the middle of the diagram is the ValiCert name and logo inside a circle.
From out of the circle are data arrows which connect to examples of how
ValiCert's products and services are used. The examples include both a small
picture and a brief textual description. At the top of the circle is a picture
of a bank and a textual description of online banking and payments. Moving in a
clockwise direction around the ValiCert logo are the following examples: a
picture of a government building and a textual description of agencies sharing
secure documents; a picture of people engaging in an electronic commerce
transaction and a textual description of the use of digital receipts; a picture
of the earth with the phrase service providers across it and connected by lines
to pictures of a bank, buildings and a government agency and a textual
description of how service providers offer secure solutions to their customers
based on ValiCert's products and services; a picture of two sets of downtown
buildings and a textual description of how firms engaged in online transactions
can benefit with ValiCert's products and services; and a picture of a hospital
and a textual description of how a hospital uses ValiCert's products and
services to securely and cost-effectively process insurance claims.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements,
before making an investment decision.
Our Business
ValiCert is a leading provider of end-to-end infrastructure software
products and services that organizations use to conduct valid, secure and
provable transactions over the Internet. Our products and services are designed
to meet our customers' need for a framework of trust before, during and after
transactions, including electronic commerce and payments, electronic data
interchange, file sharing, electronic document signing and e-mail. Our
enterprise customers, who are end users, include Aetna, Dell, Identrus,
S.W.I.F.T. and Visa. Our service provider customers, who purchase our products
to offer commercial services, include Bell Canada Emergis, NTT Communications,
PricewaterhouseCoopers and Thomson-CSF/Cashware.
The Internet is increasingly being used for business critical transactions
and communications. However, as an open network, the Internet does not restrict
access and does not inherently offer the degree of trust, security and
provability that exists for transactions in the physical world. Therefore,
organizations require secure infrastructure solutions to reduce the costs
associated with fraudulent transactions and security breaches, including direct
losses, damage to reputation and productivity losses resulting from downtime.
International Data Corporation, an independent market research firm, estimates
that enterprises will spend $10.5 billion on Internet security software and
services in 2003, up from $3.7 billion in 1998.
Our products and services bring trust and security to existing applications
and leverage our customers' investments in public key infrastructure, or PKI. A
certificate authority, which is a key component of a PKI deployment, issues and
manages digital certificates. Our validation authority software products and
services verify the status of digital certificates and establish the authority
of a party before conducting a transaction. Our secure data transfer software
products enable the reliable and tamper-proof transmission of data during a
transaction. Our digital receipt software products and services create and
archive detailed information to provide a provable audit trail after a
transaction.
To address customers' requirements for secure transactions, we provide:
. Scalable, modular products and services based on open standards;
. Flexible deployment models, which give our customers the choice to host
our software in-house; outsource their validation and digital receipt
functions to us as a trusted third party; or outsource to one of our
service provider customers;
. Interoperability with leading digital certificates and electronic
payments solutions; and
. A secure data center to deliver hosted validation and digital receipt
services, as well as backup and redundancy, data distribution or
disaster recovery capabilities.
Our products and services have been deployed in organizations that are
transaction-intensive and have a strong requirement for security, such as in
financial services, government, healthcare and telecommunications sectors. Our
sales efforts consist primarily of a direct sales force domestically and direct
sales and a network of distributors internationally. We typically structure our
sales as an up front software license fee and an annual subscription fee based
on transaction volume. To ensure broad application and platform support for our
products and services, we have formed strategic alliances with companies such
as Baltimore Technologies, Entrust, IBM, Microsoft, Netscape/iPlanet and
Trintech.
We were incorporated in California in February 1996 and reincorporated in
Delaware in May 1998 as ValiCert, Inc. Our principal offices are located at 339
North Bernardo Avenue, Mountain View, California 94043. Our telephone number is
(650) 567-5400. Our website address is www.valicert.com, but the information on
our website does not constitute a part of this prospectus.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by ValiCert..... shares
Common stock to be outstanding after
this offering....................... shares
Use of proceeds...................... For general corporate purposes. See "Use
of Proceeds" on page 21.
Dividend policy...................... We intend to retain all future earnings,
if any, to fund the development and
growth of our business. Therefore, we do
not anticipate paying cash dividends on
our common stock in the foreseeable
future. See "Dividend Policy" on page
21.
Proposed Nasdaq National Market VLCT
symbol..............................
</TABLE>
The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of April 30, 2000. This number assumes the
conversion into common stock of all shares of our preferred stock but does not
include:
. 3,739,826 shares of common stock issuable upon exercise of outstanding
stock options under our equity incentive plans as of April 30, 2000 at a
weighted average exercise price of $2.34;
. 333,072 shares of common stock reserved and available for future
issuance under our equity incentive plans as of April 30, 2000 and an
additional 2,000,000 shares of common stock reserved and available for
future issuance under our equity incentive plans that was approved by
our board of directors on May 5, 2000;
. 500,000 shares of common stock reserved and available for issuance under
our 2000 employee stock purchase plan that was approved by our board of
directors on May 5, 2000; and
. 1,015,571 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $10.70 as of April 30, 2000.
Unless otherwise indicated, all information contained in this prospectus
assumes:
. no exercise of the underwriters' over-allotment option;
. a one-for-two reverse stock split of our common and preferred stock
which will occur prior to the consummation of this offering;
. the conversion of all outstanding shares of our preferred stock into
common stock concurrently with the closing of this offering; and
. the filing of our amended and restated certificate of incorporation,
which, among other things, will increase the number of authorized shares
of our common stock and decrease the number of authorized shares of our
preferred stock.
VALICERT(R) and the ValiCert logo are registered trademarks of ValiCert,
Inc. This prospectus contains other trade names, trademarks and service marks
of ValiCert and of other companies.
4
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
From February 6,
1996 (date of
inception) Year Ended Pro Forma Three Months
through December 31, Year Ended Ended March 31,
December 31, ------------------------ December 31, ----------------
1996 1997 1998 1999 1999 1999 2000
---------------- ----- ------- -------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software licenses...... $ -- $ -- $ 60 $ 874 $ 1,953 $ 89 $ 1,396
Subscription fees and
other services........ -- -- -- 761 994 79 480
----- ----- ------- -------- -------- ------- -------
Total revenues......... -- -- 60 1,635 2,947 168 1,876
Cost of revenues:
Software licenses...... -- -- 3 93 196 7 153
Subscription fees and
other services........ -- -- -- 134 254 29 1,041
----- ----- ------- -------- -------- ------- -------
Total cost of
revenues.............. -- -- 3 227 450 36 1,194
----- ----- ------- -------- -------- ------- -------
Gross profit............ -- -- 57 1,408 2,497 132 682
Operating expenses:
Research and
development........... 335 373 1,728 5,608 6,800 822 1,911
Sales and marketing.... 26 53 1,445 4,583 5,992 802 2,404
General and
administrative........ 132 97 977 1,373 3,298 279 686
Acquired in-process
research and
development........... -- -- -- 2,780 -- -- --
Amortization of
intangibles........... -- -- -- -- 3,253 -- 810
Amortization of stock
compensation.......... -- -- -- 162 1,120 -- 457
----- ----- ------- -------- -------- ------- -------
Total operating
expenses.............. 493 523 4,150 14,506 20,463 1,903 6,268
----- ----- ------- -------- -------- ------- -------
Operating loss.......... (493) (523) (4,093) (13,098) (17,966) (1,771) (5,586)
Interest income
(expense), net......... -- (7) 103 296 121 7 128
----- ----- ------- -------- -------- ------- -------
Net loss................ $(493) $(530) $(3,990) $(12,802) $(17,845) $(1,764) $(5,458)
===== ===== ======= ======== ======== ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (0.83) $ (0.15) $ (0.24)
======== ======= =======
Shares used in pro forma
basic and diluted net
loss per share......... 15,489 11,821 22,702
======== ======= =======
</TABLE>
The pro forma data for the year ended December 31, 1999, other than net loss
per share and shares used in computing net loss per share, gives effect to our
acquisition of Receipt.com, which occurred on December 30, 1999, as if the
acquisition had been completed on January 1, 1999. The pro forma financial data
excludes a $2.8 million expense for acquired in-process research and
development as it is a material non-recurring charge. Data as to pro forma net
loss per share and pro forma shares used in computing pro forma net loss per
share has been calculated by assuming that all of our outstanding shares of
preferred stock had been converted, as of their respective dates of original
issuance, into shares of our common stock. See "Selected Financial Data" on
page 24.
<TABLE>
<CAPTION>
March 31, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $10,983 $10,983
Working capital.................................. 9,616 9,616
Total assets..................................... 33,033 33,033
Long-term obligations............................ 2,587 2,587
Convertible preferred stock...................... 34,316 --
Total stockholders' equity (deficiency).......... (8,811) 25,505
</TABLE>
The pro forma data as of March 31, 2000 gives effect to the conversion of
all of our outstanding shares of preferred stock into common stock upon the
closing of this offering. The pro forma as adjusted data gives effect to the
foregoing and to the sale of shares of common stock that we are offering
under this prospectus at an assumed initial public offering price of $ per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses. See "Capitalization" on page 22.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. Investors should carefully
consider the risks and uncertainties and the other information in this
prospectus before deciding whether to invest in shares of our common stock. Any
of the following risks could cause the trading price of our common stock to
decline.
Risks Related to Our Business
Because we have only recently introduced our products and services, we face a
number of risks which may seriously harm our business.
We were incorporated in February 1996, and to date have generated only
limited revenues. Substantially all of our revenues have been generated since
January 1, 1999. We commercially introduced our Global VA Service in December
1999 and our digital receipt products in March 2000. Because we have a limited
operating history with our products and services, and because our sources of
potential revenue may continue to shift as our business develops, you must
consider the risks that we may encounter when making your investment decision.
These risks include:
. the rate and timing of the growth and use of the Internet for electronic
commerce and communications;
. the acceptance of existing security measures as adequate for electronic
commerce and communications over the Internet;
. the rate and timing of the growth and use of specific technologies such
as PKI and electronic payments and other Internet security technologies;
. our ability to maintain our current, and enter into additional,
strategic relationships; and
. our ability to effectively manage our growth and to attract and retain
skilled professionals.
As a result of these risks, our business could be seriously harmed.
The expected fluctuations of our quarterly financial results could cause our
stock price to decline.
Our quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future. We believe that period-to-
period comparisons of our results of operations are not meaningful and should
not be relied upon as indicators of future performance. Our failure to meet
these expectations would likely cause the market price of our common stock to
decline.
Our quarterly results depend on a number of factors, many of which are
beyond our control. Our quarterly results may fluctuate in the future as a
result of many factors, including the following:
. the size, timing, cancellation or delay of customer orders;
. the timing of releases of our new software products;
. the number of transactions conducted using our products and services;
. the long sales cycles for, and complexity of, our software products and
services;
6
<PAGE>
. the timing and execution of large individual contracts;
. the impact of changes in the pricing models for our software products
and services or our competitors' products and services; and
. the continued development of our direct and indirect distribution
channels.
Due to these and other factors, our operating results in some future quarter or
quarters may fall below the expectations of securities analysts who might
follow our stock.
We have not been profitable, and if we do not achieve profitability, our
business may fail.
We have incurred significant net losses since our inception. We incurred net
losses of $530,000 in 1997, $4.0 million in 1998, $12.8 million in 1999 and
$5.5 million in the three months ended March 31, 2000. As of March 31, 2000, we
had incurred cumulative losses of $23.3 million. You should not consider recent
quarterly revenue growth as indicative of our future performance. We may not
sustain similar levels of growth in future periods and our revenues could
decline, and we may not become profitable or significantly increase our
revenues. We will continue to increase our sales and marketing, research and
development and general and administrative expenses in 2000 and plan to
continue to do so for the immediate future. As a result, we will need to
generate significantly higher revenues in order to achieve profitability. Even
if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. If our revenues
grow more slowly or decline, if our gross margins do not improve, or if our
operating expenses exceed our expectations, our operating results will suffer
and our stock price may fall.
If we do not successfully develop new products and services to respond to rapid
market changes due to changing technology and evolving industry standards, our
business will be harmed.
Our success will depend to a substantial degree on our ability to offer
products and services that incorporate leading technology and to respond to
technological advances. If we fail to offer products and services that
incorporate leading technology and respond to technological advances and
emerging standards, we may not generate sufficient revenues to offset our
development costs and other expenses, which will hurt our business. The
development of new or enhanced products and services is a complex and uncertain
process that requires the accurate anticipation of technological and market
trends. We may experience development, marketing and other technological
difficulties that may delay or limit our ability to respond to technological
changes, evolving industry standards, competitive developments or customer
requirements. You should also be aware that:
. our technology or systems may become obsolete upon the introduction of
alternative technologies;
. we may incur substantial costs if we need to modify our products and
services to respond to these alternative technologies;
. we may not have sufficient resources to develop or acquire new
technologies or to introduce new products or services capable of
competing with future technologies;
. we may be unable to acquire the rights to use the intellectual property
necessary to implement new technology; and
. when introducing new or enhanced products or services, we may be unable
to manage effectively the transition from older products and services.
7
<PAGE>
We rely on, and expect to continue to rely on, a limited number of customers
for a significant percentage of our revenues, and if any of these or other
significant customers stops licensing our software products and services, our
operating results will suffer.
Historically, a limited number of customers has accounted for a significant
portion of our revenues. In 1999, Visa accounted for 21.4% of our revenues and
PricewaterhouseCoopers accounted for 13.9% of our revenues. In addition, for
the three months ended March 31, 2000, Netscape/iPlanet accounted for 13.3% of
our revenues, S.W.I.F.T. accounted for 13.2% of our revenues, Hanwha
Corporation accounted for 12.5% of our revenues and Unisys accounted for 10.1%
of our revenues. We anticipate that our operating results in any given period
will continue to depend to a significant extent upon revenues from a small
number of customers. We do not have long-term contracts with our customers that
obligate them to license our software products or use our services. We cannot
be certain that we will retain our current customers or that we will be able to
obtain new customers. If we were to lose one or more customers, our operating
results could be significantly harmed.
We do not have an adequate history with the recent change in our licensing
arrangements to predict customer acceptance or its impact on our financial
performance.
We recently introduced a new licensing arrangement that includes a
subscription fee committed during the license period. This will result in our
recognizing subscription fees ratably over the related service period. We do
not have an adequate history with this new licensing arrangement to be able to
predict customers' acceptance of this arrangement or to forecast our financial
performance accurately.
If our customers do not renew their annual subscriptions, our revenues may
decline.
We have only recently made our software products and services commercially
available, and as such, we do not have a history of customers renewing their
annual subscriptions with us. In particular, our service provider customers are
implementing new business models which, if not successful, could result in our
service provider customers not renewing their annual subscriptions with us. If
a significant portion of our customers do not to renew their annual
subscriptions for our software products and services, our revenues could
decline and our business could be harmed.
The length of our sales cycle is uncertain, which may cause our revenues and
operating results to vary significantly from quarter to quarter.
Any failure of our sales efforts to generate revenues at the times and in
the amounts we anticipate could cause significant variations in our operating
results. During our sales cycle, we spend considerable time and expense
providing information to prospective customers about the use and benefits of
our products and services without generating corresponding revenue. Our expense
levels are relatively fixed in the short term and there is substantial
uncertainty as to when particular sales efforts will begin to generate
revenues.
Prospective customers of our products and services often require long
testing and approval processes before making a purchase decision. In general,
the process of entering into a licensing arrangement with a potential customer
may involve lengthy negotiations. As a result, our sales cycle has been and may
continue to be unpredictable. In the past, our sales cycle has ranged from one
to nine or more months. Our sales cycle is also subject to delays as a result
of customer-specific factors over which we have little or no control, including
budgetary constraints and internal acceptance procedures. In addition, because
our technology must often be integrated with the products and services of other
vendors, there may be a significant delay between the use of our software and
services in a pilot system and its
8
<PAGE>
commercial deployment by our customers. The length of the sales cycle makes it
difficult to accurately forecast the timing and amount of our sales. Thus this
may cause our revenues and operating results to vary significantly from quarter
to quarter and could harm our business.
Our international business exposes us to additional risks.
Products and services provided to our international customers accounted for
47.4% of our revenues in 1999 and 39.8% of our revenues for the three months
ended March 31, 2000. We intend to expand our international business in the
future. Conducting business outside of the United States subjects us to
additional risks, including:
. changes in regulatory requirements;
. reduced protection of intellectual property rights;
. evolving privacy laws;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. problems in collecting accounts receivables; and
. difficulties in authenticating customer information.
We must maintain and enter into new strategic alliances, and any failure to do
so could harm our business.
One of our significant business strategies has been to enter into strategic
or other similar collaborative alliances in order to reach a larger customer
base than we could reach through our direct sales and marketing efforts. We
will need to maintain or enter into additional strategic alliances to execute
our business plan. However, if we are unable to maintain our strategic
alliances or enter into additional strategic alliances, our business could be
materially harmed. We may not be able to enter into additional strategic
alliances or maintain our existing strategic alliances. If we do not, we would
have to devote substantially more resources to the distribution, sales and
marketing of our security products and services than we would otherwise.
We have entered into technology, marketing and distribution agreements with
several companies. However, we may be unable to leverage the brand and
distribution power of these strategic alliances to increase the adoption rate
of our technology. We have been establishing strategic alliances to ensure that
third-party solutions are interoperable with our software products and
services. To the extent that our products are not interoperable or our
strategic allies choose not to integrate our technology into their offerings,
this failure would inhibit the adoption of our software products and outsourced
services. Furthermore, as a result of our emphasis on these strategic
alliances, our success will depend in part on the ultimate success of other
parties to these alliances. Failure of one or more of our strategic alliances
to achieve any of these objectives could materially harm our business.
Our existing strategic alliances do not, and any future strategic alliances
may not, grant us exclusive marketing or distribution rights. In addition, the
other parties may not view their alliances with us as significant for their own
businesses. Therefore, they could reduce their commitment to us at any time in
the future. These parties could also pursue alternative technologies or develop
alternative products and services, either on their own or in collaboration with
others, including our competitors. Should any of these developments occur, our
business will be harmed.
9
<PAGE>
Failure to manage our potential growth would be detrimental to our business.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to manage
growth effectively could materially harm our business. We have grown from 29
employees at December 31, 1998 to 136 employees at April 30, 2000. We have also
opened additional sales offices and have significantly expanded our operations,
both in the United States and abroad, during this time period. We expanded our
operations by acquiring Receipt.com in the fourth quarter of 1999. To be
successful, we will need to implement additional management information
systems, develop our operating, administrative, financial and accounting
systems and controls, and maintain close coordination among our executive,
engineering, accounting, finance, marketing, sales and operations
organizations.
Any future acquisitions of companies or technologies may not be successful and
as a result, could harm our business.
We may acquire businesses, technologies, product lines or service offerings
which may need to be integrated with our business in the future. Acquisitions
involve a number of risks including, among others:
. the difficulty of assimilating the operations and personnel of the
acquired businesses;
. to the extent the acquisitions are financed with our common stock,
dilution to our existing stockholders;
. our inability to integrate, train, retain and motivate key personnel of
the acquired business;
. the diversion of our management from our day-to-day operations;
. our inability to incorporate acquired technologies successfully into our
software products and services;
. the additional expense associated with completing an acquisition and
amortizing any acquired intangible assets;
. the potential impairment of relationships with our employees, customers
and strategic third-parties; and
. the inability to maintain uniform standards, controls, procedures and
policies.
If we are unable to successfully address any of these risks, our business
could be materially harmed. In addition, we acquired Receipt.com in December
1999. Therefore, we have a limited operating history as a combined company and
are continuing to integrate its business with our operations.
If our data center proves to be unreliable or is subject to failures, our
reputation could be damaged and our business could be harmed.
An increasing number of our customers require us to provide computer and
communications hardware, software and Internet networking systems to them as an
outsourced data center service. All data centers, whether hosted by us, our
customers, or by an independent third party to which we outsource this
function, are vulnerable to damage or interruption from natural disasters,
power loss, telecommunications failure or other similar events. In particular,
our principal executive offices and data center are located near San Francisco,
California in an area that has been subject to severe earthquakes. At present,
we do not have earthquake insurance on our data center or an operational
disaster recovery facility.
10
<PAGE>
In the event of an earthquake or other disaster that results in an operations
failure, our operations will be interrupted and our business will be harmed.
Our success depends on our ability to grow and develop our direct sales and
indirect distribution channels.
Our failure to grow and develop our direct sales channel and increase the
number of our indirect distribution channels could have a material adverse
effect on our business, operating results and financial condition. We must
increase the number of strategic and other third-party relationships with
vendors of Internet-related systems and application software, resellers and
systems integrators. Our existing or future channel partners may choose to
devote greater resources to marketing and supporting the products of other
companies.
Since we sell through multiple channels and distribution networks, we may
have to resolve potential conflicts between these channels. For example, these
conflicts may result from the different discount levels offered by multiple
channel partners to their customers or, potentially, from our direct sales
force targeting the same accounts as our indirect channel partners. Such
conflicts may harm our business or reputation.
We are dependent on technologies provided by third parties, and any termination
of our right to use these technologies could increase our costs, delay product
development and harm our reputation.
We have developed our products and services partially based on technology we
license on a non-exclusive basis from third parties. Our inability to continue
to license these third-party technologies on commercially reasonable terms will
harm our business. We expect that, in the future, we will continue to have to
license technologies from third parties. Our inability to continue to license
one or more of the technologies that we currently use or our failure to obtain
the right to use future technologies could increase our costs and delay or
possibly prevent product development. Our existing licensing agreements may be
terminated by the other parties to these contracts, or may not be renewed on
favorable terms or at all. In addition, we may not be able to license new
technologies on favorable terms, if at all.
If we lose the services of our senior management or key personnel, our ability
to develop our business and secure customer relationships will suffer.
We are substantially dependent on the continued services and performance of
our senior management and other key personnel. We do not maintain key person
insurance on any of our executive officers. The loss of the services of any of
our executive officers or other key employees, particularly Joseph (Yosi)
Amram, our president and chief executive officer, and Srinivasan (Chini)
Krishnan, our chairman and chief technology officer, could significantly delay
or prevent the achievement of our development and strategic objectives.
Our management team must work together effectively in order to expand our
business, increase our revenues and improve our operating results.
Several members of our existing senior management personnel joined us
recently, including Timothy Conley, our vice president, finance, and chief
financial officer, who joined us in January 2000 and David Jevans, our vice
president, corporate development, who joined us in December 1999. In addition,
our new employees include a number of key managerial, technical and operations
personnel who have been with us for a limited period of time. We expect to add
additional key personnel in the near future who will also need to be integrated
into our management team. Because these members of our management team are new,
there is an increased risk that management will not be able to work together
effectively as a team,
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especially in the short-term, to address the challenges to our business. The
inability of our business team to work together effectively could harm our
business.
We may be unable to recruit or retain qualified personnel, which could harm our
business and product development.
We also must continue to identify, recruit, hire, train, retain and motivate
highly skilled technical, managerial, sales and marketing and professional
services personnel. Competition for these personnel is intense, and we may not
be able to successfully recruit, assimilate or retain sufficiently qualified
personnel. In particular, in the San Francisco Bay Area, competition is
especially intense for software engineering personnel. We may encounter
difficulties in recruiting a sufficient number of qualified software engineers
and we may not be able to retain these software engineering personnel, which
could harm our relationships with existing and future customers at a critical
stage of development. The failure to recruit and retain necessary technical,
managerial, sales, marketing and professional services personnel could harm our
business and our ability to obtain new customers and develop new products.
Our business will suffer if we are unable to protect our intellectual property.
We rely upon copyrights, trade secrets, know-how, patents, continuing
technological innovations and licensing opportunities to maintain and further
develop our market position. We rely on outside licensors for patent and
software license rights in encryption technology that is incorporated into and
is necessary for the operation of our products and services. Our success will
depend in part on our continued ability to have access to technologies that are
or may become important to the functionality of our products and services. Any
inability to continue to procure or use this technology could be materially
adverse to our operations.
Our success will also depend in part on our ability to protect our
intellectual property rights from infringement, misappropriation, duplication
and discovery by third parties. We cannot assure you that others will not
independently develop substantially equivalent proprietary technology or gain
access to our trade secrets or disclose our technology or that we can
meaningfully protect our trade secrets. Attempts by others to utilize our
intellectual property rights could undermine our ability to retain or secure
customers. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
attempts to enforce our intellectual property rights could be time consuming
and costly.
We cannot assure you that our pending or future patent applications will be
granted or that any patents that are issued will be enforceable or valid.
Additionally, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. We cannot be certain that we were the
first inventor of inventions covered by our issued patent or pending patent
applications or that we are the first to file patent applications for such
inventions. Moreover, we may have to participate in interference proceedings
before the United States Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to us. An adverse outcome
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from or to third parties or require us to cease using the
technology in dispute.
Any claim of infringement by third parties could be costly to defend, and if we
are found to be infringing upon the intellectual property rights of third
parties, we may be required to pay substantial licensing fees.
We may increasingly become subject to claims of intellectual property
infringement by third parties as the number of our competitors grows and the
functionality of their products and
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services increasingly overlaps with ours. Because we are in a new and evolving
field, customers may demand features which will subject us to a greater
likelihood of claims of infringement.
We are aware of pending and issued United States and foreign patent rights
owned by third parties that relate to cryptography technology. Third parties
may assert that we infringe their intellectual property rights based upon
issued patents, trade secrets or know-how that they believe cover our
technology. In addition, future patents may issue to third parties which we may
infringe. It may be time consuming and costly to defend ourself against any of
these claims and we cannot assure you that we would prevail.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could block our ability to further develop or
commercialize some or all of our products in the United States and abroad. In
the event of a claim of infringement, we may be required to obtain one or more
licenses from or pay royalties to third parties. We cannot assure you that we
will be able to obtain any such licenses at a reasonable cost, if at all.
Defense of any lawsuit or failure to obtain such license could hurt our
business.
Defects in our software products and services could diminish demand for our
products and services, which may harm our business.
Our software products and services are complex and may contain errors that
may be detected at any point after we make them commercially available. Errors
may be found in new products or releases after shipment, resulting in loss of
revenues, delay in market acceptance and sales, diversion of development
resources, injury to our reputation and increased service and warranty costs.
If any of these were to occur, our business would be adversely affected and our
stock price could fall.
Because our products and services are generally used in systems with other
vendors' products, they must integrate successfully with these existing
systems. System errors, whether caused by our products or those of another
vendor, could adversely affect the market acceptance of our products. Any
necessary revisions could cause us to incur significant expenses.
We may need to raise additional capital in the future, which may not be
available on favorable terms or at all, and which may cause dilution.
We may need to seek additional funding in the future. We do not know if we
will be able to obtain additional financing on favorable terms, if at all. If
we cannot raise funds on acceptable terms, if and when needed, we may not be
able to develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements, and we may be required to reduce operating costs through lay-offs
or other measures, any of which could seriously harm our business. In addition,
if we issue equity securities, stockholders may experience additional dilution
or the new equity securities may have rights, preferences or privileges senior
to those of our common stock.
Failure to increase our brand awareness could limit our ability to compete
effectively.
If the marketplace does not associate ValiCert with high-quality, end-to-end
secure infrastructure software products and services, it may be difficult for
us to keep our existing customers, attract new customers or successfully
introduce new products and services. Competitive and other pressures may
require us to increase our expenses to promote our brand name, and the benefits
associated with brand creation may not outweigh the risks and costs associated
with establishing our brand name. Our failure to develop a strong brand
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name or the incurrence of excessive costs associated with establishing our
brand name may harm our business.
We rely on public key cryptography and other security techniques that could be
breached, resulting in reduced demand for our products and services.
A requirement for the continued growth of electronic commerce is the secure
transmission of confidential information over public networks. We rely on
public key cryptography, an encryption method that utilizes two keys, a public
and private key, for encoding and decoding data, and on digital certificate
technology, to provide the security and authentication necessary for secure
transmission of confidential information. Regulatory and export restrictions
may prohibit us from using the strongest and most secure cryptographic
protection available, and thereby may expose us or our customers to a risk of
data interception. A party who is able to circumvent our security measures
could misappropriate proprietary information or interrupt our or our customers'
operations. Any compromise or elimination of our security could result in risk
of loss or litigation and possible liability and reduce demand for our products
and services.
If we are not able to continue to include our public root keys within software
applications, our business may be harmed.
If we are not able to continue to include our public root keys within
software applications, including Microsoft Windows 2000, the Microsoft Internet
Explorer browser and the Netscape browser, customers might perceive our
outsourced services as too cumbersome to use and our business may be harmed.
Our public root keys are used by applications to insure that digitally signed
objects which are generated by our validation authority and digital receipt
services are trustworthy and have not been tampered with or corrupted. The
initial term of our root key agreement with Netscape ends in December 2000 and
we cannot assure you that this agreement will be renewed. In addition, our root
key agreement with Microsoft may not be extended to cover subsequent releases
of Microsoft Windows 2000 or the Microsoft Internet Explorer browser.
The covenants and restrictions in our existing and future debt instruments
could have a negative effect on our business.
The covenants and restrictions in our existing and future debt instruments
could have a negative effect on our business, including impairing our ability
to obtain additional financing and reducing our operational flexibility and
ability to respond to changing business and economic conditions. The terms of
our $2.5 million secured line of credit agreement require that we comply with a
number of financial and other restrictive covenants. For example, it prohibits
us from
. incurring any indebtedness other than equipment leasing obligations;
. pledging any of our assets, subject to exceptions; and
. making investments in the securities of any other person.
The agreement also contains financial covenants, including requirements that we
maintain a minimum level of cash and available borrowing capacity and a minimum
level of tangible net worth.
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The covenants and restrictions in our existing and future debt instruments
could have a negative effect on our business, including impairing our ability
to obtain additional financing and reducing our operational flexibility and
ability to respond to changing business and economic conditions. In addition,
any failure to comply with the restrictions and covenants in our $2.5 million
line of credit agreement or any other credit facility would generally result in
a default under the facility, permitting the lenders to declare all debt
outstanding under that facility to be immediately due and payable. Further, a
default under any debt facility could, under cross-default provisions, result
in defaults under other debt instruments, entitling other lenders to declare
all debt outstanding under those other facilities to be immediately due and
payable. If any declaration of acceleration were to occur, we might be unable
to make those required payments or to raise sufficient funds from other sources
to make those payments. In addition, we have pledged substantially all of our
assets to secure our credit facilities. If a default occurs with respect to
secured indebtedness, the holders of that indebtedness would be entitled to
foreclose on their collateral, which would harm our business.
We could incur substantial costs resulting from product liability claims
relating to our customers' use of our products and services.
Any disruption to a customer's website or application caused by our products
or services could result in a claim for substantial damages against us,
regardless of our responsibility for the failure. Our existing insurance
coverage may not continue to be available on reasonable terms or in amounts
sufficient to cover one or more large claims. Our insurer may also disclaim
coverage as to any claims, which could result in substantial costs to us.
Additional government regulation relating to the Internet may increase our
costs of doing business.
We are subject to regulations applicable to businesses generally and laws or
regulations directly applicable to companies utilizing the Internet. Although
there are currently few laws and regulations directly applicable to the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. These laws could cover issues like user privacy,
pricing, content, intellectual property, distribution, antitrust, legal
liability and characteristics and quality of products and services. The
adoption of any additional laws or regulations could decrease the demand for
our products and services and increase our cost of doing business, or otherwise
could harm our business or prospects.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues like property ownership, sales and other taxes,
libel and personal privacy is uncertain. For example, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce. New state tax regulations may subject us
to additional state sales and income taxes. 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 commercial online services could harm our
ability to conduct business and our operating results.
Risks Related to Our Industry
The markets for secure online transaction products and services generally, and
our products and services specifically, are new and may not develop, which
would harm our business.
The market for our products and services is new and evolving rapidly. If the
market for our products and services fails to develop and grow, or if our
products and services do not
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gain broad market acceptance, our business and prospects will be harmed. In
particular, our success will depend upon the adoption and use by current and
potential customers and their end-users of secure online transaction products
and services. Our success will also depend upon acceptance of our technology as
the standard for providing these products and services. The adoption and use of
our products and services will involve changes in the manner in which
businesses have traditionally completed transactions. We cannot predict whether
our products and services will achieve any market acceptance. Our ability to
achieve our goals also depends upon rapid market acceptance of future
enhancements of our products. Any enhancement that is not favorably received by
customers and end-users may not be profitable and, furthermore, could damage
our reputation or brand name.
The intense competition in our industry could reduce our market share or
eliminate the demand for our software products and services, which could harm
our business.
We compete with companies that provide individual products and services that
are similar to certain aspects of our software products and services.
Certificate authority software vendors and vendors of other security products
and services could enter the market and provide end-to-end solutions which
might be more comprehensive than our solutions. Many of our competitors have
longer operating histories, greater name recognition, larger installed customer
bases and significantly greater financial, technical and marketing resources.
As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products. We anticipate that the
market for security products and services that enable valid, secure and
provable electronic commerce and communications over the Internet will remain
intensely competitive. We expect that competition will increase in the near
term and increased competition could result in pricing pressures, reduced
margins or the failure of our Internet-based security products and services to
achieve or maintain market acceptance, any of which could materially harm our
business.
In addition, current and potential competitors have established or may in
the future establish collaborative relationships among themselves or with third
parties, including third parties with whom we have strategic alliances, to
increase the ability of their products to address the security needs of our
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. If this were
to occur, our business could be materially affected.
Our business depends on the wide adoption of the Internet for conducting
electronic commerce.
In order for us to be successful, the Internet must be widely adopted as a
medium for conducting electronic commerce. Because electronic commerce over the
Internet is new and evolving, it is difficult to predict the size of this
market and its sustainable growth rate. To date, many businesses and consumers
have been deterred from utilizing the Internet for a number of reasons,
including but not limited to:
. potentially inadequate development of network infrastructure;
. security concerns including the potential for merchant or user
impersonation and fraud or theft of stored data and information
communicated over the Internet;
. inconsistent quality of service;
. lack of availability of cost-effective, high-speed service;
. limited numbers of local access points for corporate users;
. inability to integrate business applications on the Internet;
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. the need to operate with multiple and frequently incompatible products;
and
. a lack of tools to simplify access to and use of the Internet.
The adoption of the Internet will require a broad acceptance of new methods
of conducting business and exchanging information. Companies and government
agencies that already have invested substantial resources in other methods of
conducting business may be reluctant to adopt new methods. Also, individuals
with established patterns of purchasing goods and services and effecting
payments may be reluctant to change.
The use of the Internet may not increase or may increase more slowly than we
expect because the infrastructure required to support widespread use may not
develop. The Internet may continue to experience significant growth both in the
number of users and the level of use. However, the Internet infrastructure may
not be able to continue to support the demands placed on it by continued
growth. Continued growth may also affect the Internet's performance and
reliability. In addition, the growth and reliability of the Internet could be
harmed by delays in development or adoption of new standards and protocols to
handle increased levels of activity or by increased governmental regulation.
Changes in, or insufficient availability of, communications services to support
the Internet could result in poor performance and adversely affect its usage.
Any of these factors could materially harm our business.
Public key cryptography security, on which our products and services are based,
may become obsolete, which would harm our business.
The technology used to keep private keys confidential depends in part on the
application of mathematical principles and relies on the difficulty of
factoring large numbers into their prime number components. Should a simpler
factoring method be developed, then the security of encryption products
utilizing public key cryptography technology could be reduced or eliminated.
Even if no breakthroughs in factoring or other methods of attacking
cryptographic systems are made, factoring problems can theoretically be solved
by computer systems significantly faster and more powerful than those presently
available. Any significant advance in techniques for attacking cryptographic
systems could render some or all of our existing products and services obsolete
or unmarketable.
Security systems based on public key cryptography assign users a public key
and a private key, each of which is required to encrypt and decrypt data. The
security afforded by this technology depends on the user's key remaining
confidential. It is therefore critical that the private key be kept secure.
Our products are subject to export controls, and we may be unable to obtain
necessary approvals.
Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. Cryptographic
products typically require export licenses from United States government
agencies. We are currently exporting software products and services with
requisite export approval under United States law. However, the list of
products and countries for which export approval is required, and the related
regulatory policies, could be revised beyond their current scope, and we may
not be able to obtain necessary approval for the export of our products. Our
inability to obtain required approvals under these regulations could limit our
ability to make international sales. Furthermore, our competitors may also seek
to obtain approvals to export products that could increase the amount of
competition we face.
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Risks Related to this Offering
Our securities have no prior market and our stock price may decline after this
offering.
Before this offering, there has not been a public market for our common
stock and the trading price of our common stock may decline below the initial
public offering price. The initial public offering price will be determined by
negotiations between us and the representatives of the underwriters. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
An active trading market may not develop and you may not be able to resell
the shares you purchase at or above the initial public offering price, or at
all. The trading price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
. actual or anticipated declines in operating results;
. changes in financial estimates or recommendations by securities
analysts;
. announcements by us or our competitors of financial results, new
services, significant technological innovations, contracts,
acquisitions, strategic partnerships, joint ventures, capital
commitments or other events;
. stock market price and volume fluctuations, which are particularly
common among securities of Internet-related companies;
. losses in key personnel;
. future equity or debt offerings or announcements of these offerings; and
. general market and economic conditions.
In recent years the stock market in general, and the market for shares of
small capitalization and technology stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of our common stock will not experience significant fluctuations in the
future, including fluctuations unrelated to our performance. Such fluctuations
could materially adversely affect the market price of our common stock.
In addition, in the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price
of its securities. This risk is especially acute for us because the extreme
volatility of market prices of technology companies has resulted in a larger
number of securities class action claims against them. Due to the potential
volatility of our stock price, we may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.
We have no specific plan for the use of the net proceeds, and our investment of
the net proceeds may not yield a favorable return.
We plan to use the proceeds from this offering for general corporate
purposes. We may use the proceeds in ways with which certain stockholders may
not agree or that prove to be disadvantageous to our stockholders. We may not
be able to invest the proceeds of this offering in a manner which yields a
favorable return.
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After this offering we will continue to be controlled by our executive
officers, directors and major stockholders, whose interests may conflict with
yours.
Upon completion of this offering, our executive officers, directors and
major stockholders will beneficially own approximately % of our outstanding
common stock, based on shares outstanding as of April 30, 2000. As a result,
these stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could have the effect of delaying or
preventing a third party from acquiring control over or merging with us. We
also plan to reserve % of the shares offered in this offering under a
directed share program in which our vendors, employees, family members of
employees, customers and other third parties may be able to purchase shares in
this offering at the initial public offering price. This program may further
increase the amount of stock held by persons whose interests are closely
aligned with management's interests.
Provisions in our charter documents and Delaware law could prevent or delay a
change in control, which could reduce the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. In addition, provisions of Delaware law may discourage, delay or
prevent someone from acquiring or merging with us. These provisions could limit
the price that investors might be willing to pay in the future for shares of
our common stock.
There are a large number of shares of our common stock that may be sold in the
market following this offering, which may depress the market price of our
common stock.
Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that those sales may be made,
could cause the market price of our common stock to decline. In addition, the
sale of these shares could impair our ability to raise capital through the sale
of additional equity securities. Based on shares outstanding as of April 30,
2000, following this offering, we will have shares of common stock
outstanding or shares if the underwriters' over-allotment is exercised in
full. Of these, shares will become available for sale 180 days following
the date of this prospectus upon the expiration of lock-up agreements, subject
to the restrictions imposed by the federal securities laws on sales by
affiliates. Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, however, may waive these lock-up restrictions at their sole
discretion without notice.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terms such as "may," "will," "should," "expect," "plan," "intend,"
"forecast," "anticipate," "believe," "estimate," "predict," "potential,"
"continue" or the negative of these terms or other comparable terminology. The
forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties and situations that may cause our or our
industry's actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these statements. These factors include
those discussed under "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock we are offering will be approximately $ million, assuming an initial
public offering price of $ per share and after deducting underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $ million.
We intend to use the proceeds for general corporate purposes, including
working capital and capital expenditures. We may also use a portion of the net
proceeds for acquisitions, although we currently have no commitments or
agreements with respect to any acquisitions. We have not yet determined all of
our expected expenditures, and we cannot estimate the amounts to be used for
each purpose set forth above. Pending our use of the net proceeds for these
purposes, we intend to invest them in cash equivalents and short-term
investments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not anticipate paying cash dividends on our common stock in the foreseeable
future. We currently anticipate that we will retain all of our future earnings,
if any, for use in the development and expansion of our business and for
general corporate purposes. Any determination to pay dividends in the future
will be at the discretion of our board of directors and will depend upon our
financial condition, operating results and other factors as determined by our
board of directors. Additionally, we have entered into a loan agreement with a
creditor that restricts our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000 on
the following three bases:
. On an actual basis;
. On a pro forma basis to reflect the conversion of all outstanding shares
of our preferred stock into 19,937,321 shares of common stock effective
automatically upon the closing of this offering and the filing of our
amended and restated certificate of incorporation upon closing of this
offering; and
. On that pro forma basis as adjusted to reflect the sale of shares of
common stock in this offering at an assumed initial public price of $
per share.
This table should be read in conjunction with our financial statements and
the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Long-term debt obligations .................... $ 2,587 $ 2,587 $
Convertible preferred stock; $0.00005 par
value, 22,465,270 shares authorized, and
19,937,321 shares issued and outstanding,
actual; $0.001 par value, 2,000,000 shares
authorized and no shares issued and
outstanding, pro forma and pro forma as
adjusted: 3 --
Additional paid-in-capital.................... 34,368 --
Notes receivable from convertible preferred
stockholders................................. (55) --
Stockholders' equity:
Common stock; $0.00005 par value, 25,000,000
shares authorized and 6,594,609 shares issued
and outstanding, actual; $0.001 par value,
100,000,000 shares authorized and 26,248,861
shares issued and outstanding, pro forma;
$0.001 par value, 100,000,000 shares
authorized and shares issued and
outstanding, pro forma as adjusted............ 1 4
Additional paid-in-capital..................... 24,039 58,407
Deferred stock compensation.................... (7,826) (7,826)
Notes receivable from common stockholders...... (1,668) (1,723)
Accumulated other comprehensive loss........... (65) (65)
Accumulated deficit............................ (23,292) (23,292)
-------- --------
Total stockholders' equity (deficiency)....... (8,811) 25,505
Total capitalization....................... $ 28,092 $ 28,092
======== ========
</TABLE>
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DILUTION
If you invest in our common stock, the book value of your investment will be
diluted in an amount equal to the difference between the public offering price
per share of our common stock and the pro forma net tangible book value per
share of our common stock after this offering. The pro forma net tangible book
value per share after this offering equals the net tangible book value, which
is tangible assets less total liabilities, divided by the number of outstanding
shares of common stock after the offering, which will include shares of
common from the conversion of preferred stock upon consummation of this
offering.
Our pro forma net tangible book value as of March 31, 2000 was approximately
$ million or $ per share of common stock. The pro forma as adjusted net
tangible book value per share takes into account the estimated net proceeds
from this offering. Based upon an assumed initial public offering price of $
per share and after deducting the underwriting discounts and commissions and
estimated offering expenses, our pro forma as adjusted net tangible book value
as of March 31, 2000 would have been approximately $ , or $ per share.
This represents an immediate increase in pro forma as adjusted net tangible
book value of $ per share to existing stockholders and an immediate dilution
of $ per share to investors purchasing common stock in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
----
Pro forma net tangible book value per share as of March 31, 2000... $
----
Increase per share attributable to new investors...................
----
Pro forma as adjusted net tangible book value per share after the
offering...........................................................
----
Dilution per share to new investors................................. $
====
</TABLE>
The following table summarizes as of March 31, 2000, on the pro forma basis
described above, the number of shares of common stock purchased from us, and
the total consideration paid and the average price per share paid by existing
stockholders and by investors purchasing shares of common stock in this
offering, before deducting the estimated underwriting discounts and commissions
and estimated offering expenses. Additionally, as detailed below, new investors
purchasing shares in this offering at the initial public offering price will
contribute % of the total consideration paid to us but will own only % of our
shares.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Paid Per Share
------ ------- ------ ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. % $ % $
New investors...................... % %
--- ---- ---- ----
Total............................. 100% $ 100%
=== ==== ==== ====
</TABLE>
Except as noted above, the foregoing discussion and tables assume no
exercise of any stock options or warrants outstanding at March 31, 2000. As of
March 31, 2000, there were options outstanding to purchase 3,319,002 shares of
common stock at a weighted average exercise price of $1.56 and warrants to
purchase a total of 1,104,271 shares of our common stock at a weighted average
exercise price of $9.66 per share. To the extent that any of these options are
exercised, there will be further dilution to investors purchasing our common
stock.
23
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Consolidated Financial Statements and the Notes thereto
included elsewhere in this prospectus. The historical selected financial data
as of December 31, 1998 and 1999 and for the fiscal years ended December 31,
1997, 1998 and 1999 are derived from, and are qualified by reference to, the
audited financial statements and notes thereto appearing elsewhere in this
prospectus. The selected financial data for the period from February 6, 1996,
our date of inception, through December 31, 1996 and as of December 31, 1997,
are derived from, and are qualified by reference to, audited financial
statements which do not appear in this prospectus. The historical statement of
operations data for the three months ended March 31, 1999 and 2000 and the
historical balance sheet data as of March 31, 2000 are derived from, and are
qualified by reference to, our unaudited financial statements and notes thereto
appearing elsewhere in this prospectus. In the opinion of management, those
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the interim
information. Historical results are not necessarily indicative of results that
may be achieved in any future period.
On December 30, 1999, we acquired Receipt.com in a transaction accounted for
using the purchase method of accounting. The pro forma statement of operations
data for the year ended December 31, 1999 appearing in the following table has
been prepared as if the acquisition had been completed on January 1, 1999, and
was prepared by combining our statement of operations data for 1999 with the
statement of operations data of Receipt.com for 1999. The pro forma statement
of operations data is subject to a number of estimates, assumptions and
uncertainties and does not purport to reflect the results of operations that
would have occurred had this acquisition taken place on the date indicated, nor
does it purport to reflect results of operations that will occur in the future.
The pro forma financial data for the year ended December 31, 1999 appearing in
the following table excludes a one-time $2.8 million expense for acquired in-
process research and development arising from our acquisition of Receipt.com as
it is a material non-recurring charge. The pro forma statement of operations
data should be read in conjunction with our financial statements and the
financial statements of Receipt.com and our pro forma condensed combining
financial statements, in each case including the notes thereto, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
From February 6, Year Ended December Pro Forma Three Months
1996 (date of 31, Year Ended Ended March 31,
inception) through ------------------------ December 31, ----------------
December 31, 1996 1997 1998 1999 1999 1999 2000
------------------ ----- ------- -------- ------------ ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software licenses...... $ -- $ -- $ 60 $ 874 $ 1,953 $ 89 $ 1,396
Subscription fees and
other services........ -- -- -- 761 994 79 480
----- ----- ------- -------- -------- ------- -------
Total revenues......... -- -- 60 1,635 2,947 168 1,876
Cost of revenues:
Software licenses...... -- -- 3 93 196 7 153
Subscription fees and
other services........ -- -- -- 134 254 29 1,041
----- ----- ------- -------- -------- ------- -------
Total cost of
revenues.............. -- -- 3 227 450 36 1,194
----- ----- ------- -------- -------- ------- -------
Gross profit............ -- -- 57 1,408 2,497 132 682
Operating expenses:
Research and
development........... 335 373 1,728 5,608 6,800 822 1,911
Sales and marketing.... 26 53 1,445 4,583 5,992 802 2,404
General and
administrative........ 132 97 977 1,373 3,298 279 686
Acquired in-process
research and
development........... -- -- -- 2,780 -- -- --
Amortization of
intangibles........... -- -- -- -- 3,253 -- 810
Amortization of stock
compensation.......... -- -- -- 162 1,120 -- 457
----- ----- ------- -------- -------- ------- -------
Total operating
expenses.............. 493 523 4,150 14,506 20,463 1,903 6,268
----- ----- ------- -------- -------- ------- -------
Operating loss.......... (493) (523) (4,093) (13,098) (17,966) (1,771) (5,586)
Interest income
(expense), net......... -- (7) 103 296 121 7 128
----- ----- ------- -------- -------- ------- -------
Net loss................ $(493) $(530) $(3,990) $(12,802) $(17,845) $(1,764) $(5,458)
===== ===== ======= ======== ======== ======= =======
</TABLE>
The following table reflects our historical and pro forma net loss per share
for the periods indicated and the weighted average historical and pro forma
number of shares used to calculate net loss per share for the periods. The
historical net loss per share has been calculated on the basis of the weighted
average number of shares of common stock actually outstanding during the
respective periods. From
24
<PAGE>
March 20, 1998 until March 26, 1999, we did not have any shares of common stock
outstanding due to their conversion into preferred stock in March 1998. As a
result, we do not believe our historical net loss per share for 1998 and the
three months ended March 31, 1999 are meaningful because they are substantially
greater than they would have been had our common stock been outstanding during
all of 1998 and the first quarter of 1999. The pro forma data in the following
table has been calculated by assuming that all of our outstanding shares of
preferred stock had been converted, as of their respective dates of original
issuance, into shares of our common stock.
<TABLE>
<CAPTION>
From
February 6,
1996 (date
of
inception) Year Ended Three Months
through December 31, Ended March 31,
December 31, ----------------------- ------------------
1996 1997 1998 1999 1999 2000
------------ ------ ------ ------- ---------- ------
(shares in thousands)
Per Share Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per share......... $(0.68) $(0.57) $(5.34) $(32.57) $(1,548.40) $(1.54)
====== ====== ====== ======= ========== ======
Shares used in
computation of basic
and diluted net loss
per share.............. 730 934 747 393 1 3,546
====== ====== ====== ======= ========== ======
Pro forma basic and
diluted net loss per
share.................. $ (0.83) $ (0.15) $(0.24)
======= ========== ======
Shares used in pro forma
basic and diluted net
loss
per share.............. 15,489 11,821 22,702
======= ========== ======
</TABLE>
The following pro forma financial data as of March 31, 2000 gives effect to
the conversion of all of our outstanding shares of preferred stock into common
stock upon the closing of this offering. The following pro forma as adjusted
data gives effect to the foregoing and to the sale of the shares of common
stock that we are offering under this prospectus at an assumed initial public
offering price of $ per share and after deducting the underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of December 31, As of March 31, 2000
---------------------------- ------------------------------
Pro Forma
1996 1997 1998 1999 Actual Pro Forma As Adjusted
---- ------ ------ ------ ------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ 101 518 1,163 14,023 $10,983 $10,983 $
Working capital......... 36 (478) 644 13,325 9,616 9,616
Total assets............ 140 627 2,436 37,692 33,033 33,033
Long-term obligations... -- 50 16 2,314 2,587 2,587
Convertible preferred
stock.................. 566 568 6,748 34,256 34,316 --
Total stockholders'
equity (deficiency).... (493) (1,023) (5,032) (4,286) (8,811) 25,505
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our actual results could differ materially from those discussed in the
forward-looking statements in this section. See "Risk Factors" and "Special
Note Regarding Forward-Looking Statements." The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with "Selected Financial Data" and our historical and pro forma
financial statements and notes thereto appearing elsewhere in this prospectus.
Overview
We develop and market software products and services that organizations use
to conduct valid, secure and provable transactions over the Internet. From our
inception in 1996 through 1998, we primarily focused our activities on
conducting research and development, raising capital, recruiting personnel and
establishing distribution channels for our software products. We commenced
commercial shipments of our validation authority software products during the
first quarter of 1999, and to date have derived substantially all of our
revenues from the licensing of our validation authority products. In addition
to our validation authority suite of products and services, we currently offer
secure data transfer products and digital receipt products and services which
we obtained as a result of our acquisition of Receipt.com in December 1999. As
of March 31, 2000, we had over 80 customers, including Hanwha Corporation,
PricewaterhouseCoopers, Society for Worldwide Interbank Financial
Telecommunication, or S.W.I.F.T., Unisys and Visa.
We sell our products and services to enterprise end users who use them to
conduct business within their organization and with their trading partners, and
to service provider customers who use them to implement their branded
validation and digital receipt products and services. Our contracts with
enterprise end-user customers of our validation authority and digital receipt
products generally consist of a renewable subscription fee that entitles them
to validate or notarize a stated number of transactions during a specified
period, typically one year, and receive maintenance and support services. Our
enterprise end users are required to renew their subscription to continue using
our products and services after expiration of the initial period. End users who
purchase our secure data transfer products enter into perpetual license
arrangements in exchange for an up front fee and generally contract for annual
maintenance and support. Our contracts with service provider customers
generally specify a combination of an initial software license fee, a renewable
subscription fee providing rights similar to those received by corporate end
users, and optional maintenance and support fees. Beginning in 2000, we
introduced new contract arrangements with our enterprise end-user and service
provider customers related to subscription fees. These fees will be recognized
ratably over the subscription period, typically one year.
We derive revenues from software license fees, subscription fees, consulting
services, and maintenance and support. Software license revenues are comprised
of up front fees for the use of our software products. We recognize revenue
from license fees when an agreement has been signed, the product has been
delivered, the fee is fixed or determinable, collectibility is probable and
vendor-specific objective evidence exists to allocate a portion of the total
fee to any undelivered elements of the arrangement. When we deliver our
software products electronically, we consider the sale complete when we provide
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, we
recognize revenue as payments become due. If we do not consider collectibility
probable, we recognize the revenue when the fee is collected. Customer
contracts that require delivery of unspecified additional software products in
the future are accounted for as subscriptions, and we recognize this revenue
ratably over the term of the arrangement beginning with the delivery of the
first product. We recognize subscription fees ratably over the related service
period except when a customer exceeds the specified number
26
<PAGE>
of transactions prior to the end of the subscription period, in which case we
accelerate recognition of the remaining portion of the subscription fee. We
recognize consulting revenue as these services are provided to the customer. We
recognize revenue from maintenance and support arrangements on a straight-line
basis over the life of the agreement, which is typically one year. If
maintenance and support or consulting services are included in a license
agreement, amounts related to maintenance and support or consulting are
allocated based on vendor-specific objective evidence. Accordingly, future
subscription fees will be recognized ratably over the related service period.
In executing our product development plans, we consider both internal
research and development and the acquisition or licensing of emerging
technologies from third parties. We believe that time-to-market is critical to
success in the rapidly evolving Internet security infrastructure market, where
we must compete with well-established companies and where our products must
integrate with the predominant operating systems and network protocols within
the enterprise computing environment. Accordingly, we must continually evaluate
whether it is more efficient and effective to develop a given solution
internally, or to license or acquire a technology. We acquired Receipt.com in
December 1999 for approximately $21.2 million in common and preferred stock and
the assumption of liabilities. We accounted for the acquisition using the
purchase method of accounting. Receipt.com is a provider of secure data
transfer software and, at the date of acquisition, was in the process of
developing its digital receipt software product.
If our acquisition of Receipt.com had taken place on January 1, 1999, we
would have had pro forma combined revenues of $2.9 million in 1999. Our pro
forma combined costs and expenses for 1999 would have been $20.8 million,
including $4.6 million of costs and expenses from Receipt.com and $3.2 million
in amortization of intangible assets associated with the acquisition. Pro forma
combined other income for the year would have been $121,000 and net loss would
have been $17.8 million, or $2.26 per share. This pro forma data does not
include a one-time charge of $2.8 million for acquired in-process research and
development arising from the acquisition, as it was a material nonrecurring
charge. Because of the significance of this acquisition, our historical
financial condition and results of operations set forth below should not be
considered as indicative, nor should be relied upon as an indicator, of our
future performance. Likewise, our financial condition and results of operations
as of dates and for periods subsequent to the acquisition are not comparable to
our financial condition and results of operations prior to the acquisition.
Since inception, we have incurred substantial costs to develop our
technologies and software products, to recruit and train personnel for our
engineering, sales and marketing and technical support organizations, and to
establish an administrative department. As a result, we have incurred net
losses in each year of operation since inception and had an accumulated deficit
of $23.2 million as of March 31, 2000. We expect that our operating expenses
will increase substantially in future periods as we continue to grow our
domestic and international sales and marketing organizations, increase research
and development, broaden technical support services and expand our data center
operations. We also expect to incur non-cash expenses relating to amortization
of deferred stock compensation, goodwill and other intangible assets. We have
incurred losses since inception and expect to continue to incur losses for the
foreseeable future.
Results of Operations
Three Months Ended March 31, 2000 and 1999
Revenues
Revenues increased to $1.9 million for the three months ended March 31, 2000
from $168,000 for the three months ended March 31, 1999 primarily due to
increased sales of
27
<PAGE>
software licenses of our validation authority product and fees for consulting
services. Revenues for the three months ended March 31, 2000 included $1.4
million for software license revenues and $480,000 for subscription fees and
other services revenues.
Cost of Revenues
Cost of software license revenues. Cost of software license revenues
consists primarily of royalty costs related to technology licensed from third
parties. These costs increased 277.6% to $153,000 for the three months ended
March 31, 2000 from $7,000 for the three months ended March 31, 1999 due to
increased software license revenues.
Cost of subscription fees and other services revenues. Cost of subscription
fees revenues primarily consists of costs associated with operating our secure
data center and salaries and other personnel related expenses. Cost of other
services revenues consists primarily of compensation and other personnel
related expenses, and other operating expenses incurred in providing
consulting, training, and maintenance and support services. The cost of
subscription fees and other services revenues increased to $1.0 million for the
three months ended March 31, 2000 from $29,000 for the three months ended March
31, 1999 primarily as a result of the inclusion of expenses related to the
operation of our secure data center which were included in cost of sales for
the first time during the quarter ended March 31, 2000, as the data center
became operational at the end of December 1999.
Operating Expenses
Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, third-party consulting
services, and the costs of facilities and computer equipment. Research and
development expenses increased to $1.9 million during the three months ended
March 31, 2000 from $822,000 during the three months ended March 31, 1999, an
increase of 131.1%, as we continued to invest in the design, testing and
deployment of our products and services. The expense increase was primarily
related to increases in salaries and other personnel-related costs, third-party
consulting services and the costs of facilities.
Sales and marketing. Sales and marketing expenses consist primarily of costs
related to salaries and other personnel-related costs, sales commissions,
tradeshows, marketing programs, travel, facilities and computer equipment.
Sales and marketing expenses increased to $2.4 million during the three months
ended March 31, 2000 from $802,000 during the three months ended March 31,
1999, an increase of 199.8%, as we continued to expand our domestic and
international direct sales organization and increased our marketing efforts.
The increase in expenses was primarily related to salaries and other personnel-
related costs, and facilities and travel expenses.
General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs for our administrative,
finance and human resources employees, professional services such as accounting
and legal, and facilities costs. General and administrative expenses increased
to $686,000 during the three months ended March 31, 2000 from $279,000 during
the three months ended March 31, 1999, an increase of 145.9%, primarily due to
compensation expense and legal fees.
Amortization of intangibles. On December 30,1999, we acquired Receipt.com in
a transaction which was recorded using the purchase method of accounting. In
connection with the purchase, we recorded goodwill of $12.5 million and other
intangibles of $2.3 million. An expense of $810,000 was recorded in the first
quarter of 2000 for the amortization of goodwill over a five year period and
other intangibles over three years.
28
<PAGE>
Amortization of stock compensation. Deferred stock compensation represents
the difference between the exercise price of stock options granted and the
estimated fair market value of the underlying common stock on the date of the
grant. As of December 31, 1999, we had recorded deferred stock compensation
costs of $3.6 million in connection with stock options we assumed as part of
our acquisition of Receipt.com and an additional $2.3 million related to the
grant of other employee stock options. Deferred stock compensation costs are
being amortized over approximately four years on the single option method,
which resulted in an expense of $457,000 during the three months ended March
31, 2000. We expect to incur additional deferred stock compensation through the
quarter ending June 30, 2000.
Interest income (expense), net. Interest income (expense), net, consists of
interest earned on cash, cash equivalents and short-term investments offset by
interest expense, primarily incurred on equipment lease obligations. Net
interest income increased to $190,000 during the three months ended March 31,
2000 from $7,000 during the three months ended March 31, 1999 due to an
increased level of cash available for investment, primarily from the proceeds
of a private equity financing.
Fiscal Years Ended December 31, 1999, 1998 and 1997
Revenues
Total revenues increased to $1.6 million for the year ended December 31,
1999 from $60,000 for the year ended December 31, 1998. Revenues for 1998
related primarily to consulting and licensing of some of our core technology.
We did not recognize any revenues in 1997, as we had not yet released any of
our products for commercial availability. For the year ended December 31, 1999,
software license revenues accounted for 53.5% of our total revenues and
subscription fees and other services revenues accounted for 46.5% of our total
revenues.
Cost of Revenues
Cost of software license revenues. Cost of software license revenues
increased to $93,000 for the year ended December 31, 1999 from $3,000 for the
year ended December 31, 1998. Cost of software license revenues as a percentage
of software license revenues was 10.6% for 1999 and 5.0% for 1998.
Cost of subscription fees and other services revenues. Our cost of
subscription fees and other services revenues increased to $134,000 for the
year ended December 31, 1999. As a percentage of subscription fees and other
services revenues, cost of subscription fees and other services revenues was
17.6% for 1999. During 1999, we incurred substantial development costs to
design and implement a secure data center to support our validation service
offering. We capitalized these costs. The data center became available for
commercial operation at the end of December 1999 and, as a result, beginning in
the first quarter of 2000 our cost of subscription fees and other services
revenues includes the costs of operating our secure data center. These costs
include salaries and other personnel-related costs, depreciation,
telecommunications and other costs associated with operating and maintaining a
secure data center.
Operating Expenses
Research and development. Research and development expenses increased to
$5.6 million for the year ended December 31, 1999 from $1.7 million for the
year ended December 31, 1998, an increase of 229.4%. Research and development
expenses as a percentage of total revenues were 342.5% for the year ended
December 31, 1999. The increase
29
<PAGE>
was primarily due to salaries and other personnel-related costs as we continued
to expand our research and development organization and for third-party
consulting services. Our research and development staff increased from 12 at
December 31, 1998 to 47 at December 31, 1999.
Sales and marketing. Sales and marketing expenses increased to $4.6 million
for the year ended December 31, 1999 from $1.4 million for the year ended
December 31, 1998, an increase of 228.6%. Sales and marketing expenses as a
percentage of total revenues were 281.3% for the year ended December 31, 1999.
As we continued to hire additional sales and marketing personnel, our sales and
marketing costs increased because of increased salaries and other personnel-
related costs. In 1999, we opened seven sales offices in the United States as
well as sales offices in Amsterdam, Paris and Tokyo.
General and administrative. General and administrative expenses increased to
$1.4 million for the year ended December 31, 1999 from $1.0 million for the
year ended December 31, 1998, an increase of 40.0%, primarily due to increases
in salaries and other personnel-related costs and increased third-party
consulting and legal fees to support the increased level of business
activities. General and administrative expenses as a percentage of total
revenues were 85.6% for the year ended December 31, 1999.
Acquired in-process research and development. Acquired in-process research
and development of $2.8 million was incurred in connection with our acquisition
of Receipt.com and was charged to expense because technological feasibility had
not been achieved. We believe that at the date of the acquisition, Receipt.com
had completed approximately 60% of the research and development of a system
that captures the digital signatures of the sender and receiver and provides a
verifiable time stamp for each transaction. The primary remaining efforts
associated with the development of the digital receipt technology included
completion of software development in several key areas, such as management,
reporting and access to receipts in the server vault, application program
interfaces, or APIs, and the completion of a toolkit for developers who need to
add digital receipt functionality to their applications.
The values assigned to the acquired in-process research and development were
determined by estimating the costs to develop the purchased in-process
technology into a commercially viable product, estimating the resulting net
cash flows from the product and discounting the net cash flows to their present
value. The revenue projections that were used to value the acquired in-process
research and development were based on estimates of relevant market sizes,
growth factors, expected trends in technology and other factors. Operating
expenses were estimated based on historical results and anticipated profit
margins. The rates utilized to discount the net cash flows to their present
value were based on cost of capital calculations. Due to the nature of the
forecast and risks associated with the projected growth, profitability and the
developmental nature of the product at the time of the acquisition, we used a
discount rate of 27.5% to value the acquired in-process research and
development. We determined that this discount rate was commensurate with this
product development and the uncertainties in the economic estimates described
above. At the time of this acquisition, we determined if the acquired in-
process research and development product was not commercially successful, our
business would be materially adversely affected and the value of other acquired
intangible assets would become impaired.
Amortized stock compensation. As of December 31, 1999, we have recorded
deferred stock compensation costs of $3.6 million in connection with stock
options we assumed as part of our acquisition of Receipt.com and an additional
$2.3 million related to the grant of other employee stock options. These
deferred costs are being amortized over approximately four years on the single
option method. Accordingly, our results from operations will include deferred
compensation expense at least through 2004. We recognized $163,000 of this
expense during the year ended December 31, 1999.
30
<PAGE>
Interest income (expense), net. Interest income, net, increased to $296,000
for the year ended December 31, 1999 from $103,000 for the year ended December
31, 1998, primarily due to interest earned on the proceeds from the August 1999
private placement of our preferred stock, offset by interest expense from our
equipment loans and leases.
Income taxes. Since inception, we have incurred net losses for federal and
state tax purposes and have not recognized any material tax provision or
benefit. As of December 31, 1999, we had net operating loss carryforwards of
$17.5 million for federal income tax purposes and $11.4 million for state
income tax purposes. The federal and state net operating loss carryforwards, if
not utilized, expire at various times through 2019 and through 2004,
respectively. Federal and state tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift of our
ownership that constitutes an ownership change, as defined in section 382 of
the Internal Revenue Code.
We have placed a valuation allowance against our net deferred tax assets to
reduce them to amounts that we believe are more likely than not to be realized.
The allowance totaled $8.0 million at December 31, 1999, resulting in no net
deferred asset. We evaluate on a quarterly basis the recoverability of net
deferred tax assets and the level of the valuation allowance. When we have
determined that it is more likely than not that the net deferred tax assets are
realizable, we will reduce the valuation allowance.
31
<PAGE>
Quarterly Results of Operations
The following table sets forth unaudited consolidated statements of
operations data for the five quarters following the general availability of our
products in January 1999 through March 31, 2000, as well as this information
expressed as a percentage of our total revenues for the periods indicated. The
financial results of Receipt.com are excluded from all periods presented except
for the three months ended March 31, 2000 as our acquisition of Receipt.com did
not close until December 30, 1999. This information has been derived from our
unaudited consolidated financial statements. The unaudited consolidated
quarterly financial statements have been prepared on the same basis as the
audited consolidated financial statements contained in this prospectus and
include all adjustments, consisting only of normal recurring adjustments, that
we considered necessary for a fair presentation of such information when read
in conjunction with our audited consolidated financial statements and related
notes. Operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000
-------- -------- --------- -------- --------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses......... $ 89 $ 29 $ 130 $ 626 $ 1,396
Subscription fees and
other services........... 79 222 145 315 480
------- ------- ------- ------- -------
Total revenues............ 168 251 275 941 1,876
------- ------- ------- ------- -------
Cost of revenues:
Software licenses......... 10 11 23 49 185
Subscription fees and
other services........... 27 43 30 34 1,009
------- ------- ------- ------- -------
Total cost of revenues.... 37 54 53 83 1,194
Gross profit............... 131 197 222 858 682
Operating expenses:
Research and development.. 822 913 1,245 2,563 1,911
Sales and marketing....... 802 813 1,176 1,826 2,404
General and
administrative........... 282 282 313 526 688
Acquired in-process
research and
development.............. -- -- -- 2,780 --
Amortization of
intangibles.............. -- -- -- -- 810
Amortized stock
compensation............. -- -- 44 118 457
------- ------- ------- ------- -------
Total operating expenses.. 1,906 2,008 2,778 7,813 6,270
Operating loss............. (1,775) (1,811) (2,556) (6,955) (5,588)
Interest income (expense),
net....................... 10 (14) 148 152 128
------- ------- ------- ------- -------
Net loss................... $(1,765) $(1,825) $(2,408) $(6,803) $(5,460)
======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses......... 53.0% 11.6% 47.3% 66.5% 74.4%
Subscription fees and
other services........... 47.0 88.4 52.7 33.5 25.6
------- ------- ------- ------- -------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses......... 6.0 4.4 8.4 5.2 9.9
Subscription fees and
other services........... 16.1 17.1 10.9 3.6 53.8
------- ------- ------- ------- -------
Total cost of revenues.... 22.0 21.5 19.3 8.8 63.6
Gross margin............... 78.0 78.5 80.7 91.2 36.4
Operating expenses:
Research and development.. 489.3 363.7 452.7 272.4 101.9
Sales and marketing....... 477.4 323.9 427.6 194.0 128.1
General and
administrative........... 167.9 112.4 113.8 55.9 36.7
Acquired in-process
research and
development.............. -- -- -- 295.4 --
Amortization of
intangibles.............. -- -- -- -- 43.2
Amortized stock
compensation............. -- -- 16.0 12.5 24.4
------- ------- ------- ------- -------
Total operating expenses.. 1134.5 800.0 1010.2 830.3 334.2
Operating loss............. (1056.5) (721.5) (929.5) (739.1) (297.9)
Interest income (expense),
net....................... 6.0 (5.6) 53.8 16.2 6.8
------- ------- ------- ------- -------
Net loss................... (1050.6)% (727.1)% (875.6)% (723.0)% (291.0)%
======= ======= ======= ======= =======
</TABLE>
32
<PAGE>
Revenues
Software license revenues. Our software license revenues have generally
increased in every quarter following the commencement of commercial shipments
of our initial validation authority software products in the first quarter of
1999. Software license revenues decreased in the second quarter of 1999
compared to the first quarter of 1999 due to the variability of initial sales.
The generally increasing trend resulted from growing market acceptance of our
products and services. Software license revenues in the fourth quarter of 1999
and the first quarter of 2000 increased significantly as we gained additional
market acceptance for our products and were able to offer products resulting
from our acquisition of Receipt.com.
Subscription fees and other services revenues. Revenues from our
subscription fees and other services revenues have increased in each quarter in
the periods presented, except for the third quarter of 1999. The generally
increasing trend resulted from increases in the number of, and fees from,
consulting engagements and, to a lesser extent, a growing base of maintenance
and support revenues. The decrease in revenues from subscription fees and other
services on an absolute dollar basis and as a percentage of revenues in the
quarter ended September 30, 1999 as compared to the preceding quarter was due
to a lower level of consulting fees.
Costs of revenues
Cost of software license revenues. Cost of software license revenues, which
consist primarily of royalty costs to third parties, have generally increased
each quarter since we began commercial sales of our products in the first
quarter of 1999 due to increased sales of our software products.
Cost of subscription fees and other services revenues. Cost of subscription
fees and other services revenues during 1999 fluctuated primarily due to the
amount of revenues derived from various consulting projects. The significant
increase in costs during the quarter ended March 31, 2000 resulted primarily
from the costs related to operating our secure data center that became
commercially operational at the end of December 1999.
Operating expenses
Research and development. Research and development expenses, except for the
first quarter of 2000, continued to grow during the five quarters ended March
31, 2000 as we continued to develop new products and enhance our existing
products and services. Until the first quarter of the year 2000, research and
development expenses also included costs associated with our secure data
center. Research and development expenses declined in the first quarter of 2000
partly because of this reclassification of secure data center costs which was
partially offset by the increased research and development expenses resulting
from the Receipt.com acquisition. We believe that continued investment in
research and development is critical to attaining our strategic objectives and
we expect these expenses to increase significantly in absolute dollars in
future periods.
Sales and marketing. Sales and marketing expenses have increased since we
started to ship our validation authority software product in the first quarter
of 1999 as we have continued to build our sales and marketing organization. The
primary reasons for these increases are increased personnel and associated
sales commissions, expanded marketing programs and expansion of regional sales
offices. In addition, the three months ended March 31, 2000 reflect additional
sales and marketing expenses resulting from the Receipt.com acquisition. We
expect that sales and marketing expenses will increase in absolute dollars in
future periods as we continue to add personnel and expand our sales and
marketing efforts.
General and administrative. General and administrative expenses have
generally grown during the five quarters ended March 31, 2000. We have
continued to increase the
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number of general and administrative personnel to support our growing
organization and transaction volume. We expect that general and administrative
expenses will increase in absolute dollars in future periods as we add
personnel to support the anticipated growth in our business and incur costs
related to operating as a public company.
Acquired in-process research and development; amortization of
intangibles. Our operating expenses for the fourth quarter of 1999 included
$2.8 million for acquired in-process research and development, and our expenses
for the first quarter of 2000 included $810,000 for the amortization of
intangibles. Both of these items were attributable to our acquisition of
Receipt.com in the fourth quarter of 1999.
Amortization of stock compensation. We recorded $2.4 million of deferred
stock compensation during the quarter ended March 31, 2000 related to stock
options granted during the period. We recognized $450,000 in amortized stock
compensation expense during the quarter ended March 31, 2000.
You should not rely on quarter-to-quarter comparisons of our results of
operations as indicators of future performance due to our limited operating
history, the early stage of our markets and factors discussed in the section
entitled "Risk Factors" above and elsewhere in this prospectus. In particular,
because our base of customers and the number of additional customer licenses we
enter into each quarter are still relatively small, the loss or deferral of a
small number of anticipated large customer orders in any quarter could result
in a significant variability in revenues for that quarter. In addition, we
acquired Receipt.com in December 1999 and our results of operation for periods
after that acquisition are not and will not be comparable to our results of
operations for prior periods. If in some future periods our operating results
are below the expectations of public market analysts and investors, the price
of our common stock may fall.
Liquidity and Capital Resources
From our inception through March 31, 2000, we have funded our operations
primarily through the private sale of our equity securities with aggregate net
proceeds of approximately $30.0 million. At March 31, 2000, we had cash and
cash equivalents and short-term investments of $11.0 million and a secured bank
credit line of $1.0 million. In April 2000, the bank credit line was increased
to $2.5 million, and borrowings of $1.0 were outstanding under that line as of
April 30, 2000. We anticipate using available cash to provide working capital
and otherwise fund our operations and to purchase capital equipment and make
leasehold improvements.
Net cash used in operating activities of $383,000 in 1997, $3.7 million in
1998, $6.6 million in 1999 and $1.7 million in the three months ended March 31,
2000, was primarily used to fund our operating losses. Net cash used for
operating activities in the three months ended March 31, 2000 related primarily
to an operating loss of $5.5 million partially offset by non-cash depreciation
and amortization expenses of $1.6 million. Net cash used for operating
activities in 1999 related primarily to an operating loss of $12.9 million
partially offset by non-cash depreciation and amortization expenses of $3.7
million, an increase in accounts payable of $2.5 million and other changes in
working capital. Net cash used for operating activities in 1997 and 1998
related primarily to funding our operating losses.
Net cash used in investing activities was $855,000 in 1998 and $4.4 million
in 1999, and primarily related to capital equipment expenditures and net short-
term investments. Net cash from investing activities of $2.6 million for the
three months ended March 31, 2000 was
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<PAGE>
provided by the sale of short-term investments offset in part by capital
equipment expenditures. Capital equipment expenditures primarily related to the
purchase of computer hardware and software, office furniture and equipment, and
leasehold improvements. We expect continued increases in capital expenditures
and lease commitments due to growth in operations, infrastructure and
personnel.
Net cash provided by financing activities was $830,000 in 1997, $5.3 million
in 1998, $23.9 million in 1999 and $1.1 million for the three months ended
March 31, 2000. Net cash was provided primarily from sales of capital stock
and, to a more limited extent, borrowings and the exercise of warrants and
stock options.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, and our
capital expenditures for the foreseeable future in order to execute our
business strategy. As a result, we anticipate that such operating expenses and
planned capital expenditures will constitute a material use of our cash
resources. In addition, we may utilize cash resources to fund acquisitions of,
or investments in, complementary businesses, technologies or product lines. We
believe that the net proceeds from the sale of the common stock in this
offering, together with current cash balances and borrowing available under our
credit facilities, will be sufficient to meet our working capital needs for at
least the next 12 months. Thereafter, we may find it necessary to obtain
additional equity or debt financing. Additional financing may not be available
at all or, if available, may not be obtainable on terms favorable to us. In
addition, any additional financing may be dilutive and new equity securities
could have rights senior to those of existing holders or our common stock. If
we need to raise funds and cannot do so on acceptable terms, we may not be able
to respond to competitive pressures or anticipated requirements or take
advantage of future opportunities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This statement is
effective for financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We intend to adopt this statement when required;
however, it is not expected to have a material impact on our financial position
or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Most of our debt obligations have been at fixed interest rates, and
therefore the fair value of these obligations is affected by changes in market
interest rates. Our cash equivalents and short-term investments are primarily
comprised of high-grade commercial paper and highly liquid deposits with
financial institutions. Therefore, the fair value of the underlying securities
are not materially effected by a change in market interest rates. A
hypothetical increase or decrease in market interest rate by 100 basis points
would not have a material effect on our financial position.
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<PAGE>
BUSINESS
Overview
ValiCert is a leading provider of end-to-end infrastructure software
products and services that organizations use to conduct valid, secure and
provable transactions over the Internet. Our products and services are designed
to meet our customers' need for a framework of trust before, during and after
e-Transactions, including electronic commerce and payments, electronic data
interchange, file sharing, electronic document signing and business critical e-
mail. We believe that our products and services reduce the costs associated
with fraudulent transactions and security breaches, including direct losses,
damage to reputation and productivity losses resulting from downtime. Our
customers include Aetna, Dell, Identrus, PricewaterhouseCoopers and NTT
Communications.
Our validation authority software products and services verify the status of
digital certificates and establish the authority of a party before conducting a
transaction. Our secure data transfer software products enable the reliable and
tamper-proof transmission of data during a transaction. Our digital receipt
software products and services create and archive detailed information to
provide a provable audit trail after a transaction. To ensure broad application
and platform support for our products and services, we have formed strategic
alliances with companies such as Baltimore Technologies, Entrust, IBM,
Microsoft, Netscape/iPlanet and Trintech. We believe that our products and
services, combined with our strategic alliances, provide a comprehensive
solution to address the rapidly growing Internet security software and services
market.
Industry Background
Growth of Internet commerce and communications
The Internet, with its global reach, cost-effectiveness and ability to
enable real-time interactions, is fundamentally changing the way in which
companies, government agencies and individuals conduct business and interact
with one another. The Internet has enabled organizations to more efficiently
communicate and conduct commerce directly with their customers, suppliers and
partners. The Internet has been traditionally used for non-critical information
publishing, e-mail, and more recently, for business-to-consumer electronic
commerce. However, it is being increasingly viewed as a medium for conducting a
broad range of business-to-business and other electronic transactions. We call
these transactions e-Transactions and they include electronic commerce and
payments, electronic data interchange, file sharing, electronic document
signing and business critical e-mail. Forrester Research, an independent
research firm, reported that 78% of the United States companies it surveyed
expect their customers and 65% expect their trading partners to conduct
electronic commerce with them by 2002. To accommodate this anticipated growth,
organizations are making sizeable investments in Internet infrastructure
products and services, including commerce applications, content management
tools, analytic tools, customer service tools, application servers and
integration software. Forrester Research estimates that the domestic market for
these infrastructure products and services will grow from $13.7 billion in 1999
to $79.3 billion by 2003.
Requirement for valid, secure and provable transactions
As an open network, the Internet does not restrict access and does not
inherently offer the degree of trust, security and provability that we believe
organizations and individuals increasingly require to ensure confidence in
electronic transactions. Therefore, the people and
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<PAGE>
organizations that rely on the Internet to conduct transactions are subject to
risks of theft, loss, alteration or dissemination of confidential data, damage
to their reputation and economic loss through fraud. To minimize these risks,
the Internet requires a framework of trust that meets users' security
requirements before, during and after a transaction:
. Before a transaction, the validity of the credentials used by the
participants must be verified and the authority of the participants to
conduct the specific transaction must be confirmed; we refer to this
process as validation.
. During a transaction, the transmission of information must be secure and
reliable to ensure the integrity and confidentiality of the transaction;
we refer to this process as secure data transfer.
. After a transaction, a receipt or confirmation that records the details
of the transaction must be promptly generated and archived. This proof
of occurrence must typically include information such as the type of
exchange and the time at which the exchange occurred. We refer to the
process of generating a receipt as transaction notarization. In
addition, the transaction data must be securely archived and easily
retrievable to provide an audit trail should a dispute arise at a later
date. We refer to this ability to prove the occurrence of a transaction
as non-repudiation.
In the physical world, this framework of trust is achieved through a
combination of business and legal practices and policies. These procedures
often include the use of physical credentials, a third-party entity to validate
those credentials, a secure medium to transmit transaction information and a
receipt to provide proof of the transaction. For example, an organization
making a purchase may use a corporate credit card as a physical credential to
establish its identity and credit worthiness, and the vendor will typically
rely on a third-party clearinghouse to validate the purchase. The transaction
data would be transmitted over a secure private network and a point of sale
system would then issue a time-stamped paper receipt as proof of the
transaction's occurrence. This framework of trust is essential as the number of
credentials, people and organizations involved increases and as the number and
value of the transactions conducted rise.
Evolution of Internet security infrastructure
Public key infrastructure, commonly referred to as PKI, has emerged as a
critical element for creating this framework of trust for the Internet. Based
on public key cryptography, PKI is the underlying system that organizations use
to issue and manage electronic credentials, which we refer to as digital
certificates, and the keys they contain to facilitate secure communications for
a large number of users. Each entity within a PKI deployment is assigned a
public key, which is provided to others, and a private key, which the entity
keeps confidential. Information encrypted using the public key can only be
decrypted, or unscrambled, using the corresponding private key. Conversely,
information signed with the private key can be verified as authentic with the
corresponding public key.
As PKI is incorporated into various computer applications, the number of
companies that market and distribute digital certificate products and services
has increased. The software product or the entity that issues and manages the
life cycle of digital certificates is referred to as a certificate authority.
As organizations increase their usage of the Internet to conduct
e-Transactions, industry spending on PKI and related security infrastructure
components is expected to grow rapidly. IDC estimates that enterprises will
spend $10.5 billion on Internet security software and services by 2003, up from
$3.7 billion in 1998.
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Use of digital certificates and the need for validation before a transaction
Digital certificates act as proofs of identity for users, servers, routers,
downloaded programs and other components in a network environment. These
credentials establish an entity's membership in a specific organization or
community. As such, they have become the primary mechanism for verifying the
identities of parties involved in a transaction before it is executed. However,
digital certificates do not, by themselves, establish the validity of a party's
credentials or provide real-time authorization to conduct a specific
transaction. For example, a digital certificate can verify the identity of an
employee prior to a transaction but cannot provide real-time validation of the
employment status of that individual or the specific spending restrictions or
other limits that may apply. A credential can be validated only if the
revocation status of the digital certificate is known and evaluated against a
specific set of policies which describe the party's authority to engage in a
given transaction. We refer to the software or entity that is used to validate
transactions as a validation authority.
Many certificate authorities incorporate some validation capabilities for
credentials they issue but typically do not provide validation of credentials
issued by other vendors. In addition, most certificate authorities use specific
validation protocols which may not be compatible with the validation protocols
used by a given software application. This inability to cross-validate digital
certificates limits the use of those certificate authorities for validation in
multi-certificate authority environments which are common for transactions that
cross organizational and geographic boundaries. We believe that there is a need
to separate the validation authority from the certificate authority to address
the need for cross-validation and to enhance trust standards. In addition, we
believe that this separation of duties between a validation authority and a
certificate authority mitigates the consequences of certificate authority
compromise.
Securing data during a transaction
Organizations use a variety of methods to securely transfer data across a
network while conducting an e-Transaction. Dedicated private networks, virtual
private networks, referred to as VPNs, and secure e-mail are mechanisms for
ensuring the private and tamper-proof transmission of data. While these
mechanisms provide security, they also typically add set-up time, cost and
complexity to the enterprise's business processes. In addition, enterprises
that employ dedicated private networks, VPNs and secure e-mail can generally
securely transfer data only to those customers, suppliers or trading partners
that employ the same proprietary technology. Thus, while these methods are
suitable for some business applications, they are not designed to be an
automated, highly-scalable solution that supports the transfer of large data
files, readily integrates with legacy systems, provides notification
capabilities, and generates a secure audit trail for each transmission.
Creating an audit trail after a transaction
To provide an audit trail for e-Transactions, a framework of trust must
include detailed proof of occurrence. A digital receipt is a securely
documented and archived proof of a transaction and provides the parties to the
transaction with a means for non-repudiation should a dispute arise at a later
date. A number of mechanisms such as e-mail confirmations, proprietary receipts
and web-based confirmations, are used to prove the occurrence of a transaction.
These mechanisms are typically tied to specific business applications, such as
online stock trading, consumer retail purchasing and Internet-based electronic
payments, and are generally limited in scope and not extensible.
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Many PKI-based products also include varying degrees of time stamping
functionality to record the time and other details regarding a transaction.
These time stamping methods often record the information in data formats that
are not easily shared among applications. Transactions over the Internet are
increasingly being conducted using a common format called extensible markup
language, or XML, which facilitates the exchange of information between
disparate computer systems and applications. We believe that a digital receipt
based on XML enables the flexible exchange of proof of occurrence details among
different entities while meeting organizations' requirements for non-
repudiation.
Need for an end-to-end, secure infrastructure for e-Transactions
We believe that organizations require a trusted, extensible infrastructure
to conduct valid, secure and provable transactions over the Internet. Current
approaches do not provide the necessary trusted infrastructure because they
generally do not address all stages of a transaction, are limited in scope and
are often inflexible, expensive and proprietary in nature. In many cases, the
vendors of security products do not have the operational expertise or have not
built the requisite data center infrastructure to deliver trust services. Trust
services are security services that are offered to organizations that wish to
outsource functions such as validation, notarization and non-repudiation to a
third party. Vendors that do not offer trust services can, therefore, only sell
software licenses and will not be able to provide their customers the
flexibility to purchase either the software or outsourced services.
We believe that to establish a trusted infrastructure for e-Transactions,
organizations require:
. end-to-end, modular technologies that effectively address an
organization's trust requirements before, during and after a
transaction;
. flexible deployment alternatives, including internally managed,
outsourced and service provider hosted models;
. the ability to leverage a broad range of applications and platforms to
accommodate existing investments in PKI, applications and platforms; and
. products and services that are based on open standards to provide the
scalability, flexibility and interoperability that is required among
multiple certificate authority vendors and payment systems.
The ValiCert Solution
We offer a suite of end-to-end infrastructure software products and services
that organizations use to conduct valid, secure and provable e-Transactions.
Our scalable, high-performance software products and services are based on open
standards and incorporate our technologies, including our certificate
validation mechanisms, stateful validation, secure data transfer and XML-based
digital receipt technologies. We have established a broad range of
relationships with application and platform vendors which we believe will
enable the widespread deployment of our validation, secure transport and
digital receipt software products and services.
Key components of our offering include the following:
End-to-end, modular secure infrastructure software products and services. We
offer end-to-end, modular secure infrastructure software products and services
that address the security
39
<PAGE>
requirements at every stage of a transaction. We provide validation of
credentials before a transaction, the secure transfer of data during a
transaction, and transaction notarization and non-repudiation after a
transaction. In addition, we have developed technologies to address the
performance, interoperability and scalability issues associated with digital
certificates. We have designed our architecture to reduce network overhead and
increase the performance of applications which use digital certificates.
Customers may deploy one element of our modular software products and services
and expand to include others as their needs require.
Flexible deployment models. We believe that our software products and
services are attractive to a broad range of customers because we offer a number
of deployment models in order to meet specific customer requirements. Our
flexible deployment models, which we collectively refer to as all-sourcing,
give our customers the choice among insourced hosting of our software;
outsourcing to us as a trusted third party service provider; or outsourcing to
one of our service provider customers. Customers can select a model based on
their specific business application, available resources, time to market
considerations, and desired level of control and operational responsibility.
Because of the common architecture that underlies our products and services,
our customers may migrate their data and applications from one deployment model
to another as their needs change. In addition, our products and services can be
distributed over one or many computer systems. This feature enhances
scalability and allows some functions of credential validation and digital
receipt issuance and management to be deployed at the customers' locations,
while maintaining a secure and reliable link to our global service for back-end
processing.
Extensive security and trusted practices. We believe that as a result of our
significant investments in security and trust practices, customers of our
software products and services can conduct transactions with the assurance that
the security of the transactions will be maintained. We have deployed industry-
endorsed practices and procedures for conducting secure transactions, including
obtaining insurance policies that in some cases limit the potential liability
of organizations that use our products and services. We adhere to a strict
operations protocol that has been designed by Internet security industry
experts to exceed typical commercial security requirements. In addition, we
have invested substantial time and effort in establishing the physical security
and controls essential to operating a secure, large-scale data center. For
example, we use multiple Internet service providers to ensure the reliability
of our Internet connections and we have taken special precautions to prevent
security breaches. Our network is also designed to provide redundancy in case
of equipment failure.
Certificate authority and payments neutrality. Our products are intended to
support leading certificate authorities and payments solutions. We believe this
neutral position enables our products and services to function as an
independent clearinghouse and complement the existing infrastructure of
entities that issue digital certificates, authorize transactions and process
electronic payments. In addition, our approach allows our customers to leverage
their existing investments in digital certificates and electronic payment
applications. We have established an interoperability lab to ensure the current
and future compatibility of our software products with major certificate
authorities, software applications and platforms, including electronic payments
systems. We also host open trials for industry-standard protocols to promote
vendor interoperability and demonstrate our technical leadership in these
areas.
Broad application and platform support. We have developed a range of
software modules that may be integrated with popular third party software
applications to enable support for secure transactions. Our software
development toolkits enable application developers and platform vendors to
rapidly and easily add validation and digital receipt
40
<PAGE>
capabilities to their products and services. As a result of our open standards
approach, we have been able to establish a network of strategic alliances with
software application, certificate authority and platform vendors to ensure
broad support for our products and services. We believe this network increases
the value of our products and services to our customers and provides us with
opportunities to increase our brand awareness and distribution.
Interoperability and adoption of open standards. Our software products and
services support the major certificate validation protocols, including
certificate revocation list, or CRL; CRL distribution point; online certificate
status protocol, or OCSP; and our own certificate validation mechanisms. We
believe that we are the only company that provides support for these validation
protocols in a single set of products and services. We are a founding member of
the Digital Receipt Alliance, an organization of vendors and users of digital
receipt technology, with which we are jointly developing a standard for XML
digital receipt specifications. We co-authored and provided one of the first
commercial implementations of OCSP which is a widely adopted validation
protocol. We are also the lead author of the simple certificate validation
protocol for use in wireless applications.
The ValiCert Strategy
Our objective is to further extend our position as a leading provider of a
wide range of software products and services for use by organizations to
conduct valid, secure and provable e-Transactions. Key elements of our strategy
include the following:
Extend technology leadership and product development. We intend to extend
our technology leadership by continuing to invest in research and development,
and by actively participating in industry standards setting organizations. We
expect to continue to develop and acquire open, flexible and scalable
technologies that can add value to a transaction stream, and to enhance our
internal best practices and controls to maintain the security and integrity of
our operations. In addition to our internal research and development efforts,
we participate in a number of standards setting organizations, including the
Internet Engineering Task Force, the Digital Receipt Alliance, the Wireless
Application Protocol forum and the Raddichio consortium for mobile security
standards. In addition to influencing industry standards, we believe that our
participation in these groups gives us valuable insight into new technology
developments and emerging market opportunities.
Further establish ValiCert in key industry segments. We have initially
targeted organizations in key industry segments, such as financial services,
government, telecommunications and health care, whose businesses are
transaction-intensive and have a high requirement for security. For example,
our software products and services are currently used by financial services
organizations such as Identrus, government agencies such as the Defense
Information System Agency, health care companies such as Aetna, and
telecommunications companies such as NTT Communications. In addition, we have
targeted various business-to-business exchanges that are becoming transaction
clearinghouses in a number of industries. By leveraging our experience in these
key industry segments, we believe we are well positioned to extend our presence
in other industries as they rely more on the Internet to conduct transactions
and exchange information.
Expand global distribution channels. We intend to continue to expand our
global marketing and distribution efforts to address a wide range of markets
and applications for secure infrastructure solutions. We plan to increase the
number of direct sales personnel we
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have in Europe, Asia and the Americas. In addition, we plan to expand our
network of distributors, including software vendors and system integrators, who
either include our software products and services in their offerings or resell
various elements of them. In addition to the United States, we have sales
offices in France, Hong Kong, Japan, The Netherlands and the United Kingdom,
and continue to aggressively pursue additional global opportunities.
Grow our service provider business. As part of our marketing strategy, we
are establishing a network of service providers who offer trust services based
on our software products, technology and expertise. We believe that, over time,
this network will represent a global system to validate and notarize
transactions across geographic and organizational boundaries. Our service
provider customers include Bell Canada Emergis, NTT Communications,
PricewaterhouseCoopers and Thomson-CSF/Cashware. By leveraging the brand name
and distribution power of these organizations, we believe that we will be able
to increase the adoption of our products and services. We intend to continue to
aggressively add participants to this growing list by targeting service
providers in a number of markets. We believe that this will create a network
effect whereby the utility of this global system will increase as it expands
and, therefore, will make it more valuable for current and new participants.
Expand strategic alliances to broaden the use of our products and
services. To accelerate the widespread adoption of our products and services,
we have entered into technology, marketing and distribution alliances with
industry leaders. We have entered into these types of alliances with companies
that include Baltimore Technologies, Entrust, IBM, Microsoft, Netscape/iPlanet
and Trintech. In addition, we plan to expand on existing and establish new
strategic alliances with companies that will integrate our technologies with
their offerings and participate in joint marketing, training and sales
arrangements. We believe these alliances will enable us to accelerate the
adoption of our products and services.
Products and Services
We offer end-to-end infrastructure software products and services that
combine an extensible, modular architecture with advanced security and
scalability to enable valid, secure and provable e-Transactions. Our software
products and services are available in three deployment models: trusted
outsourced services; offerings for service providers and business-to-business
exchanges; and in-house software for enterprises. Our software products and
services operate on multiple platforms, including Windows NT, Solaris, AIX, HP-
UX, Linux and certain mainframe environments. The pricing of our software
products and services consists of up front license fees, subscription fees
based on transaction volume and maintenance and support fees. Revenues from a
typical contract range from $25,000 to $250,000.
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The figure below illustrates our software products and services:
[The diagram shows an oval with the words validate, secure and prove, at the
top and bottom of the oval. A computer for each of party 1 and party 2 are
shown at the left and right sides of the oval. ValiCert's logo is at the center
of the oval. The diagram shows three boxes beneath the oval. The first box
contains the words validation authority products & services. The second box
contains the words secure data transfer products. The third box contains the
words digital receipt products & services.]
The following table outlines our software products and services offering:
<TABLE>
<CAPTION>
Products and Services Description
--------------------- -----------
<S> <C>
Validation Authority
Products and Services
Enterprise VA Suite...... Enterprise version of validation software product
Certificate VA Suite..... Base level original equipment manufacturer version
of validation software product
Affiliate VA Suite....... Service provider version of validation software
product
Global VA Service........ Complete, outsourced or backup validation service
Secure Data Transfer
Products
SecureTransport.......... Secure, reliable transport software product
Digital Receipt Products
and Services
Receipt Suite............ Enterprise version of digital receipt software
product
Receipt Affiliate........ Service provider version of digital receipt
software product
Receipt Service.......... Complete, outsourced digital receipt service
Professional Services...... Consulting services, product and service training
and custom development and support
</TABLE>
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Validation authority software products and services
We provide a comprehensive line of software products and services for the
high-performance validation of transactions. These products and services are
designed to enable customers to reduce the risks and costs associated with the
misuse of invalid digital credentials and provide flexible extensions for
stateful validation. Stateful validation is a method of validation in which
contextual information, such as real-time credit status and purchasing
authority, is used in conjunction with information on the validity of
credentials. Our validation authority software products and services are based
on our multi-protocol architecture which enables interoperability with leading
certificate authorities, directory services and business applications.
We currently offer the following validation authority software products and
services: Enterprise VA Suite, Certificate VA Suite, Affiliate VA Suite and
Global VA Service. In addition, we offer a set of common component software
products, VA Publisher, Validator Toolkit and Validator Suite, to facilitate
the deployment of our validation authority products and services.
Validation Authority Suites. Our Enterprise VA Suite, Certificate VA Suite
and Affiliate VA Suite enable customers to deploy and manage validation
capabilities in their transaction infrastructure.
Enterprise VA Server. Our enterprise version validation server software
supports a wide range of validation protocols, including OCSP, CRL, CRL
distribution points and our own certificate validation mechanisms. Our
Enterprise VA Suite is also bundled with an option for customers to publish
data on revoked credentials to our Global VA Service for backup and
redundancy, data distribution or disaster recovery. Enterprise VA licenses
are specifically limited to in-house use by organizations.
Certificate VA Server. Our base level original equipment manufacturer,
or OEM, version of the Enterprise VA Server is designed to enable
certificate authority vendors to incorporate validation capabilities in
their products. The Certificate VA Server supports the OCSP validation
protocol and our own certificate validation mechanisms and has been
designed to be easily upgraded to the Enterprise VA Server.
Affiliate VA Server. This server software provides functionality that is
similar to our Enterprise VA Server but is designed for service providers
and business-to-business exchanges. We license our Affiliate VA Server for
use by third party trust service providers. In certain cases, our service
provider customers are contractually required to mirror their revocation
data to our Global VA Service and have the right to mirror the Global VA
Service data to their local sites for incorporation into their own service
offering. This requirement is intended to allow for efficient, global
cross-validation among organizations.
Global VA Service. The Global VA Service is an outsourced validation service
that we host and operate. This service, which is designed to be available 24
hours a day, seven days a week from our secure data facility, is designed for
customers that wish to outsource the validation authority function to a third
party or validate transactions with entities outside their internal boundaries.
The Global VA Service accepts data from various organizations that wish to
broadly distribute information about credentials that they have revoked. With
our certificate validation mechanisms, we can efficiently distribute large
volumes of revocation data on a worldwide basis to our service provider
customers. We believe that this capability enables us to cost-effectively scale
our global validation service business.
VA Common Components. VA Publisher, Validator Toolkit and Validator Suite
are included with all of our VA Suite and Global VA Service offerings.
VA Publisher. Our VA Publisher is used to publish revocation data to a
validation authority server or service from a directory server or directly
from a certificate authority.
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In some cases, where we have existing strategic relationships with
certificate authority vendors, the VA Publisher is bundled with the
certificate authority to enable real-time publication of revocation data
and rapid deployment.
Validator Toolkit. Our Validator Toolkit is a software development
toolkit designed to allow for the rapid addition of validation capabilities
into applications which require stateful validation or use digital
certificates regardless of the issuing certificate authority. We license
the toolkit to independent software vendors to support our validation
authority software products and services.
Validator Suite. Our Validator Suite is a set of software modules that
are used for validation in popular web server, web client and e-mail
applications. We currently ship modules for Apache Stronghold Server,
Netscape/iPlanet Enterprise Server, Microsoft Address Book, Microsoft's
Internet Explorer, Microsoft Internet Information Server and Microsoft
Outlook. We license certain Validator Suite modules to independent software
vendors for inclusion in their software.
Secure data transfer software products
Our secure data transfer software product line enables scalable, secure data
transfer over the Internet.
SecureTransport. Our secure data transfer software product line is designed
to give customers cost-effective, secure, reliable delivery of large
transaction files and documents. The products support commonly used data
transfer protocols, including file transfer protocol and hypertext transfer
protocol. The products can be deployed in a variety of business application
environments. Like our other software products and services, SecureTransport is
designed to work with a variety of certificate authorities.
Our secure data transfer software products consist of the SecureTransport
Server and the optional SecureTransport Client. Customers typically deploy the
SecureTransport Server at their local sites and can distribute the
SecureTransport Client to the entities with whom they conduct business. The
client software adds secure and reliable data transfer through a feature which
enables the rapid resumption of a data transfer in progress if a network
connection has been dropped. In addition, the client software supports
sophisticated scheduling of data transfers in a range of business applications.
We recently upgraded the SecureTransport Server to integrate it with our
other software products and services. We have linked SecureTransport and our
digital receipt products so that customers can automatically generate and
archive an XML digital receipt to record the event, time and date of a
transfer, and to capture the contents of the document. We believe this
capability helps make our secure data transfer product ideal for use in
business-to-business exchanges which have largely standardized on the XML
business document format. This capability can also facilitate the resolution of
disputes relating to a data transfer and enhances the use of the product for
proof-of-compliance with certain government regulations such as the Health
Insurance Portability and Accountability Act.
Digital receipt software products and services
We provide a comprehensive line of software products and services that
enables the secure creation, tracking and management of digital receipts. Our
standards-based receipts are digitally signed XML documents that contain a
customizable set of information about a transaction. Such information could
include the identities of the parties involved, time and
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date of the transaction, and goods and services purchased or sold. Our digital
receipt software products and services are designed to help customers lower
costs, facilitate dispute resolution and reduce fraud in transactions conducted
over the Internet. Our digital receipt software products and services are
designed to work with a wide variety of certificate authorities and electronic
payments solutions.
We offer the following digital receipt software products and services:
Receipt Suite, Receipt Affiliate and Receipt Service.
Receipt Suite. Our enterprise software suite is used to create, track and
manage digital receipts. The suite consists of Receipt Notary Server, Receipt
Vault Server and Receipt Toolkit. The suite is bundled with an option for
customers to automatically create Receipt Vault integrity reports and publish
them to the Receipt Service. This functionality provides our customers with a
means of determining whether archived receipt data has been tampered with or
corrupted. Receipt Suite licenses are specifically limited to in-house use.
Receipt Notary Server. Our server software captures the primary elements
of a transaction and creates a tamper-proof digital receipt with a secure
timestamp. After the server generates the digital receipt, copies of the
receipt are stored in the Receipt Vault Server and may be sent to the
parties involved in the transaction through a variety of configurable
means, including e-mail, file transfer, or simple web page renderings.
Receipt Vault Server. Our server software stores large volumes of
digital receipts and provides comprehensive search and retrieval
capabilities for customers to use for dispute resolution, data mining and
other purposes. All items stored in the server are digitally signed and the
entire contents of the server can be periodically verified for integrity of
the signatures and the data which they protect. The server is designed to
interface with high-performance databases including Oracle 8i and NCR
Teradata.
Receipt Toolkit. Our Receipt Toolkit is designed to quickly and easily
add digital receipt capabilities into electronic commerce and other
applications and provide interfaces to the Receipt Notary Server and
Receipt Vault Server. In addition to providing the toolkit as part of the
Receipt Suite, we also license it to independent software vendors to
support our digital receipt software products and services.
Receipt Affiliate. This server software provides functionality that is
similar to our Receipt Suite but is designed for service providers and
business-to-business exchanges. Our Receipt Affiliate licensees can offer
digital receipt services directly to customers, including the issuance and
management of large volumes of digital receipts. The Receipt Affiliate is
increasingly licensed in conjunction with our Affiliate VA Suite.
Receipt Service. Our Receipt Service is a complete, outsourced application
service provider digital receipt service offering. We operate our Receipt
Service out of our secure data facility for customers that desire turnkey,
rapid deployment and wish to leverage our infrastructure. The service is
designed to offer 24 hours a day, seven days a week availability.
Professional services
We offer a broad range of professional services to assist in site planning,
design, installation, integration, training and maintenance of our products and
services. Our professional services include consulting services, product and
service training, and custom development and support. We employ highly trained
professionals in the data networking, network security, cryptography and
network operations fields to deliver these services.
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Customers
We primarily target our software products and services to a variety of
transaction-intensive enterprises and service providers. As of March 31, 2000,
we had over 80 customers.
The following is the list of our top 40 enterprise customers based on
software license and subscription fees and other services revenues since
January 1, 1998, computed on a pro forma basis by including revenues recognized
by Receipt.com prior to our acquisition of that company in December 1999.
Financial Services Healthcare
ABN AMRO Aetna Life Insurance Company
BankOne Blue Cross and Blue Shield of
Canadian Imperial Bank of Commerce Alabama
(CIBC) MCC Behavioral Care
The Chase Manhattan Bank
La Confederation des Caisses Retail
Populaires et d'Economie Desjardins The Gap
du Quebec (CCPEDQ) Nike
Dun & Bradstreet Corporation Sears, Roebuck and Co.
Identrus LLC
Imperial Bank Technology / Internet
Insurance Service Office Apple Computer
NASD Custom Technology Corporation
NatWest Dell Computer Corporation
PNC Bank IT Security AG
S.W.I.F.T. Microsoft Corporation
Trans Union LLC Netscape/iPlanet
Visa USA Preview Software
Wells Fargo Bank Silicon Graphics, SA
Symantec Corporation
Government TC TrustCenter GmbH
Defense Information Systems Agency
(DISA) Telecommunications
EPOST--Cebra MCI Worldcom
Federal Reserve Automated Services PageNet
Hongkong Post
US Navy Other
Hanwha Corporation
The following is a list of our top ten service provider customers based on
software license and subscription fees and other services revenues since
January 1, 1998:
Financial Services Systems Integrators
Thomson-CSF/Cashware Daou Technology
ID Certify
Government PricewaterhouseCoopers
Malaysian Government/ DigiCert Unisys
United Arab Emirates/Etisalat
Telecommunications
Bell Canada Emergis
Global Crossing
NTT Communications Corporation
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In fiscal 1999, Visa and PricewaterhouseCoopers accounted for 21.4% and
13.9% of our revenues, respectively. In the three months ended March 31, 2000,
Netscape/iPlanet accounted for 13.3% of our revenues, S.W.I.F.T. accounted for
13.2% of our revenues, Hanwha Corporation accounted for 12.5% of our revenues
and Unisys accounted for 10.1% of our revenues.
Customer profiles
The following examples illustrate how customers use our software products
and services:
Identrus LLC. Identrus LLC is a consortium of global financial institutions
that have joined together to create a secure infrastructure for business-to-
business electronic commerce. To help accomplish this goal, Identrus needed a
comprehensive business-to-financial institution authentication solution.
Identrus selected us to help address this need because of our scalable family
of validation authority software products and services, and our expertise in
deploying transaction security technologies. Our Enterprise VA software
product is installed in multiple locations within the Identrus network to
validate the digital certificates that participating banks have issued using
multiple, distinct certificate authorities. In conjunction with our software
products and services, the Identrus network enables trading parties from
around the world to identify one another over the Internet, creating a means
of validation in a broad array of business-to-business electronic commerce
applications.
Industry Canada. Industry Canada is responsible for managing access to the
radio frequency spectrum for the country of Canada. In October 1999, the
agency conducted Canada's first nationwide online spectrum auction, granting
258 radio frequency licenses to twelve different companies. According to
Industry Canada, the online auction included bids exceeding Cdn. $170
million--which we believe to be among the largest business-to-government
electronic commerce transactions ever to take place over the Internet. In
order to ensure the speed and security of the bid transactions, Industry
Canada selected our Enterprise VA Suite to validate the credentials of auction
participants. We were selected due to our high-performance OCSP validation
capabilities and our ability to provide a secure audit trail for each of the
bid transactions. Based on the successful use of our Enterprise VA Suite in
this auction, Industry Canada is planning to use our software for its upcoming
personal communications services, or PCS, auction for mobile wireless and
related services.
Chase Manhattan Bank. Chase Manhattan Bank's treasury solutions division
provides treasury management services to corporations, financial institutions,
brokers and dealers and public sector organizations. To provide a secure,
Internet-based financial transaction and document delivery capability to its
customers, Chase integrated our SecureTransport software product into its
electronic commerce infrastructure. We were selected for our ability to
deliver a reliable, secure and scalable data transfer product.
The Hanwha Corporation. The Hanwha Corporation is one of the largest
conglomerates in South Korea with divisions in the chemical, trade,
construction, telecommunications, pharmaceuticals and information services
industries. To streamline its supply chain processes, Hanwha is converting its
electronic commerce infrastructure from dedicated private networks to the
Internet. To ensure proof of occurrence for purchase transactions, Hanwha is
deploying our Receipt Suite in conjunction with its global procurement
application. We were selected due to our technology leadership, global
presence and ability to deliver a scalable, extensible software product
offering for non-repudiation.
Strategic Alliances
As of April 30, 2000, we had over 30 strategic alliances with leading
companies such as Baltimore Technologies, Digital Signature Trust, Entrust,
IBM, Microsoft, Netscape/iPlanet,
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Operational Research Consultants and Trintech. The purpose of these alliances
is:
. To promote the widespread deployment of our software products and
services through distribution arrangements;
. To ensure that third-party technologies interoperate effectively with
our software products and services; and
. To enable widespread application support for our software products and
services.
Certain of our strategic alliances are described below.
Baltimore Technologies. We have entered into worldwide marketing and
distribution agreements with Baltimore Technologies. Baltimore Technologies
resells our Enterprise VA software products to its customers. Baltimore
Technologies has also integrated our VA Publisher into its UniCert certificate
authority product to provide real-time publication of revocation data to our
software products and services. We also collaborate with Baltimore Technologies
from time to time on joint selling and marketing activities.
Digital Signature Trust. We have entered into a distribution and service
provider agreement with Digital Signature Trust, or DST, for our Enterprise VA
and Affiliate VA software products. DST provides hosted, trusted third-party
services to banks, state and federal governments. DST is one of three companies
which have been awarded the United States government Access Certificates for
Electronic Services, or ACES, project. The ACES project encompasses the planned
use of digital certificates for purposes of commerce and communication among
government agencies and ultimately United States residents. DST intends to use
our Enterprise VA Suite for providing validation services for this project.
Entrust. We have entered into a marketing and interoperability agreement
with Entrust for our Global VA Service and Enterprise VA. As part of this
agreement, we have extensively tested our products and services with Entrust's
PKI products to ensure compatibility. In addition, we have worked with the
Entrust sales force to help them promote our validation authority software
products and services to customers who require support for OCSP, such as
Identrus member banks.
IBM. We are a registered member of IBM's PartnerWorld Developer Program. We
have also entered into a software compatibility agreement with IBM. Pursuant to
this agreement, our Enterprise VA Suite products have been tested for
compatibility with IBM's SecureWay Vault Registry and Trust Authority products.
In addition, we are jointly developing an approach to interface our products
with IBM's products for the financial services market. This initiative includes
our validation authority and digital receipt software products and IBM's
middleware offerings, such as MQSeries, WebSphere Web application software
platform and Tivoli SecureWay Policy Director.
Microsoft. Our public root keys are included in the Microsoft Windows 2000
operating system and Internet Explorer 5.01 browser products. These root keys
are used by applications to ensure that digitally signed objects which are
generated at our Global VA Service and Digital Receipt Service are trustworthy
and have not been tampered with or corrupted. We have also joined the Microsoft
Security Solutions Provider program, which highlights our software products and
services and their compatibility with Microsoft products.
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Netscape/iPlanet. We have entered into marketing and OEM agreements with
Netscape/iPlanet. Under these agreements, our Certificate VA Suite is bundled
with every copy of the Netscape/iPlanet certificate authority product, our VA
Publisher has been integrated into Netscape/iPlanet's certificate authority
product for real-time publication of revocation data to our software products
and services, and a component of our Validator Suite is bundled with every copy
of Netscape/iPlanet's webserver. We have also entered into distribution
agreements for our secure data transfer and digital receipt software products
and services to be included with Netscape/iPlanet's business-to-business
electronic commerce offerings. We have also entered into an agreement with
Netscape/iPlanet to bundle our public root keys with the Netscape browser and
e-mail clients through December 2000.
Operational Research Consultants. We have entered into a distribution
agreement with Operational Research Consultants, or ORC, for our Enterprise VA
Suite. ORC provides systems integration services to the United States
government and is one of three companies which has been awarded the United
States government ACES project. ORC plans to use our Enterprise VA Suite for
providing validation services for the ACES project.
Trintech. We have entered into a worldwide marketing and distribution
agreement with Trintech for our digital receipt products and services. Trintech
has also licensed and is integrating our Receipt Toolkit into its electronic
payments solutions. As a result, Trintech customers in over 35 countries will
have products that support our digital receipt software products and services.
Technology
We have built both open and proprietary mechanisms into our core technology,
which forms the foundation for our products and services. Some of the key areas
where we have developed technology enable:
. Efficient distribution of certificate revocation data;
. Real-time access to data repositories during the validation process;
. Automation of data transfer between disparate applications;
. Fault-tolerant, high-integrity data transfer over unreliable
communication lines; and
. Efficient storage and fast search and retrieval of large volumes of XML
documents.
Certificate Validation Mechanisms. Our patented certificate validation
mechanisms allow us to efficiently distribute large amounts of certificate
revocation data on a global basis. We use our certificate validation mechanisms
to distribute our revocation data to enterprise customers, service provider
customers, and our own servers at remote locations in order to provide regional
validation capabilities across the globe. Another benefit of our certificate
validation mechanisms is that the remote locations where we host certificate
revocation data do not require secure facilities such as those we have built in
our Mountain View, California, facility. We believe this enables us to scale
our operations globally at a substantially lower cost than our competitors.
Stateful Validation. Our stateful validation technology allows for
customized software modules to be developed for our validation authority
products and services. These modules can interface with external systems to
enable the use of contextual information, such as credit histories, purchase
authorization, or access controls, in conjunction with the validation process.
Interfacing through our stateful policy API, these modules do not require
modification
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of our software products or services in order to be developed and deployed
which we view as a strong competitive advantage.
Agent Extension Mechanisms. We have developed technology that allows for
customized software modules to be developed for our secure data transfer
products. These modules can be automatically invoked at any stage of data
transmission or based on certain events such as a file transfer initiation or
file transfer completion. These modules allow for the addition of value-added
capabilities such as virus scanning of files and file format conversion.
Rapid Restart. Our secure data transfer engine incorporates technology that
allows for the rapid resumption of a previously interrupted data transfer. This
capability is essential for customers that wish to utilize the Internet to
efficiently and reliably transfer large data files.
XML to Relational Schema Mapping. We have developed technology that allows
us to store our XML-based documents, such as digital receipts, in our Receipt
Vault, which has a database at its core. This technology can automatically
parse an XML document and map the individual data fields on to a relational
database schema for fast and efficient storage, manipulation and retrieval of
large volumes of XML documents.
Network operations and trust infrastructure
We have made significant investments in developing our network operations
and infrastructure capabilities, including construction of a secure data center
which is designed to exceed typical commercial security requirements. The key
elements of our data center design include data redundancy, a highly scalable
architecture, advanced control and audit capabilities, reliance on multiple
Internet service providers and use of carrier-class equipment. In addition, our
network operations procedures encompass state-of-the-art techniques for
achieving high security, reliability, and scalability in a continuously online
data center. Our Network Operations Center, or NOC, serves as the hub for our
worldwide operations and service delivery, is the central point for data
exchange with our Affiliate VA customers. A number of our customers also rely
on the NOC infrastructure to provide a backup for their transaction data.
Our transaction services architecture offers automatic failover, capacity
monitoring, security auditing, and load balancing for critical services. To
support this level of security, we have adopted a number of network security
measures including periodic audits and reviews by third parties and
incorporated a variety of provisions such as redundant power supplies. We have
designed and constructed our secure NOC facility in order to mirror the best
practices in commercial security establishments, including the following:
. Physical construction techniques, such as eavesdrop-resistant
enclosures, and constant security monitoring to create and deliver a
robust level of protection to the site;
. Use of sophisticated access control systems, including biometrics,
audit-ready video recording, and motion and glass break detection
systems;
. Use of tamper-proof, multi-party access controlled cryptographic devices
for secure data transmissions;
. Use of employee background checks and separation of duties for our
personnel; and
. Ongoing policy and practices control and review processes.
As a result of our commitment to building a trust infrastructure, our data
center and related operations now function as a secure, distributed 24 hours a
day, seven days a week service. To protect from catastrophic failure
situations, we are currently evaluating business resumption sites.
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Research and Development
We believe our future success will depend in large part on our ability to
develop new products, core technologies and enhancements to existing product
lines. In the past, we have developed our software products and services both
independently and through efforts with leading independent software vendors and
major customers.
As of April 30, 2000, we had 58 employees dedicated to research and
development. Research and development expenses were $708,000 in the period from
our inception in February 1996 to December 31, 1997, $1.7 million in 1998, $5.6
million in 1999 and $1.9 million in the first three months of 2000. To date,
all development costs have been expensed as incurred. Our research and
development efforts are focused primarily on integrating our validation
authority, secure data transfer and digital receipt products and services after
the acquisition of Receipt.com, introducing our digital receipt solutions into
our trusted third party operational framework, and expanding addressable
markets by way of internationalization and addressing specific segments such as
business-to-business exchanges.
Our research and development personnel are active in standards-setting
bodies and have contributed to a number of standards in the Internet and data
security areas. We intend to continue recruiting and hiring experienced
research and development personnel and to make other investments in research
and development.
Sales and Marketing
We sell our products and services in the United States primarily through our
direct sales force that focuses on key customers in the industries we target.
Our domestic offices currently include Akron, Arlington, Dallas, Mountain View
and New York. We market our products and services internationally through our
direct sales force and through resellers and system integrators and our service
provider customers. We currently have international offices in Amsterdam, Hong
Kong, London, Paris and Tokyo. As of April 30, 2000, we employed 45 people as
part of our sales and marketing organizations. We generated 52.6% of our
revenues from domestic customers in 1999 and 60.2% of our revenues from
domestic customers for the quarter ended March 31, 2000. We generated 47.4% of
our revenues from international customers in 1999 and 39.8% of our revenues
from international customers for the quarter ended March 31, 2000.
Our sales force includes field sales engineers and inside sales personnel
who support the account executives. Field sales engineers assist our account
executives with technical presentations, customer requirements analysis and
initial solution designs. Our inside sales personnel assist the account
executives in managing their customer relationships. Our domestic sales effort
is also augmented by the sales forces through resellers and system integrators
and our service provider customers.
Our internal telemarketing operation is responsible for customer
prospecting, lead generation and lead follow-up. This marketing activity
qualifies leads for further follow-up by the direct sales force or inside sales
team, or leads the prospect to our website so that the prospect can access
information and enroll for our Internet-based products and services.
We utilize a variety of marketing programs to generate leads and increase
brand awareness. Our marketing strategy is organized around three primary
areas: product
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marketing, product management and marketing communications. Product marketing
identifies target markets and customer opportunities and then develops the
positioning, programs and materials to reach customers and support sales
activities. Product marketing is also responsible for branding, corporate
identity and maintaining our corporate website.
Product management translates customer and market requirements into product
and service development plans and works with engineering to ensure completion.
Product management also trains the sales force on product information and
competition. Marketing communications drives overall market awareness of
ValiCert and our products through public relations, industry analyst
relationships, product reviews, trade shows and seminars, editorial promotion,
industry events and executive speaking engagements.
Competition
Our security infrastructure products and services address the new and
rapidly evolving market for trusted and secure transactions over the Internet.
The market for our products and services is intensely competitive and subject
to rapid change.
We compete with vendors offering a wide range of security products and
services. With respect to our validation authority software products and
services, we compete primarily with companies offering commercial certificate
authority products and services such as CertCo, Digital Signature Trust,
Entrust, VeriSign and Xcert. With respect to our secure data transfer software
products and services, we compete with Internet EDI companies such as
CommPress, Harbinger, Sterling Commerce, and with companies offering document
delivery and storage products and services such as Critical Path, PostX and
Tumbleweed Communications Corp. With respect to our digital receipt software
products and services, we compete with transaction middleware companies,
companies that offer timestamping services, online notarization or point of
sale integrated solutions and payment companies. These competitors include
@POS, FirstUse, JCP, Surety and VeriSign. In addition, many companies may
choose to develop their own security products and services in-house.
We believe that the principal competitive factors in our market are
interoperability, completeness of solution, flexibility, neutrality, customer
service and support, ease of use and speed of deployment.
Although we believe that we compete favorably with our competitors based on
these factors, we cannot assure you that we can maintain our competitive
position against current and potential competitors. Several of our current and
potential competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do and therefore
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards and customer requirements. Many of these
competitors also have broader and more established distribution channels that
may be used to deliver competing products or services directly to customers
which could substantially reduce demand for our products and services. In
addition, browser companies that embed our public root keys or otherwise
feature us as a provider of digital certificate solutions in their web browsers
or on their websites could also promote our competitors, charge us substantial
fees for such promotions in the future, or terminate their relationship with
us.
New technologies and the expansion of existing technologies may increase the
competitive pressures on us. We cannot assure you that competing technologies
that others develop or the emergence of new industry standards will not
adversely affect our competitive position or render our Internet-based security
services or technologies noncompetitive or obsolete. In addition, our
competitors in particular segments of the security marketplace may
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in the future broaden or enhance their products to provide a more comprehensive
offering than ours. We may also compete in the future for sales of our software
products and services against our OEM licensees, who resell our products and
services under their own brand names. As a result of these factors, we may not
be able to compete effectively with current or future competitors and
competitive pressures that we face could materially harm our business.
Intellectual Property
We rely upon a combination of intellectual property protection including
patents, copyrights, trademarks, trade secrets and licensing methods to protect
our proprietary technology and other proprietary rights. We also rely on
outside licensors, including RSA Security, for patent and software license
rights to encryption technology that is incorporated into and is necessary for
the operation of our products and services. Our success will depend on our
continued ability to have access to these or other technologies that are or may
become important to the functionality of our products. Any inability to
continue to procure or use this technology could significantly harm our
operations.
It is also our policy to require our employees and consultants to enter into
confidentiality agreements, and to generally control access to and distribution
of our documentation and other proprietary information. The agreements also
provide that all inventions conceived by an employee shall be our property.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, such piracy can be expected to be a persistent
problem, particularly in international markets and as a result of the growing
use of the Internet. We can provide no assurance that our trade secrets or
confidentiality agreements will provide meaningful protection of our
proprietary information. Furthermore, we cannot assure you that others will not
independently develop similar technologies or duplicate any technology
developed by us or that our technology will not infringe upon the patent rights
of others. In addition, legal protections of our rights may be ineffective in
foreign countries where intellectual property is not afforded the same
protection afforded in the United States. Our inability to protect our
proprietary rights could harm our business.
We currently own one issued patent and have filed seven United States and
foreign applications and other foreign applications for patents covering our
technology. We cannot assure you that our pending or future patent applications
will issue or that any patents that issue will be enforceable or valid.
Additionally, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Our failure to protect our intellectual
property in a meaningful manner could materially harm our operations. In
addition, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
enforceability of the patents of others. Any litigation could result in
substantial costs and diversion of management and technical resources, either
of which could harm our business.
Even if patents are issued, they may not adequately protect our technology
from infringement or prevent others from claiming that our technology infringes
their patents. Parties making such claims may be able to obtain injunctive or
other equitable relief that could block our ability to further develop or
commercialize some or all of our products in the United States and abroad. In
the event of a claim of infringement, we may be required to obtain one or more
licenses from or pay royalties to third parties. However, we cannot assure you
that we will be able to obtain such licenses at a reasonable cost, if at all.
Defense of any lawsuit or
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failure to obtain any such license could hurt our business. In that regard, we
are aware of one patent application which, if granted, could result in a claim
of infringement against us. However, if this were to occur, we believe that we
have access to alternative technologies which would enable us to deliver our
products even in the event a claim of infringement were successfully brought
against us.
Employees
As of April 30, 2000, we had 136 employees, of which 58 were employed in
research and development, 45 were employed in sales and marketing, 19 were
employed in operations and customer support and 14 were employed in general and
administration. None of our employees is subject to a collective bargaining
agreement and we have never experienced a work stoppage. We believe our
relations with our employees are good. Our ability to achieve our financial and
operational objectives depends in large part upon our continued ability to
attract, integrate, train, retain and motivate highly qualified sales,
technical and managerial personnel, and upon the continued service of our
senior management and key sales and technical personnel, none of whom is bound
by an employment agreement. Competition for such qualified personnel in our
industry is intense, particularly in the San Francisco Bay Area.
Properties
Our principal executive and administrative offices are located at 339 N.
Bernardo in Mountain View, California, where we lease approximately 48,000
square feet, which lease expires April 2007. We also sublease an additional
facility in Mountain View, California, of approximately 25,000 square feet,
which sublease expires February 2003. We believe that such existing facilities
are adequate for our current needs and that suitable additional or alternative
space will be available in the future on commercially reasonable terms to meet
any additional needs.
Legal Proceedings
From time to time, we could become involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved
in any legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our executive officers and directors as of
April 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph (Yosi) Amram........... 43 President, Chief Executive Officer and
Director
Srinivasan (Chini) Krishnan... 31 Chairman of the Board of Directors, Chief
Technology Officer and Secretary
Timothy Conley................ 51 Vice President, Finance, and Chief Financial
Officer
Rajiv Dholakia................ 37 Vice President, Product Development and
Operations
Alexander Garcia-Tobar........ 32 Vice President, International Operations
David Jevans.................. 33 Vice President, Corporate Development
Sathvik Krishnamurthy......... 31 Vice President, Marketing and Business
Development
Martin Yam.................... 49 Vice President, Sales and Field Operations
Taher Elgamal (1)............. 45 Director
John Johnston (2)............. 48 Director
Scott J. Loftesness (2)....... 53 Director
Magdalena Yesil (1)........... 42 Director
</TABLE>
- --------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Joseph (Yosi) Amram has served as our president and chief executive officer
since August 1997. From January 1989 to August 1997, Mr. Amram founded and
served as chairman and chief executive officer for Individual, Inc., a content
aggregation provider of personalized information services. Prior to that, Mr.
Amram was a venture capitalist at the Aegis Funds, and led the product
marketing group at Rational Software, a provider of object oriented software.
Mr. Amram has served three years in the Israeli Air Force where he attained the
rank of Sergeant Major. Mr. Amram holds B.S. and M.S. degrees in electrical
engineering from the Massachusetts Institute of Technology and an M.B.A. with
distinction from Harvard Business School.
Srinivasan (Chini) Krishnan co-founded ValiCert in February 1996 and has
served as our chairman of the board of directors and chief technology officer
since our inception. From June 1994 to February 1996, Mr. Krishnan was at
Enterprise Integration Technologies where he was instrumental in launching and
managing Terisa Systems, a security toolkits company and CommerceNet, an
industry consortium to develop business over the Internet. Mr. Krishnan has
also served in various engineering positions at Cadence Design Systems between
May 1991 and June 1994. Mr. Krishnan holds a B.S. degree in Computer Science
from the Indian Institute of Technology and a M.S. degree in computer science
from Duke University.
Timothy Conley has served as our vice president, finance, and chief
financial officer since January 2000. From September 1998 to January 2000, Mr.
Conley was vice president of finance and chief financial officer of Longboard,
Inc., a provider of telecommunications systems. From June 1997 to August 1998,
Mr. Conley served as vice president of finance and chief financial officer of
Logicvision, a provider of intellectual property for use in the design and
testing of semiconductor devices. Previously, from November 1989 to May 1997,
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Mr. Conley was vice president of finance and chief financial officer of
Verilink Corporation, a manufacturer of network access equipment. Mr. Conley
holds a B.S. degree in business administration from Wisconsin State University
and is a certified public accountant.
Rajiv Dholakia has served as our vice president, product development and
operations since June 1998. From November 1996 to June 1998, Mr. Dholakia
served as vice president of product development for TestDrive Software, an
Internet software distribution company. From February 1996 to November 1996,
Mr. Dholakia served as chief technical officer at VillageTree Software, a
consulting firm for Internet start-up companies. From May 1993 to February 1996
Mr. Dholakia served as director of engineering for platform products at
Taligent, Inc., a cross platform application frameworks company. Mr. Dholakia
also held senior engineering and managerial positions at Sun Microsystems and
Intellicorp from December 1986 to May 1993. Mr. Dholakia holds a B.E. degree in
chemical engineering from M.S. University, Baroda, India and did graduate work
in chemical engineering at the University of South Florida, Tampa.
Alexander Garcia-Tobar has served as our vice president, international
operations since June 1998. From January 1997 to June 1998, Mr. Garcia-Tobar
served as international director for Forrester Research, Inc., an independent
research firm. Before joining Forrester Research, Mr. Garcia-Tobar served as
executive director and a member of the board of directors of NewsWatch Inc., a
joint venture between Toshiba Corporation, Mitsui & Co. and Individual, Inc.
from October 1995 to January 1997. From March 1994 to October 1995, Mr. Garcia-
Tobar served as international director for Individual. Mr. Garcia-Tobar holds a
B.A. degree in international economics from Yale University.
David Jevans has served as our vice president, corporate development since
January 2000. In April 1996, Mr. Jevans founded Receipt.com and served as its
president and chief executive officer until December 1999 when we acquired
Receipt.com. Before Receipt.com, Mr. Jevans was the vice president of networks
at Catapult Entertainment, an Internet service company, from April 1994 to
April 1996. From December 1989 to April 1994, Mr. Jevans was employed at Apple
Computer where he served as an e-commerce technology advisor to the chief
executive officer and executive management team, and a project leader in the
operating systems group. Mr. Jevans holds an M.S. degree in computer science
from the University of Calgary, Canada.
Sathvik Krishnamurthy has served as our vice president, marketing and
business development since May 1998. From November 1992 to April 1998, Mr.
Krishnamurthy served in various capacities for Worldtalk Corporation, an e-mail
security company that was recently acquired by Tumbleweed, including vice
president of product planning and development and vice president and general
manager of Deming Internet Security, a Worldtalk company. Before joining
Worldtalk, Mr. Krishnamurthy held engineering positions at various data-
communications companies including Retix, TITN and Touch Communications. Mr.
Krishnamurthy holds a B.S. degree in computer science and engineering from the
University of California, Los Angeles.
Martin Yam has served as our vice president, sales and field operations
since October 1998. From May 1997 to October 1998, Mr. Yam served as vice
president of sales and services for Accrue Software, Inc., an Internet software
company. From February 1996 to April 1997 and from May 1990 to October 1994,
Mr. Yam was senior vice president of sales and marketing for ParcPlace, Inc.,
an object oriented development software company. Mr. Yam was vice president of
sales for NeXT Software, Inc., an object oriented development software company,
from November 1994 through February 1996. Mr. Yam holds a B.S. degree in
business administration and an M.S. degree in technology and management from
The American University.
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<PAGE>
Taher Elgamal has served as one of our directors since October 1997. Mr.
Elgamal has served as chief executive officer for Securify, an internet
security company since June 1998. Mr. Elgamal served as chief scientist for
Netscape Communications, an internet software company, from April 1995 to June
1998. Mr. Elgamal has M.S. degree and Ph.D. degree in electric engineering
from Stanford University.
John Johnston has served as one of our directors since May 1998. From
August 1995 to present, Mr. Johnston has been a venture capitalist at the
August Capital and from 1988 to August 1995 at Technology Venture. Mr.
Johnston holds a B.A. degree in English from Princeton University and an
M.B.A. degree from Harvard Business School.
Scott J. Loftesness has served as one of our directors since March 1998.
From August 1998 to July 1999, Mr. Loftesness was interim chief executive
officer of Digicash Incorporated, an electronic payment company. From June
1994 to July 1998, Mr. Loftesness was group executive at First Data
Corporation, an electronic payment processing company. Mr. Loftesness attended
the University of California at Berkeley.
Magdalena Yesil has served as one of our directors since October 1999. Ms.
Yesil has been a venture capitalist at US Venture Partners since January 1998.
From August 1996 to December 1997, Ms. Yesil founded MarketPay, a software
company, and served as its president. From 1994 to August 1996, Ms. Yesil
founded Cybercash, a secure electronic payment company, and served as vice
president, marketing and technology. Ms. Yesil holds an M.S. degree in
electrical engineering and a B.S. degree in industrial engineering from
Stanford University.
Board of Directors
Effective upon the closing of this offering, our certificate of
incorporation and bylaws will provide for a board of directors that is divided
into three classes:
. Class I, whose term will expire at the annual meeting of stockholders
expected to be held in June 2001;
. Class II , whose term will expire at the annual meeting of stockholders
expect to be held in June 2002; and
. Class III, whose term will expire at the annual meeting of stockholders
expected to be held in June 2003.
As a result, only one class of directors will be elected at each annual
meeting of stockholders, with the other classes continuing for the remainder
of their terms. Following the expiration of the initial term of any class of
directors, that class will thereafter serve for a three-year term. Effective
upon the closing of this offering, the following individuals will serve as our
directors:
. Taher Elgamal and Magdalena Yesil will be our Class I directors;
. John Johnston and Scott Loftesness will be our Class II directors; and
. Joseph (Yosi) Amram and Srinivasan (Chini) Krishnan will be our Class
III directors.
There are no family relationships among any of our directors, officers or
key employees.
Board Committees
Our board of directors has formed an audit committee and a compensation
committee.
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<PAGE>
Audit Committee. The audit committee reviews the results and scope of the
annual audit and meets with our independent auditors to review our internal
accounting policies and procedure.
Compensation Committee. The compensation committee reviews and makes
recommendations to our board of directors on our general and specific
compensation policies and practices and administers our 1996 equity incentive
plan, 1998 stock plan and 2000 employee stock purchase plan.
Director Compensation
Directors currently do not receive any cash compensation from us for their
services as members of the board of directs, although members are reimbursed
for expenses in connection with attendance at board of directors and committee
meetings. Directors are eligible to participate in our stock plans.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves, or in the past has served, as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.
Before the creation of our compensation committee, all compensation decisions
were made by our full board of directors.
Employment, Termination of Employment and Change-in-Control Arrangements
We routinely deliver written offer letters containing provisions on salary
bonuses, benefits and stock option grants to prospective members of management
and other employees. In addition, we have entered into agreements containing
employment and change-in-control provisions as described below.
Employment Agreement
We entered into an employment agreement with Joseph (Yosi) Amram, our
president and chief executive officer, on August 1997, as amended. Under this
agreement, Mr. Amram was paid an annualized base salary of $150,000 and a bonus
of up to $50,000 in 1998. After 1998, the amount of salary and bonus are
determined by our compensation committee. Under his employment agreement, Mr.
Amram was granted options to purchase 1,650,000 shares of series A junior
preferred at a purchase price of $0.02 per share, which will vest over three
years, with one-sixth vesting upon the completion of six months of service and
the remainder vesting in equal monthly installments over the next 30 months of
service. If Mr. Amram's employment is terminated by us other than for cause, or
is constructively terminated, before all of his options vest, all of his option
shares that remain unvested will vest if the per share value of our common
stock equals or exceeds $6.00; or 50% of Mr. Amram's option shares that remain
unvested will vest if the per share value of our common stock is less than
$6.00. Upon a change-in-control, all of Mr. Amram's option shares that remain
unvested will fully vest.
Stock Option Agreements
We entered into stock option agreements with Joseph (Yosi) Amram, our
president, chief executive officer and a director, pursuant to which Mr. Amram
was granted options to purchase an aggregate of 514,093 shares of common stock.
Mr. Amram has exercised options
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<PAGE>
to purchase 414,093 shares of common stock. The stock option agreements provide
for immediate termination of our right to repurchase all unvested options upon
a change-in-control event.
We entered into stock option agreements with Srinivasan (Chini) Krishnan,
our chairman of the board of directors, chief technology officer and secretary,
pursuant to which Mr. Krishnan was granted options to purchase an aggregate of
1,400,000 shares of series A junior preferred and an aggregate of 308,095
shares of common stock. Mr. Krishnan has exercised options to purchase
1,658,095 shares of common stock. The stock option agreements provide for
immediate termination of our right to repurchase all unvested options upon a
change-in-control event.
We entered into stock option agreements with Timothy Conley, our vice
president, finance, and chief financial officer, pursuant to which Mr. Conley
was granted options to purchase an aggregate of 300,000 shares of common stock.
Mr. Conley has exercised options to purchase 50,000 shares of common stock. The
stock option agreements provide for immediate termination of our right to
repurchase 50% of unvested options upon a change-in-control event.
We entered into stock option agreements with Rajiv Dholakia, our vice
president, product development and operation, pursuant to which Mr. Dholakia
was granted options to purchase an aggregate of 500,000 shares of common stock.
Mr. Dholakia has exercised all of these options. The stock option agreements
provide for immediate termination of our right to repurchase 50% of unvested
options upon a change-in-control event.
We entered into stock option agreements with Alexander Garcia-Tobar, our
vice president, international operations, pursuant to which Mr. Garcia-Tobar
was granted options to purchase an aggregate of 350,000 shares of common stock.
Mr. Garcia-Tobar has exercised 300,000 of these options. The stock option
agreements provide for immediate termination of our right to repurchase 50% of
unvested options upon a change-in-control event.
We entered into a stock option agreement with David Jevans, our vice
president, corporate development, pursuant to which Mr. Jevans was granted
options to purchase 644,132 shares of common stock. Mr. Jevans has exercised
options to purchase 250,000 shares of common stock. The stock option agreement
provides for immediate termination of our right to repurchase 50% of unvested
options upon a change-in-control event.
We entered into stock option agreements with Sathvik Krishnamurthy, our vice
president, marketing and business development, pursuant to which Mr.
Krishnamurthy was granted options to purchase an aggregate of 525,000 shares of
common stock. Mr. Krishnamurthy has exercised all of these options. The stock
option agreements provide for immediate termination of our right to repurchase
50% of unvested options upon a change-in-control event.
We entered into stock option agreements with Martin Yam, our vice president,
sales and field operations, pursuant to which Mr. Yam was granted options to
purchase an aggregate of 350,000 shares of common stock. Mr. Yam has exercised
options to purchase 290,000 shares of common stock. The stock option agreements
provide for immediate termination of our right to repurchase 50% of unvested
options upon a change-in-control event.
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<PAGE>
Executive Compensation
The following table sets forth in summary form information concerning the
compensation paid or earned by our chief executive officer and our four other
most highly compensated executive officers whose total salary and bonus for the
fiscal year ended December 31, 1999 exceeded $100,000. The total amount of
personal benefits paid to the named executive officers during fiscal year 1999
was less than the lesser of $50,000 or 10% of the executive officer's total
reported salary and bonus. Our chief financial officer joined us in January
2000 and therefore is not included in the table below.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------
Name and Principal Position Year Salary ($) Bonus ($)
- --------------------------- ---- ---------- ---------
<S> <C> <C> <C>
Joseph (Yosi) Amram.................................. 1999 150,000 61,750
President, Chief Executive Officer and Director
Srinivasan (Chini) Krishnan.......................... 1999 133,000 28,050
Chairman of the Board of Directors,
Chief Technology Officer and Secretary
Rajiv Dholakia....................................... 1999 180,000 17,900
Vice President, Development and Operations
Sathvik Krishnamurthy................................ 1999 145,000 28,050
Vice President, Marketing and Business Development
Martin Yam........................................... 1999 135,000 49,932
Vice President, Sales and Field Operations
</TABLE>
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<PAGE>
Option Grants in Last Fiscal Year
The following table presents information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended December 31, 1999. All of these options were
granted under our 1998 stock plan. Generally, the options vest on a monthly
basis for 48 months beginning on the first day of the grant.
The following table is based on the grant of options to purchase a total of
1,655,860 shares of our common stock during fiscal year 1999. This number does
not include options to purchase 1,618,535 shares of common stock issued under
the Receipt.com stock plan which we assumed in connection with our acquisition
of Receipt.com in December 1999. All options were granted at the fair market
value of our common stock, as determined by the board of directors on the date
of grant. Potential realizable values are net of exercise price, but before
taxes associated with exercise. Amounts represent hypothetical gains that could
be achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are required by the rules
of the Securities and Exchange Commission and do not represent our estimate or
projection of the future common stock price. Unless the market price of the
common stock appreciates over the option term, no value will be realized from
the option grants made to executive officers. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock. The assigned 5% and 10% rates of stock appreciation are based on an
assumed offering price of $ per share.
Options Granted in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realized Value
at Assumed
Annual Rates
of Stock Price
Number of % of Total Appreciation
Securities Options for Option
Underlying Granted to Exercise Term
Options Employees in Price Expiration --------------
Name Granted(1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
---- ---------- ------------ --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Joseph (Yosi) Amram..... 200,000 12.1% $0.60 8/9/09
Srinivasan (Chini)
Krishnan............... 100,000 6.0% $0.60 8/9/09
Rajiv Dholakia.......... -- -- -- --
Sathvik Krishnamurthy... -- -- -- --
Martin Yam.............. 75,000 4.5% $0.60 8/9/09
</TABLE>
- --------
(1) These options vest ratably on a monthly basis for 48 months beginning the
first day of the date of grant.
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Option Exercises and Fiscal Year-End Holdings
The following table presents the number of shares of our common stock
acquired and the value realized upon exercise of stock options during the
fiscal year ended December 31, 1999 by each of the executive officers named in
the Summary Compensation Table above. All options granted under our 1998 stock
plan are immediately exercisable for executive officers, but any shares under
those options may be repurchased by us, at the original exercise price paid per
share, if the optionee ceases to remain with us prior to the vesting of their
shares. The executive officers named in the table above had exercised all of
their options as of December 31, 1999.
Aggregate Option Exercises in Fiscal Year 1999 and Values at December 31, 1999
<TABLE>
<CAPTION>
Number of
Shares
Acquired on Value
Name Exercise (#) Realized ($)
---- ------------ ------------
<S> <C> <C>
Joseph (Yosi) Amram.............................. 414,093 549,703
Srinivasan (Chini) Krishnan...................... 258,095 353,466
Rajiv Dholakia................................... 450,000 693,000
Sathvik Krishnamurthy............................ 450,000 693,000
Martin Yam....................................... 250,000 352,000
</TABLE>
Stock Option Plans
1998 Stock Plan
A total of 5,345,000 shares of common stock have been reserved for issuance
under the 1998 stock plan. In May 2000, our board of directors reserved,
subject to stockholder approval, an additional 2,000,000 shares for issuance
under this plan. In addition, the number of shares reserved under the 1998
stock plan will automatically increase on the first day of each fiscal year
beginning on January 1, 2001 by the lesser of:
. 3,672,500 shares;
. 5% of the number of shares of our common stock that was issued and
outstanding on the last day of the immediately preceding fiscal year; or
. a lesser number of shares as determined by our board of directors.
Under the 1998 stock plan, all of our employees or employees of a
subsidiary, all nonemployee directors and any consultant who performs services
for us are eligible to receive nonstatutory stock options and restricted stock
purchase rights. Employees are also eligible to receive incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code. The 1998
stock plan is administered by our board of directors, which selects the persons
who will receive options and restricted stock purchase rights, determines the
number of shares subject to each option and prescribes other terms and
conditions, including the type of consideration to be paid to us upon exercise
and vesting schedules, in connection with each option and restricted stock
purchase right. However, this responsibility may be delegated to a committee of
our board of directors.
The exercise price of nonstatutory stock options granted under the 1998
stock plan must be at least 85% of the fair market value of our common stock on
the date of grant. The exercise price of incentive stock options cannot be
lower than 100% of the fair market value of our common stock on the date of
grant and, in the case of incentive stock options granted to 10% stockholders,
not less than 110% of the fair market value. The term of an option cannot
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<PAGE>
exceed 10 years, or five years for an incentive stock option granted to a 10%
stockholder. An individual's options generally expire 30 days following his
termination of service or six or 12 months following the individual's
termination date if the termination was due to his death or disability,
respectively.
Options granted under our 1998 stock plan are generally immediately
exercisable, subject to our right to repurchase any unvested shares at the
optionee's original cost upon the optionee's termination of service. Shares
subject to options granted under the 1998 stock plan generally vest over four
years, although the board or committee may specify a different vesting schedule
for a particular grant. Options granted under the 1998 stock plan are generally
nontransferable other than by will or the laws of descent and distribution,
although the board or committee may grant nonstatutory stock options which
allows for limited transferability.
In the event of a change-in-control, the acquiring or successor corporation
may assume, or substitute its stock options for, the outstanding options
granted under the 1998 stock plan. In addition, certain options granted under
the 1998 stock plan provide for acceleration of vesting of 50% or 100% of the
unvested shares subject to the option upon the change in control. The
outstanding options will terminate to the extent that the options are not
exercised or assumed or substituted for by the acquiring or successor
corporation.
As of April 30, 2000, 3,022,839 shares of common stock had been issued upon
exercise of options outstanding and options to purchase 2,238,339 shares of
common stock with a weighted average exercise price of $3.22 were outstanding
under the plan.
1996 Equity Incentive Plan
The plan allows for grants of incentive stock options and restricted stock
purchase rights, within the meaning of Section 422 of the Internal Revenue
Code, to employees, including officers and employee directors. In addition, it
allows grants of nonstatutory options and restricted stock purchase rights to
employees, non-employee directors and consultants. As of April 30, 2000,
2,606,165 shares of series A junior preferred stock had been issued upon
exercise of options outstanding and options to purchase 222,923 shares of
series A junior preferred stock with a weighted average exercise price of $0.07
were outstanding under the plan. Options for series A junior preferred stock
issued under this plan will automatically convert into options for common stock
upon the closing of this offering. No additional options will be granted under
this plan although options granted under this plan will remain outstanding in
accordance with their terms.
In the event of a change-in-control, the acquiring or successor corporation
may assume, or substitute its stock options for, the outstanding options
granted under the 1996 equity incentive plan. In addition, certain options
granted under the 1996 equity incentive plan provide for acceleration of
vesting of 50% or 100% of the unvested shares subject to the option upon the
change in control. The outstanding options will terminate to the extent that
the options are not exercised or assumed or substituted for by the acquiring or
successor corporation.
In 1996, we granted options to employees and consultants primarily prior to
the adoption of our 1996 equity incentive plan. Options to purchase 222,923
shares of our series A junior preferred stock were outstanding as of April 30,
2000. Options for series A junior preferred stock will automatically convert
into options for common stock upon the closing of this offering. These options
are generally exercisable over a period not to exceed ten years from the date
of grant and are generally exercisable when they vest.
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Receipt.com Stock Plan
In connection with the acquisition of Receipt.com, we assumed the options
outstanding under the Receipt.com stock plan and the options were converted
into options to purchase our common stock. The plan allowed for grants of
incentive stock options and restricted stock purchase rights, within the
meaning of Section 422 of the Internal Revenue Code, to employees, including
officers and employee directors. In addition, it allowed grants of nonstatutory
options and restricted stock purchase rights to employees, non-employee
directors and consultants. As of April 30, 2000, 428,201 shares of common stock
had been issued upon exercise of options outstanding and options to purchase
1,190,334 shares of common stock with a weighted average exercise price of
$1.28 were outstanding under the plan. No additional options will be granted
under this plan although options granted under this plan will remain
outstanding in accordance with their terms.
In the event of a change-in-control, the acquiring or successor corporation
may assume, or substitute its stock options for, the outstanding options
granted under the Receipt.com stock plan. In addition, certain options granted
under the Receipt.com stock plan provide for acceleration of vesting of 50% or
100% of the unvested shares subject to the option upon the change in control.
The outstanding options will terminate to the extent that the options are not
exercised or assumed or substituted by the acquiring or successor corporation.
2000 Employee Stock Purchase Plan
A total of 500,000 shares of common stock have been reserved for issuance
under our 2000 employee stock purchase plan, none of which has been issued.
This number of shares will be increased by 2% of the common shares outstanding
on January 1, 2002 and each January 1 thereafter through January 1, 2010. This
plan is intended to qualify under Section 423 of the Internal Revenue Code and
our compensation committee will administer the plan. Employees, including
officers and employee directors, are eligible to participate in the plan if
they are employed by us for more than 20 hours per week and more than five
months per calendar year. The plan will be implemented during sequential six-
month offering periods, the first of which will commence on the effective date
of this offering and will terminate on January 31, 2001. After the effective
date of this offering, offering periods under the plan will generally begin on
February and August of each year.
The 2000 employee stock purchase plan permits eligible employees to purchase
shares of our common stock through payroll deductions, which may not exceed 10%
of the employee's compensation. Stock will be purchased under the plan at a
price equal to 85% of the fair market value of our common stock on either the
first or the last day of the offering period, whichever is lower. Employees may
end their participation in the offering at any time during the offering period,
and participation ends automatically on termination of a participant's
employment with us. Participants may not purchase shares of common stock having
a value, measured at the beginning of the offering period, greater than $25,000
in any calendar year or more than 2,500 shares.
401(k) Plan
On September 1, 1997, we adopted an employee savings and retirement plan
intended to be tax-qualified under sections 401(a) and 401(k) of the Internal
Revenue Code. Employees who are at least 21 years old are generally eligible to
participate and may enter the plan as of the first day of hire or the first day
of any month after their date of hire. Participants may make pre-tax
contributions to the plan of up to 20% of their eligible compensation, subject
to a statutorily prescribed annual limit, which is $10,500 in calendar year
2000. Each participant's
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contributions and investment earnings on these contributions are fully vested
at all times. The 401(k) plan permits, but does not require, matching
contributions by us on behalf of participants. To date, we have not made such
contributions. Contributions to the 401(k) plan, and the income earned on these
contributions, are generally not taxable to the participants until withdrawn.
Contributions are generally deductible by us when made. The 401(k) plan assets
are held in trust. The trustee of the 401(k) plan invests the assets of the
plan in various investment options as directed by the participants.
Limitations of Liability and Indemnification Matters
We have adopted provisions in our certificate of incorporation which provide
that our directors shall not be personally liable to us or our stockholders for
monetary damages for breaches of their fiduciary duties as directors, to the
fullest extent permitted by the Delaware General Corporation Law. Under that
law, our directors remain liable for:
. breaches of their duty of loyalty to us and our stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law;
. under Section 174 of the Delaware General Corporation Law relating to
improper dividends or distributions; or
. for any transaction from which the director obtained an improper
personal benefit.
Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware General Corporation Law.
Before the completion of this offering, we intend to enter into separate
indemnification agreements with each of our current directors and executive
officers which may, in some cases, be broader than the specific indemnification
provisions allowed by the Delaware General Corporation Law. The indemnification
agreements will require us to indemnify the executive officers and directors
against liabilities that may arise by reason of their status or service as
directors or executive officers and to advance expenses they spend as a result
of any proceeding against them for which they could be indemnified to the
fullest extent permitted by the Delaware General Corporation Law.
We intend to obtain liability insurance for our directors and officers and
intend to obtain a rider to extend that coverage for public securities matters.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of ValiCert where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
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RELATED PARTY TRANSACTIONS
Since January 1, 1997, there has not been, nor is there currently planned,
any transaction or series of similar transactions to which ValiCert was or is a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of ValiCert's capital stock or any
member of their immediate family had or will have a direct or indirect material
interest, other than transactions which are described under the caption
"Management" and the transactions described below.
Loans to Officers
The following officers have executed promissory notes and pledge agreements
in order to finance the exercise of their stock options. Each note bears
interest at 6.0% per year and has a term of five years from the date of
issuance. As collateral, the holder of the shares of stock purchased with each
note pledges the stock to us. Each note represents a debt to us that the holder
must repay, with interest, by the earliest of:
. The maturity date of the note;
. The termination of the holder's employment with us;
. A default in the payment of any installment of principal when due;
. A sale of the stock pledge as collateral; or
. Any other such acceleration reasonably necessary for us to comply with
any regulations promulgated by the board of governors of the federal
reserve system affecting the extension of credit in connection with our
securities.
The following table summarizes the dates on which these notes were issued
and, as of April 30, 2000, the oustanding principal amount of these notes and
the aggregate number of shares pledged as collateral.
<TABLE>
<CAPTION>
Aggregate number
of shares
Aggregate pledged
Note holder Dates of issuance of notes amount as collateral
----------- ----------------------------------- --------- ----------------
<S> <C> <C> <C>
Joseph (Yosi) Amram..... December 31, 1997 - August 30, 1999 $187,250 2,064,093
Srinivasan (Chini)
Krishnan............... December 31, 1997 - August 30, 1999 107,170 1,658,095
Timothy Conley.......... March 6, 2000 165,000 50,000
Rajiv Dholakia.......... June 18, 1999 - January 18, 2000 197,000 500,000
Alexander Garcia-Tobar.. June 18, 1999 - January 19, 2000 209,000 300,000
David Jevans............ March 6, 2000 388,598 250,000
Sathvik Krishnamurthy... May 25, 1999 - January 20, 2000 259,500 525,000
Martin Yam.............. June 18, 1999 - February 1, 2000 173,000 290,000
</TABLE>
Consulting and License Revenues
An affiliate of one of the holders of more than 5% of our capital stock
provides software development and consulting services to us. We paid $147,000
in 1998 and $682,000 in 1999 for these services.
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Preferred and Common Stock Sales
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of these persons' immediate families
purchased from us shares of our series B preferred stock and series C preferred
stock and common stock. Immediately before the closing of this offering, each
outstanding share of series B preferred stock and series C preferred stock will
automatically convert into one share of common stock.
<TABLE>
<CAPTION>
Series B Series C Common
Purchaser Preferred Preferred Stock
--------- --------- --------- ---------
<S> <C> <C> <C>
Joseph (Yosi) Amram........................ -- -- 300,000
Aurelle Amram Trust....................... -- -- 107,046
Oz Amram Trust............................ -- -- 107,046
Nancy Schary Trust........................ 16,423 -- --
Srinivasan (Chini) Krishnan................ -- -- 258,095
Timothy Conley............................. -- -- 50,000
Rajiv Dholakia............................. -- -- 500,000
Alexander Garcia-Tobar..................... -- -- 300,000
David Jevans............................... -- -- 455,890
Sathvik Krishnamurthy...................... -- -- --
Krishnamurthy Trust....................... -- -- 519,750
L. Malathy Villar (1)..................... -- -- 3,750
L. Malathy Villar, custodian for Arya
Bruno (1)................................ -- -- 750
L. Malathy Villar, custodian for Harmon
Bruno (1)................................ -- -- 750
Martin Yam................................. -- -- 290,000
Scott J. Loftesness........................ 41,045 -- 2,363
August Capital, L.P........................ 2,261,905 559,701 --
US Venture Partners V, L.P................. 396,825 995,108 1,977,157
</TABLE>
- --------
(1) Ms. Villar is the sister of Mr. Krishnamurthy. Mr. Krishnamurthy disclaims
beneficial ownership of these securities.
The following is a summary of sales of our preferred and common stock that
are presented in the table above.
Series B financing. On May 6, 1998, we sold a total of 4,923,811 shares of
our series B preferred stock at a price of $1.26 per share convertible into an
aggregate of 4,923,811 shares of common stock.
Series C financing. On July 21, 1999 and August 6, 1999, we sold a total of
4,871,892 and 840,958 shares, respectively, of series C preferred stock at a
price of $4.02 per share convertible into an aggregate of 5,712,851 shares of
common stock.
Receipt.com merger. On December 30, 1999, US Venture Partners V, L.P.
received 807,730 shares of our series C preferred stock and 795,408 shares of
our common stock in exchange for 3,365,385 shares of Receipt.com series B
preferred stock.
In connection with our sale of preferred stock, we entered into agreements
with the investors providing for registration rights with respect to these
shares. The most recent such agreement is an amended and restated investor
rights agreement dated July 21, 1999, which restates and incorporates the
registration rights of all investors.
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Common stock financing.
On June 18, 1999, Mr. Joseph (Yosi) Amram exercised an option to acquire
214,093 shares of common stock at an exercise price of $0.16 per share.
On August 30, 1999, Mr. Joseph (Yosi) Amram exercised an option to acquire
200,000 shares of common stock at an exercise price of $0.60 per share.
On February 3, 2000, Mr. Joseph (Yosi) Amram purchased 100,000 shares of
common stock from Mr. David Jevans at a price of $3.18 per share.
On June 24, 1999, Mr. Srinivasan (Chini) Krishnan exercised an option to
acquire 158,095 shares of common stock at an exercise price of $0.16 per share.
On August 30, 1999, Mr. Srinivasan (Chini) Krishnan exercised an option to
acquire 100,000 shares of common stock at an exercise price of $0.60 per share.
On March 6, 2000, Mr. Timothy Conley exercised an option to acquire 50,000
shares of common stock at an exercise price of $3.30 per share.
On June 14, 1999, Mr. Rajiv Dholakia exercised an option to acquire 450,000
shares of common stock at an exercise price of $0.16 per share.
On January 18, 2000, Mr. Rajiv Dholakia exercised an option to acquire
50,000 shares of common stock at an exercise price of $2.50 per share.
On June 18, 1999, Mr. Alexander Garcia-Tobar exercised an option to acquire
150,000 shares of common stock at an exercise price of $0.16 per share.
On September 9, 1999, Mr. Alexander Garcia-Tobar exercised an option to
acquire 100,000 shares of common stock at an exercise price of $0.60 per share.
On January 19, 2000, Mr. Alexander Garcia-Tobar exercised an option to
acquire 50,000 shares of common stock at an exercise price of $2.50 per share.
On December 30, 1999, Mr. David Jevans received 330,890 shares of common
stock in exchange for 1,400,000 shares of Receipt.com, Inc. common stock.
On March 6, 2000, Mr. David Jevans exercised an option to acquire 250,000
shares of common stock at an exercise price of $1.44 per share.
On May 25, 1999, Mr. Sathvik Krishnamurthy exercised an option to acquire
450,000 shares of common stock at an exercise price of $0.16 per share.
On January 20, 2000, Mr. Sathvik Krishnamurthy exercised an option to
acquire 75,000 shares of common stock at an exercise price of $2.50 per share.
On June 6, 1999, Mr. Martin Yam exercised an option to acquire 175,000
shares of common stock at an exercise price of $0.16 per share.
On August 30, 1999, Mr. Martin Yam exercised an option to acquire 75,000
shares of common stock at an exercise price of $0.60 per share.
On February 1, 2000, Mr. Martin Yam exercised an option to acquire 40,000
shares of common stock at an exercise price of $2.50 per share.
On March 7, 2000, Mr. Scott Loftesness exercised an option to acquire 2,363
shares of common stock at an exercise price of $0.44 per share.
On December 30, 1999, US Venture Partners V, L.P. received 1,977,157 shares
of common stock in exchange for 8,365,378 shares of Receipt.com common stock.
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PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial ownership
of the shares of our common stock as of April 30, 2000, and pro forma as
adjusted to reflect the sale of shares of common stock in this offering
assuming (a) 26,674,068 shares of common stock outstanding as of April 30, 2000
and shares outstanding immediately following the completion of this
offering, (b) conversion of all outstanding shares of convertible preferred
stock into common stock, and (c) no exercise of the underwriters' over-
allotment option, by
. each person we know to be the beneficial owner of 5% or more of the
outstanding shares of common stock;
. each of our executive officers listed on the Summary Compensation
Table above under "Management";
. each of our directors; and
. all of our executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the stockholder. Shares of common stock
subject to options that are currently exercisable or exercisable within 60 days
of April 30, 2000 are considered outstanding and beneficially owned by the
person holding the options for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
Generally, shares of common stock subject to options granted by us and
shares of common stock which were purchased by exercising options granted by us
are subject to a right of repurchase in favor of ValiCert which lapses as to
one eighth of the shares after six months of vesting and thereafter ratably on
a monthly basis for 48 months. Unless indicated below, the address of each
individual listed below is 339 North Bernardo Ave., Mountain View, CA 94043.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Outstanding
Shares --------------------
Beneficially Before the After the
Name and Address Owned Offering Offering
- ---------------- ------------ ---------- ---------
<S> <C> <C> <C>
August Capital............................... 2,821,606 10.6%
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
Gaitonde Living Trust........................ 2,447,366 9.2%
c/o Girish Gaitonde
Tekedge Corporation
5400 Betsy Ross Drive
Santa Clara, CA 95054
Srinivasan (Chini) Krishnan(1)............... 2,141,323 8.0%
US Venture Partners V, L.P. and affiliated
entities(2)................................. 3,369,090 12.6%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares --------------------
Beneficially Before the After the
Name and Address Owned Offering Offering
- ---------------- ------------ ---------- ---------
<S> <C> <C> <C>
Joseph (Yosi) Amram(3)...................... 2,399,083 8.9%
Rajiv Dholakia(4)........................... 542,857 2.0%
Sathvik Krishnamurthy(5).................... 584,750 2.2%
Martin Yam(6)............................... 369,047 1.4%
Taher Elgamal(7)............................ 90,000 *
John Johnston(8)............................ 2,821,606 10.6%
Scott J. Loftesness(9)...................... 123,329 *
Magdalena Yesil(10)......................... 3,369,090 12.6%
All executive officers and directors of
ValiCert as a group (12 persons)........... 13,952,565 50.1%
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock
(1) Includes:
(a) immediately exercisable options to purchase 50,000 shares of common
stock at an exercise price of $6.00 per share that are subject to a
right of repurchase which lapses over time; and
(b) warrants to purchase 28,645 shares of common stock at an exercise
price of $12.60 per share.
(2) Includes:
(a) 3,032,183 shares held by US Venture Partners V, L.P.; and
(b) 336,907 shares held by parties affiliated with US Venture Partners V,
L.P. US Venture Partners V, L.P. disclaims voting power and
beneficial ownership of the shares held by its affiliated parties.
(3) Includes:
(a) immediately exercisable options to purchase 100,000 shares of common
stock at an exercise price of $6.00 per share that are subject to a
right of repurchase which lapses over time;
(b) warrants to purchase 57,291 shares of common stock at an exercise
price of $12.60 per share; and
(c) warrants to purchase 39,682 shares of series B preferred stock at an
exercise price of $1.26 per share.
(4) Includes warrants to purchase 42,857 shares of common stock at an
exercise price of $12.60 per share.
(5) Includes:
(a) 519,750 shares held by the Krishnamurthy Trust; and
(b) warrants to purchase 65,000 shares of common stock at an exercise
price of $12.00 per share.
(6) Includes:
(a) immediately exercisable options to purchase 10,000 shares of common
stock at an exercise price of $2.50 per share that are subject to a
right of repurchase which lapses over time;
(b) immediately exercisable options to purchase 50,000 shares of common
stock at an exercise price of $6.00 per share subject to a right of
repurchase which lapses over time; and
(c) warrants to purchase 19,047 shares of common stock at an exercise
price of $12.60 per share.
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(7) Includes immediately exercisable options to purchase 20,000 shares of
common stock at an exercise price of $0.15 per share.
(8) Consists of shares held by August Capital, L.P. Mr. Johnston disclaims
voting power and beneficial ownership of the shares held by August
Capital, L.P.
(9) Includes warrants to purchase 9,920 shares of series A junior preferred
stock at an exercise price of $1.26 per share.
(10) Consists of shares held by US Venture Partners V, L.P. and affiliated
entities. Ms. Yesil disclaims voting power and beneficial ownership of
the shares held by entities affiliated with US Venture Partners V, L.P.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.001 par value per share, and
2,000,000 shares of preferred stock, $0.001 par value per share. As of April
30, 2000, there were outstanding 6,736,747 shares of common stock and
19,937,321 shares of preferred stock. Such shares were held of record by a
total of 205 stockholders.
The following is a summary of some of the terms of our common stock,
preferred stock and outstanding warrants to purchase common stock, as well as
some of the terms of our charter, bylaws and Amended and Restated Investor
Rights Agreement. This summary does not describe all of the terms and
provisions of our common and preferred stock or warrants and those other
instruments and agreements. This summary is qualified by the actual terms of
our certificate of incorporation and bylaws and Amended and Restated Investor
Rights Agreements, copies of which are available as described under "Where You
Can Find More Information."
Common Stock
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available at the times and
in the amounts as our board of directors may from time to time determine.
Each common stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of common stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
outstanding shares of common stock can elect all of the directors then standing
for election.
Our common stock is not entitled to preemptive rights and is not subject to
conversion or redemption.
Upon our liquidation, dissolution or winding-up, the assets legally
available for distribution to our stockholders are distributable ratably among
the holders of our common stock after payment of liquidation preferences, if
any, on any outstanding preferred stock and payment of or provision for claims
of creditors.
Each outstanding share of common stock is, and all shares of common stock to
be outstanding upon completion of this offering will be, fully paid and
nonassessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of preferred stock
then outstanding will be converted into one share of common stock. See note 9
to our consolidated financial statements for a description of the preferred
stock.
Following this offering, our board of directors will be authorized, without
any vote or action by our stockholders, to issue preferred stock in one or more
series, to establish from time to time the number of shares to be included in
each series and to designate the rights, preferences and privileges of the
shares of each series and any of their qualifications, limitations or
restrictions.
Our board of directors may authorize the issuance of preferred stock with
voting, conversion or other rights that could adversely affect the voting power
or other rights of the
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holders of our common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying or preventing a change in control
of ValiCert and may cause the market price of our common stock to decline or
impair the voting and other rights of the holders of our common stock. We have
no current plans to issue any shares of preferred stock.
Warrants
As of April 30, 2000, we had issued:
. warrants to purchase 707,500 shares of common stock with an exercise
price of $12.60 per share, which expire in 2010;
. warrants to purchase 130,000 shares of common stock with an exercise
price of $12.00 per share, which expire in 2008;
. warrants to purchase 84,641 shares of series A junior preferred stock
with a weighted average exercise price of $1.37 per share, which expire
in 2008;
. warrants to purchase 39,682 shares of series B preferred stock with an
exercise price of $1.26 per share, which expire in 2008;
. warrants to purchase 53,748 shares of series C preferred stock with a
weighted average exercise price of $4.25 per share, which expire in
2010.
Following the closing of this offering the warrants to purchase series A
junior preferred stock, series B preferred stock and series C preferred stock
will entitle the holders to purchase the same number of shares of our common
stock.
Registration Rights
The holders of 13,708,687 shares of our series A senior, series B and series
C preferred stock have the right to require us to register the shares of common
stock issuable on conversion of that preferred stock with the Securities and
Exchange Commission so that the common stock may be resold. In addition, the
holders of 19,937,321 shares of our series A senior, series A junior, series B
and series C preferred stock have the right to require that we include the
shares of common stock issuable on conversion of that preferred stock in any
registration statement we file with the SEC. Following this offering, these
registration rights will continue to be applicable to the shares of common
stock issued on conversion of our preferred stock. The underwriters of any
underwritten offering will have the right to limit the number of shares to be
included in the filed registration statement.
Demand registration rights
The holders of 50% of the aggregate number of shares of our common stock
issued or issuable on conversion of our series A senior, series B and series C
preferred stock have the right to demand that we register their shares under
the Securities Act of 1933 subject to limitations. We are not required to
effect more than two registrations pursuant to the demand registration right.
If we are eligible to file a registration statement on Form S-3, any holder
of our series A senior, series B and series C preferred stock has the right to
demand that we file a registration statement on Form S-3 covering the shares of
common stock issuable on conversion of that preferred stock, as long as the
amount of securities to be sold under the registration statement exceeds
$1,000,000. We are not required to effect more than two registrations pursuant
to this demand registration right within any twelve-month period.
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Piggyback registration rights
If we register securities for public sale, the holders of all series of our
preferred stock will be entitled to include the common stock issuable on
conversion of those shares in the registration statement.
Expenses of registration
We will pay all registration expenses, excluding underwriting discounts and
commissions but including the reasonable fees of a single counsel acting on
behalf of all selling holders not to exceed $30,000, of all demand and
piggyback registrations, except that holders requesting a registration on Form
S-3 as described above will be required to pay all registration expenses.
Expiration of registration rights
All registration rights will expire seven years after this offering is
completed.
Delaware Anti-Takeover Law and Charter Provisions
The provisions of the Delaware General Corporation Law, our certificate of
incorporation and our bylaws described below may have the effect of delaying,
deferring or discouraging another person from acquiring control of us.
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prohibits, subject
to exceptions, publicly traded Delaware corporations from engaging in a
business combination, which includes a merger or sale of more than 10% of the
corporation's assets, with any interested stockholder. An interested
stockholder is generally defined as a person who, together with its affiliates
and associates, owns or, within three years prior to the time of determination
of interested stockholder status, did own 15% or more of a corporation's
outstanding voting securities. However, this prohibition does not apply if:
. the transaction is approved by the board of directors before the time
the interested stockholder attained that status;
. upon the closing of the transaction that resulted in the stockholder's
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; or
. at or after the time the stockholder became an interested stockholder,
the business combination is approved by the board and authorized at an
annual or special meeting of stockholders by at least two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from an amendment
approved by at least a majority of the outstanding voting shares. However, we
have not opted out of this provision. This provision of the Delaware General
Corporation Law could prohibit or delay a merger or other takeover or change-
in-control attempts and may discourage attempts to acquire us.
Certificate of Incorporation and Bylaws
Provisions of our certificate of incorporation and bylaws, which will become
effective upon the closing of this offering, may have the effect of making it
more difficult for a third party to
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<PAGE>
acquire, or of discouraging a third party from attempting to acquire, control
of ValiCert. These provisions could cause the price of our common stock to
decrease. Some of these provisions allow us to issue preferred stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for stockholders to take specific corporate actions and could
have the effect of delaying or preventing a change in control of ValiCert. Upon
the closing of this offering, our certificate of incorporation will provide
that the board of directors will be divided into three classes of directors,
with each class serving a staggered three-year term. The classification system
of electing directors may discourage a third party from making a tender offer
or otherwise attempting to obtain control of us and may maintain the incumbency
of the directors, because the classification of the board of directors
generally increases the difficulty of replacing a majority of the directors.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
our certificate of incorporation and bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law. Our bylaws will also provide that we will indemnify officers
and directors against losses that they may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. We intend to enter into separate
indemnification agreements, prior to the closing of this offering, with our
directors and executive officers, which may be more broad than the specific
indemnification provisions contained in the Delaware General Corporation Law.
These provisions and agreements may have the effect of preventing changes in
our management.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is . The
address of our transfer agent and registrar is , and its telephone
number at this location is .
Listing
We have applied to list our common stock on the Nasdaq National Market under
the symbol VLCT.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock, including
shares issued upon exercise outstanding options and warrants, in the public
markets after this offering, or the perception that these sales may occur,
could adversely affect market prices prevailing from time to time and our
ability to raise equity capital in the future. Furthermore, the holders of
substantially all shares of our common stock outstanding prior to this offering
will be restricted from reselling those shares for 180 days after the date of
this prospectus as a result of the lock-up agreements described below. Future
sales of substantial amounts of our common stock in the public market after the
lock-up restrictions lapse, or the perception that these sales may occur, could
adversely affect the prevailing market price of our common stock.
Upon completion of this offering, we will have outstanding shares of
common stock, based on common stock outstanding as of April 30, 2000 and
assuming no exercise of the underwriters' over-allotment option, no exercise of
outstanding options and warrants and no issuance of additional shares. Of these
shares, the shares sold in this offering will be freely tradable without
restriction under the Securities Act, unless purchased by our "affiliates," as
that term is defined in Rule 144 under the Securities Act. Substantially all
shares of our stock outstanding prior to this offering are subject to 180-day
lock-up agreements, and may not be sold in the public market prior to the
expiration of the lock-up agreement except as described below. The shares of
our common stock outstanding prior to this offering will be eligible for sale
in the public market, subject in some cases to compliance with the volume and
other limitations of Rule 144, as follows.
<TABLE>
<CAPTION>
Days after Date of this Shares Eligible
Prospectus for Sale Comment
- ----------------------- --------------- -------
<S> <C> <C>
90 days................. All holders of securities are bound by
lock-up agreements with the underwriters or
us.
180 days................ A substantial number of these shares will
be subject to volume limitations and
restrictions under Rule 144 because they
will have been held for over one year but
less than two years or they are held by
some of our officers and directors.
Various dates These shares will be subject to volume
thereafter............. limitations and restrictions of Rule 144 at
the expiration of a one year holding
period, which will occur on .
</TABLE>
Lock-Up Agreements
We and our directors and officers, substantially all of the holders of the
shares of our common stock and preferred stock outstanding prior to this
offering, and substantially all holders of options and warrants to purchase our
capital stock outstanding prior to this offering have agreed not to sell any of
our common stock without the prior written consent of Deutsche Bank Securities
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated until 180 days
after the date of this prospectus, except that we may, without such consent,
issue shares upon the exercise of outstanding stock options and warrants and
grant options and sell shares pursuant to our 1998 Stock Plan and 2000 Employee
Stock Purchase Plan. Deutsche Bank Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated may release any shares subject to these
restrictions in whole or in part at any time without prior public notice.
77
<PAGE>
Stock Options
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register approximately shares of common stock issued
under our stock option and equity incentive plans. These registration
statements are expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Shares registered under these
registration statements will be available for sale in the open market, unless
the shares are subject to vesting restrictions with ValiCert or the lock-up
restrictions above.
Rule 144
In general, under Rule 144 a person, or persons whose shares are aggregated,
who has beneficially owned those shares for at least one year is entitled to
sell within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, or
approximately of the shares outstanding immediately after this
offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not and has not been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, shares that have been held by a non-affiliate for
at least two years may be sold in the open market immediately after the lock-up
agreements expire.
Rule 701
Any employee, officer of director of, or consultant to, us who purchased his
shares under a written compensatory plan or contract may be entitled to sell
his shares in reliance on Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may
sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares.
Registration Rights
Upon completion of this offering, the holders of 13,708,686 shares of common
stock, or their transferees, may demand that we register their shares under the
Securities Act and holders of 19,937,321 shares of common stock, or their
transferees, may elect to include their shares in any other registration
statement we may file under the Securities Act, subject to exceptions. See
"Description of Capital Stock--Registration Rights." If these shares are
registered, they will be freely tradable without restriction under the
Securities Act.
78
<PAGE>
UNDERWRITING
General
Subject to the terms and subject to the conditions contained in an
underwriting agreement, the underwriters named below, through their
representatives Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, as joint bookrunners, and Donaldson, Lufkin & Jenrette
Securities Corporation and Wit SoundView Corporation, have severally agreed to
purchase from us the following respective numbers of shares of common stock at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Deutsche Bank Securities Inc.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Wit SoundView Corporation..........................................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to specified conditions and that the underwriters will purchase all
of the shares of common stock offered by this prospectus, other than those
covered by the over-allotment option described below, if any of the shares are
purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
initial public offering price specified on the cover page of this prospectus
and to selected dealers at a price that represents a concession not in excess
of $ per share from the initial public offering price. The underwriters may
allow other dealers, and those dealers may re-allow, a concession not in excess
of $ per share. After the initial public offering, the representatives of
the underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to additional shares
of common stock at the initial public offering price less the underwriting
discounts and commissions specified on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated, subject to conditions, to purchase approximately the
same percentage of the option shares that the number of shares of common stock
to be purchased by it in the above table bears the total number of shares of
common stock indicated in a table. We will be obligated, pursuant to the
option, to sell those additional shares of common stock to the underwriters to
the extent the option is exercised. If any additional shares of common stock
are purchased, the underwriters will offer the additional shares on the same
terms as those on which the shares are being offered.
The underwriting discounts and commissions per share are equal to the
initial public offering price per share of common stock less the amount paid by
the underwriters to us per
79
<PAGE>
share of common stock. The underwriting discounts and commissions are % of
the initial public offering price. We have agreed to pay the underwriters the
following discounts and commissions, assuming either no exercise or full
exercise by the underwriters of the underwriters' over-allotment option:
<TABLE>
<CAPTION>
Total Discounts and Commissions
Discounts and -------------------------------------------
Commissions Without Exercise of With Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
------------- --------------------- ---------------------
<S> <C> <C> <C>
Discounts and
commissions paid by
us.................... $ $ $
</TABLE>
In addition, we estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of these
liabilities.
Each of our officers and directors, substantially all of our stockholders
and substantially all of the holders of options and warrants to purchase our
stock have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of our common stock or any securities convertible into or
exchangeable or exercisable for shares of our common stock or derivatives of
our common stock for a period of 180 days after the date of this prospectus
without the prior written consent of Deutsche Bank Securities Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. This consent may be given at any
time without public notice. We have entered into a similar agreement with the
representatives of the underwriters, except that we may issue shares upon the
exercise of outstanding stock options and warrants and grant options and sell
shares pursuant to our 1998 Stock Plan and 2000 Employee Stock Purchase Plan
without that consent.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these over-
allotments or stabilize the market price of our common stock, the underwriters
may bid for, and purchase, shares of our common stock in the open market.
Finally, the representatives on behalf of the underwriters may also reclaim
selling concessions allowed to an underwriter or dealer. Any of these
activities may maintain the market price of our common stock at a level above
that which might otherwise prevail in the open market. These transactions may
be effected on the Nasdaq National Market or otherwise. The underwriters are
not required to engage in these activities and, if commenced, may end any of
these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares for sale to our vendors, employees,
family members of employees, customers and other third parties. The number of
shares of our common stock available for sale to the general public will be
reduced to the extent these reserved shares are purchased. Any reserved shares
that are not purchased by these persons will be offered by the underwriters to
the general public on the same basis as the other shares in this offering.
80
<PAGE>
A prospectus in electronic format is being made available on an Internet
website maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on websites
maintained by each of these dealers. Other than the prospectus in electronic
format, the information on any website maintained by Wit Capital or any dealer
is not part of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved or endorsed by us or any
underwriter and should not be relied upon by investors.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be determined by negotiation between us and the representatives of the
underwriters. Among the factors to be considered in determining the initial
public offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to us; and
. estimates of our business potential.
The estimated initial public offering price set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions
and other factors.
81
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Brown & Wood LLP,
San Francisco, California will act as counsel for the underwriters.
EXPERTS
The ValiCert, Inc. consolidated financial statements as of and for the year
ended December 31, 1999 and the Receipt.com, Inc. financial statements for the
year ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999 included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in the
reliance upon the reports of such firm given upon their authority as experts in
auditing and accounting.
The financial statements of Valicert, Inc., as of December 31, 1998 and for
each of the two years then ended, included in this prospectus and registration
statement, have been audited by PricewaterhouseCoopers LLP, independent
accountants. Such financial statements have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contains additional information about us and our capital stock. The
rules and regulations of the SEC allow us to omit various information included
in the registration statement from this document.
In addition, upon completion of this offering, we will become subject to the
reporting and information requirements of the Securities Exchange Act of 1934
and, as a result, will file periodic reports, proxy statements and other
information with the SEC. You may read and copy this information at the
following public reference rooms of the SEC:
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, DC 20549 New York, NY 10048 Chicago, IL 60661-2511
You may also obtain copies of this information by mail from the public
reference section of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, DC
20549, at prescribed rates. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-(800) SEC-0330.
The SEC also maintains an internet website that contains reports, proxy
statements and other information about issuers, like ValiCert, who file
electronically with the SEC. The address of that website is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing audited
financial statements, and make available to our stockholders quarterly reports
for the first three quarters of each fiscal year containing unaudited interim
financial information.
82
<PAGE>
VALICERT, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
------
<S> <C>
ValiCert, Inc.:
Independent Auditors' Report--Deloitte & Touche LLP................... F-2
Report of Independent Accountants--PricewaterhouseCoopers LLP......... F-3
Consolidated Balance Sheets as of December 31, 1998 and 1999 and March
31, 2000 (Unaudited)................................................. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999 and the Three-Month Periods Ended March 31, 1999
(Unaudited) and 2000 (Unaudited)..................................... F-5
Consolidated Statements of Stockholders' Deficiency and Comprehensive
Loss for the Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Period Ended March 31, 2000 (Unaudited).................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and the Three-Month Periods Ended March 31, 1999
(Unaudited) and 2000 (Unaudited)..................................... F-7
Notes to Consolidated Financial Statements............................ F-8-26
Receipt.com, Inc.:
Independent Auditors' Report.......................................... F-27
Statements of Operations and Comprehensive Loss for the Year Ended
December 31, 1998 and from January 1, 1999 to December 30, 1999...... F-28
Statements of Cash Flows for the Year Ended December 31, 1998 and from
January 1, 1999 to December 30, 1999................................. F-29
Notes to Financial Statements for the Year Ended December 31, 1998 and
from January 1, 1999 to December 30, 1999............................ F-30
Pro Forma Condensed Combining Financial Information (Unaudited):
Pro Forma Condensed Combining Financial Statement (Unaudited)......... F-35
Pro Forma Condensed Combining Statements of Operations (Unaudited).... F-36
Notes to Pro Forma Condensed Combining Financial Statement
(Unaudited).......................................................... F-37
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
"To the Board of Directors and Stockholders of
ValiCert, Inc.:
We have audited the accompanying consolidated balance sheet of ValiCert,
Inc. ("Company") as of December 31, 1999, and the related consolidated
statements of operations, stockholders' deficiency and comprehensive loss, and
cash flows for the year ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ValiCert, Inc. at December 31,
1999, and the results of its operations and its cash flows for the year ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
San Jose, California
April 14, 2000
(May 5, 2000 as to Note 15)"
The accompanying consolidated financial statements included herein reflect
ValiCert, Inc.'s stock split of outstanding stock as described in Note 15 to
the consolidated financial statements prior to the initial public offering. The
above opinion is in the form that will be signed by Deloitte & Touche LLP upon
the effectiveness of such events assuming that from May 5, 2000 to the
effective date of such events, no other events shall have occurred that would
affect the accompanying consolidated financial statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
May 5, 2000
F-2
<PAGE>
The stock split described in Note 15 to the financial statements has not been
consummated at May 5, 2000. When the stock split has been consummated, we will
be in a position to furnish the following report:
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and Stockholders
of Valicert, Inc.:
In our opinion, the accompanying balance sheet as of December 31, 1998 and
the related statements of operations, stockholders' deficiency and
comprehensive loss and cash flows present fairly, in all material respects, the
financial position of Valicert, Inc. (the Company), a development stage
company, at December 31, 1998 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of Valicert, Inc. for any period subsequent to December 31, 1998."
PricewaterhouseCoopers LLP
San Jose, California
March 19, 1999
(May 5, 2000 as to Note 15)
F-3
<PAGE>
VALICERT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders
December 31, Equity
----------------- March 31, March 31,
1998 1999 2000 2000
------- -------- --------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents................. $ 1,163 $ 14,023 $ 10,983
Short-term investments............... -- 3,404 308
Accounts receivable, net of
allowances of $0, $75 and $125...... -- 1,079 2,471
Prepaid expenses and other current
assets.............................. 185 227 735
------- -------- --------
Total current assets.............. 1,348 18,733 14,497
Property and equipment, net.......... 778 3,848 3,867
Employee receivables................. 125 125 125
Goodwill, net of accumulated
amortization of $0, $0 and $560..... -- 12,491 11,931
Intangible assets, net of accumulated
amortization of $0, $0 and $188..... -- 2,266 2,078
Other assets......................... 185 229 535
------- -------- --------
Total assets...................... $ 2,436 $ 37,692 $ 33,033
======= ======== ========
LIABILITIES REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable..................... $ 170 $ 1,762 $ 767
Accrued compensation and related
benefits............................ 160 517 90
Other accrued liabilities............ 374 868 1,888
Deferred revenue..................... -- 814 1,133
Short term notes..................... -- 737 153
Current portion of long-term
obligations......................... -- 710 850
------- -------- --------
Total current liabilities......... 704 5,408 4,881
------- -------- --------
Long-term obligations................ -- 2,240 2,587
Other liabilities.................... 16 74 60
Commitments and contingencies (Note
8)
Redeemable convertible preferred
stock, $0.001 par value; shares
authorized 22,465,270 (aggregate
liquidation preference of $39,578 at
December 31, 1999):
Series A--Senior shares designated,
1,865,239; issued and outstanding:
1998, 1999 and 2000, 1,865,237
shares; pro forma, none............ 565 565 565
Series A--Junior shares designated,
8,612,618; issued and outstanding:
1998, 4,458,289 shares; 1999,
5,703,307 shares; 2000, 5,920,650
shares; pro forma, none............ 94 154 183
Series B shares designated,
5,200,000; issued and outstanding:
1998, 4,923,812 shares; 1999 and
2000 5,082,542 shares; pro forma,
none............................... 6,150 6,445 6,445
Series C shares designated,
6,787,414; issued and outstanding:
1998, none; 1999 and 2000,
6,760,908 shares; pro forma,
none............................... -- 27,147 27,178
Notes receivable from convertible
preferred stockholders............. (61) (55) (55)
Stockholders' equity (deficiency):
Common stock, $0.001 par value;
authorized--25,000,000 shares;
1998, none; 1999, 5,431,586; 2000,
6,619,523; pro forma, 26,248,861... -- 1 1 4
Additional paid-in capital.......... -- 20,001 24,039 58,407
Deferred stock compensation......... -- (5,843) (7,826) (7,826)
Notes receivable from common
stockholders....................... -- (611) (1,668) (1,723)
Accumulated other comprehensive
loss............................... -- -- (65) (65)
Accumulated deficit................. (5,032) (17,834) (23,292) (23,292)
------- -------- -------- --------
Total stockholders' equity
(deficiency)..................... (5,032) (4,286) (8,811) 25,505
------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficiency)..................... $ 2,436 $ 37,692 $ 33,033
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VALICERT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
------------------------- -------------------
1997 1998 1999 1999 2000
------ ------- -------- ---------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............. $ -- $ 60 $ 874 $ 89 $ 1,396
Subscription fees and other
services..................... -- -- 761 79 480
------ ------- -------- ---------- -------
Total revenues.............. -- 60 1,635 168 1,876
------ ------- -------- ---------- -------
Cost of revenues:
Software licenses............. -- 3 93 7 153
Subscription fees and other
services..................... -- -- 134 29 1,041
------ ------- -------- ---------- -------
Total cost of revenues...... -- 3 227 36 1,194
------ ------- -------- ---------- -------
Gross profit................... -- 57 1,408 132 682
Operating expenses:
Research and development...... 373 1,728 5,608 822 1,911
Sales and marketing........... 53 1,445 4,583 802 2,404
General and administrative.... 97 977 1,373 279 686
Acquired in-process research
and development.............. -- -- 2,780 -- --
Amortization of intangibles... -- -- -- -- 810
Amortization of stock
compensation*................ -- -- 162 -- 457
------ ------- -------- ---------- -------
Total operating expenses.... 523 4,150 14,506 1,903 6,268
------ ------- -------- ---------- -------
Operating loss................. (523) (4,093) (13,098) (1,771) (5,586)
Other income (expense):
Interest income............... -- 125 477 7 190
Interest expense.............. (7) (22) (181) -- (62)
------ ------- -------- ---------- -------
Total other income
(expense).................. (7) 103 296 7 128
------ ------- -------- ---------- -------
Net loss....................... $ (530) $(3,990) $(12,802) $ (1,764) $(5,458)
====== ======= ======== ========== =======
Net loss attributable to common
stockholders.................. $ (549) $(3,990) $(12,802) $ (1,764) $(5,458)
====== ======= ======== ========== =======
Basic and diluted net loss per
share......................... $(0.59) $ (5.34) $ (32.55) $(1,548.40) $ (1.54)
====== ======= ======== ========== =======
Shares used in computation of
basic and diluted net loss per
share......................... 934 747 393 1,139 3,546
====== ======= ======== ========== =======
Pro forma basic and diluted net
loss per share (Note 1)
(unaudited)................... $ (0.83) $ (0.15) $ (0.24)
======== ========== =======
Shares used in pro forma basic
and diluted net loss per share
(Note 1) (unaudited).......... 15,489 11,821 22,702
======== ========== =======
</TABLE>
- --------
* Amortization of stock compensation:
<TABLE>
<S> <C> <C> <C>
Cost of revenues:
Subscription fees and other services.......................... $ 4 $-- $ 5
Research and development....................................... 31 -- 146
Sales and marketing............................................ 78 -- 120
General and administrative..................................... 49 -- 186
---- ---- ----
$162 $-- $457
==== ==== ====
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
VALICERT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes Accumulated
Common stock Additional Deferred Receivable Other Total
---------------- Paid-In Stock from Comprehensive Accumulated Comprehensive
Shares Amount Capital Compensation Stockholders Loss Deficit Total Loss
--------- ------ ---------- ------------ ------------ ------------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
January 1,
1997............ -- $ -- $ -- $ -- $ -- $ -- $ (493) $ (493) $ --
Net loss and
comprehensive
loss............ (530) (530) (530)
--------- ---- ------- ------- ------- ----- -------- -------- --------
Balances,
December 31,
1997............ -- -- -- -- -- -- (1,023) (1,023) --
Issuance of
Series A-Senior
preferred
stock........... (19) (19)
Net loss and
comprehensive
loss............ (3,990) (3,990) (3,990)
--------- ---- ------- ------- ------- ----- -------- -------- --------
Balances,
December 31,
1998............ -- -- -- -- -- -- (5,032) (5,032) --
Issuance of
common stock and
common stock
options in
connection with
acquisition
(note 2)........ 3,273,208 1 17,169 (3,733) (52) 13,385
Exercise of
common stock
options and
issuance of
stockholder
notes........... 2,158,378 560 (541) 19
Interest on
stockholder
notes........... (18) (18)
Deferred stock
compensation.... 2,272 (2,272)
Amortization of
stock
compensation.... 162 162
Net loss and
comprehensive
loss............ (12,802) (12,802) (12,802)
--------- ---- ------- ------- ------- ----- -------- -------- --------
Balances,
December 31,
1999............ 5,431,586 1 20,001 (5,843) (611) -- (17,834) (4,286) --
Exercise of
common stock
options and
issuance of
stockholder
holder notes*... 1,187,937 1,598 (1,091) 507
Deferred stock
compensation*... 2,440 (2,440)
Amortization of
stock
compensation*... 457 457
Interest on
stockholder
notes*.......... (16) (16)
Repayment of
notes receivable
from
stockholders*... 50 50
Net loss*....... (5,458) (5,458) (5,458)
Change in net
unrealized loss
from short-term
investments*.... (65) (65) (65)
--------
Comprehensive
loss*........... $ (5,523)
--------- ---- ------- ------- ------- ----- -------- -------- ========
Balances, March
31, 2000*....... 6,619,523 $ 1 $24,039 $(7,826) $(1,668) $ (65) $(23,292) $ (8,811)
========= ==== ======= ======= ======= ===== ======== ========
</TABLE>
- -----
* Unaudited
See notes to consolidated financial statements.
F-6
<PAGE>
VALICERT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended March 31,
------------------------ ----------------
1997 1998 1999 1999 2000
----- ------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(530) $(3,990) $(12,802) $(1,764) $(5,458)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... 14 125 720 69 422
Interest on stockholder notes..... -- -- (18) -- (16)
Amortization of deferred stock
compensation..................... -- -- 162 -- 457
In-process research and
development...................... -- -- 2,780 -- --
Amortization of goodwill and
intangibles...................... -- -- -- -- 749
Expenses related to professional
services......................... 32 -- -- -- --
Changes in assets and liabilities
(net of acquisitions--Note 2):
Accounts receivable.............. -- -- (952) (169) (1,393)
Prepaid expenses and other
current assets.................. (39) (149) (41) 8 (508)
Other assets..................... (15) (160) (2) (3) (306)
Loans to employees............... -- (125) -- -- --
Accounts payable................. (44) 155 2,470 428 (994)
Accrued compensation and related
benefits........................ -- -- 120 -- (427)
Other accrued liabilities........ 145 381 390 7 1,019
Deferred revenue................. 54 (54) 486 (56) 319
Other liabilities................ -- 16 59 (16) (14)
----- ------- -------- ------- -------
Net cash used in operating
activities..................... (383) (3,801) (6,628) (1,496) (6,150)
----- ------- -------- ------- -------
Cash flows from investing
activities:
Property and equipment additions.. (30) (855) (2,247) (544) (441)
Cash from acquisitions............ -- -- 834 -- --
Purchase of short-term
investments...................... -- -- (3,031) -- --
Sale of short-term investments.... -- -- -- -- 3,031
Repayment of notes receivable from
stockholders..................... -- -- -- -- 50
----- ------- -------- ------- -------
Net cash used in (provided by)
investing activities........... (30) (855) (4,444) (544) 2,640
----- ------- -------- ------- -------
Cash flows from financing
activities:
Exercise of common stock options.. -- -- 83 -- 507
Exercise of preferred stock
warrants and options............. -- -- 294 215 59
Proceeds from issuance of
preferred stock, net............. -- 5,351 22,934 -- --
Repurchase of preferred stock..... -- -- 2 -- --
Repayment of notes payable........ -- (50) -- -- (584)
Proceeds from notes payable....... 830 -- -- -- --
Borrowings under line-of-credit
agreements....................... -- -- 2,689 873 488
Repayment of borrowings........... -- -- (2,070) -- --
----- ------- -------- ------- -------
Net cash provided by financing
activities..................... 830 5,301 23,932 1,088 470
----- ------- -------- ------- -------
Net increase (decrease) in cash and
equivalents....................... 417 645 12,860 (952) (3,040)
Cash and equivalents--beginning of
period............................ 101 518 1,163 1,163 14,023
----- ------- -------- ------- -------
Cash and equivalents--end of
period............................ $ 518 $ 1,163 $ 14,023 $ 211 $10,983
===== ======= ======== ======= =======
Noncash investing and financing
activities:
Preferred stock issued for
professional services............ $ 2 $ -- $ -- $ -- $ --
===== ======= ======== ======= =======
Notes payable issued for
professional services............ $ 30 $ -- $ -- $ -- $ --
===== ======= ======== ======= =======
Common stock issued in exchange
for stockholder notes............ $ -- $ -- $ 541 $ -- $ 1,091
===== ======= ======== ======= =======
Payable converted into preferred
stock............................ $ -- $ 810 $ -- $ -- $ --
===== ======= ======== ======= =======
Assets acquired under capital
lease............................ $ -- $ -- $ 1,117 $ -- $ --
===== ======= ======== ======= =======
Equity issued for purchase of
Receipt.com (Note 2), net of cash
acquired......................... $ -- $ -- $ 16,815 $ -- $ --
===== ======= ======== ======= =======
Supplemental disclosure of cash
flow information--cash paid during
the period for interest........... $ -- $ 3 $ 132 $ -- $ 60
===== ======= ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
VALICERT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
1. Business and Significant Accounting Policies
Business--ValiCert, Inc. (the Company), incorporated in California in
February 6, 1996, develops and markets software products and services that
provide infrastructure to enable businesses to conduct valid, secure and
provable transactions. In February 1998, the Company reincorporated in
Delaware. During 1999, the Company exited development stage for financial
reporting purposes as it completed its initial product development activities
and commercially released its software products.
In March 1998, the Company effected a recapitalization which included a 1-
to-1 conversion of common stock into Series A-junior preferred stock and a 1-
to-1 conversion of preferred stock into Series A senior preferred stock. In May
1998, the Company approved a 2-for-1 stock split, and accordingly all share
information for all prior periods presented has been retroactively adjusted to
reflect the recapitalization and stock split.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents.
Property and Equipment--Property and equipment are stated at cost. Computer
software costs for internal use are capitalized and accounted in accordance
with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, issued by the American
Institute of Certified Public Accountants. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of the
assets ranging from three to five years, or the lease term, as appropriate.
Goodwill--Goodwill related to the Receipt.com acquisition (Note 2) is being
amortized on a straight-line basis over five years.
Intangible Assets--Intangible assets, consisting of purchased technology and
acquired workforce, are related to the acquisition of Receipt.com, described in
Note 2. Amortization is recorded on a straight-line basis over a period of
three years.
Impairment of Long-Lived Assets--The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets, goodwill or other intangibles may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86,
F-8
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
Computer Software To Be Sold, Leased or Otherwise Marketed. Because the Company
believes its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs have
been capitalized to date.
Notes Receivable from Stockholders--The notes receivable from stockholders
were issued in exchange for redeemable convertible preferred stock and common
stock, bear interest at 6% per annum, and are due between December 2002 and
September 2004.
Revenue Recognition--The Company's revenue recognition policy is consistent
with Statement of Position No. 97-2, Software Revenue Recognition, as amended.
License revenues are comprised of fees for the Company's software products.
Revenue from license fees is recognized when an agreement has been signed,
delivery of the product has occurred, the fee is fixed or determinable,
collectibility is probable and vendor-specific objective evidence exists to
allocate a portion of the total fee to any undelivered elements of the
arrangement. For electronic delivery, the software is considered to have been
delivered when the Company 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. If collectibility is not considered probable, revenue is recognized when
the fee is collected.
Other service revenues are comprised of revenue from maintenance
arrangements, consulting fees and training. Maintenance arrangements do not
provide for specified upgrade rights and provide technical support and the
right to unspecified upgrades on an if-and-when available basis. Revenue from
maintenance arrangements is recognized on a straight-line basis as service
revenue over the life of the related agreement, which is typically one year. If
maintenance or consulting services are included in an arrangement that includes
a license agreement, amounts related to maintenance or consulting are allocated
based on vendor-specific objective evidence. Vendor-specific objective evidence
for maintenance and professional services is based on the price when such
elements are sold separately, or, when not sold separately, the price is
established by management having the relevant authority. Where discounts are
offered on multiple element arrangements, a proportionate amount of that
discount is applied to each element included in the arrangement based on each
element's fair value. Consulting and training revenue is recognized as services
are provided to the customer. Customer advances and amounts billed to customers
in excess of revenue recognized are recorded as deferred revenue.
Fees from license arrangements that include a service element for which
vendor-specific objective evidence does not exist are recognized ratably over
the license term as subscription fees.
All revenues for the periods presented have been derived from licensing and
other services.
Income Taxes--Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement
F-9
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
carrying amounts and the tax bases of assets and liabilities and net operating
loss and tax credit carryforwards.
Stock Compensation--The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and complies with the
disclosure provisions of SFAS No. 123, Accounting for Stock based Compensation.
Net Loss per Common Share--Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase and under
escrow). Diluted net loss per share was the same as basic net loss per share
for all periods presented. The effect of any potentially dilutive securities
was excluded as they are anti-dilutive because of the Company's net losses.
Pro Forma Net Loss per Common Share--Pro forma basic and diluted net loss
per share is computed by dividing net loss by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase and under escrow) and the weighted average number of common shares
resulting from the assumed conversion of outstanding shares of convertible
preferred stock.
Concentration of Credit Risk--Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of cash and
equivalents, short-term investments and trade receivables. The Company limits
its exposure to concentration of credit risk with respect to cash and
equivalents and short-term investments by placing them in high quality
securities with major banks and financial institutions. The Company does not
require collateral or other security to support accounts receivable. To reduce
credit risk, management performs ongoing credit evaluations of its customers'
financial condition. The Company maintains allowances for probable credit
losses. At December 31, 1999 two customers accounted for 23% and 17% of the
accounts receivable balance.
Financial Instruments--The Company's financial instruments include cash and
equivalents, short term investments, notes receivable from stockholders and
long-term debt. At December 31, 1998 and 1999, the fair value of these
financial instruments approximated their financial statement carrying amounts
because of the short maturity of these instruments or because the stated
interest rates approximate market rates.
Significant Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the Unites States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Certain Significant Risks and Uncertainties--The Company operates in the
software industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company in
terms of its future financial position, results of operations and cash flows;
ability to attain profitability; regulatory changes; fundamental changes in the
F-10
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
technology underlying software products; market acceptance of the Company's
products under development; development of sales channels; litigation or other
claims against the Company; the hiring, training and retention of key
employees; successful and timely completion of product development efforts; and
defects in products.
Unaudited Pro Forma Information--The Company's unaudited pro forma balance
sheet information assumes that the conversion upon closing of an initial public
offering of each share of preferred stock to one share of common stock had
actually occurred at March 31, 2000. Estimated proceeds from the common shares
to be issued as a result of such initial public offering are excluded.
Unaudited Interim Financial Information--The interim financial information
as of March 31, 2000 and for the three months ended March 31, 1999 and 2000 are
unaudited and have been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited financial information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information. Operating results
for the three months ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
Comprehensive Income (Losses)--The Company reports comprehensive income
(loss) in accordance with SFAS No. 130, Reporting Comprehensive Income, which
established standards for reporting and developing comprehensive income.
Comprehensive income (loss) consists of the Company's reported net loss and the
unrealized holding losses on investments. At December 31, 1999, there were no
significant differences between the fair value and cost of such investments.
Recently Issued Accounting Standard--In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Subsequently, the FASB issued SFAS
No. 137 which deferred the effective date of SFAS No. 133. SFAS No. 133 will be
effective for the Company's fiscal year ending December 31, 2001. Although
management has not fully assessed the implications of SFAS 133, management
believes that this statement will not have a significant impact on the
Company's financial position, results of operations or cash flows.
Reclassifications--Certain prior period amounts have been reclassified to
conform to current period presentation.
F-11
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
2. Acquisition
On December 30, 1999, the Company acquired Receipt.com (Receipt), which is a
provider of secure data transfer software. The Company exchanged 1,048,068
shares of Series C preferred stock and 3,273,208 shares of common stock for all
the outstanding shares of Receipt. The aggregate fair value of the transaction,
which was accounted for as a purchase, was $17,649,000. Of the total shares
issued under the agreement, 618,760 shares of the Series C preferred stock and
common stock are being held in escrow for a period of one year from the closing
as collateral for Receipt's indemnification obligations under the agreement.
Assets acquired and liabilities assumed in the acquisition were as follows (in
thousands):
<TABLE>
<S> <C>
Tangible assets................................................... $ 1,855
In-process research and development............................... 2,780
Purchased technology.............................................. 1,833
Acquired workforce................................................ 433
Goodwill.......................................................... 12,491
Liabilities assumed............................................... (1,743)
-------
$17,649
=======
</TABLE>
In addition, the Company converted outstanding warrants and options to
purchase Receipt common stock into options and warrants to purchase 3,233,404
shares of common stock of the Company.
The allocation of the purchase price to the respective intangibles was based
on management's estimates of the after-tax cash flows and gave explicit
consideration to the Securities and Exchange Commission's view on purchased in-
process research and development as set forth in its September 9, 1998 letter
to the American Institute of Certified Public Accountants. Specifically, the
valuation gave consideration to the following: (i) the employment of a fair
market value premise excluding any Company-specific considerations that could
result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets; (iii)
the determination that none of the technology development had been completed at
the time of acquisition; and (iv) the allocation to in-process research and
development based on a calculation that considered only the efforts completed
as of the transaction date, and only the cash flow associated with these
completed efforts for one generation of the products currently in process.
The Company allocated $2.7 million to acquired in-process research and
development that had not reached technological feasibility as of the date of
the transaction. The acquired in-process research and development was
approximately 60% complete towards development of a system that captures the
digital signatures of the sender and receiver and provides a verifiable time
stamp for each transaction. The primary remaining efforts associated with the
development of the digital receipt technology included code completion in
several key areas, such as management, reporting and access to receipts in the
server vault, application program interfaces and the completion of a toolkit
for developers who need to add digital receipt functionality to their
applications. The Company incurred approximately 30 person-months of additional
development since the acquisition to complete the initial development of the
digital receipt technology in March 2000.
F-12
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
The values assigned to the acquired in-process research and development was
determined by estimating the costs to develop the purchased in-process
technology into a commercially viable product, estimating the resulting net
cash flows from the product and discounting the net cash flows to their present
value. The revenue projections used to value the acquired in-process research
and development were based on estimates of relevant market sizes, growth
factors, expected trends in technology and other factors. Operating expenses
were estimated based on historical results and anticipated profit margins.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations. Due to the nature of the forecast
and risks associated with the projected growth, profitability and the
developmental nature of the product, a discount rate of 27.5% was used to value
the in-process research and development. This discount rate was commensurate
with the respective stage of development and the uncertainties in the economic
estimates described above. If the acquired in-process research and development
product is not commercially successful, the Company's business, operating
results and financial condition may be materially adversely affected in future
periods. In addition, the value of other intangible assets acquired may become
impaired.
The operating results of Receipt since the date of acquisition to December
31, 1999 were nominal. Had the acquisition taken place at the beginning of
fiscal 1998, the unaudited pro forma results of operations would have been as
follows for the year ended December 31, (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenues.............................................. $ 993 $ 2,947
Net loss.............................................. $(10,527) $(17,845)
Basic and diluted loss per common share............... $ (2.61) $ (4.87)
</TABLE>
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill. The $2,780,000
charge for acquired in-process technology has been excluded from the pro forma
results as it is a material non-recurring charge.
The pro forma amounts are based on certain assumptions and estimates and do
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of results
of future combined operations.
3. Short-Term Investments
Short-term investments at December 31, 1999 consist of (in thousands):
<TABLE>
<S> <C>
Debt securities--available for sale (original maturities less
than one year)................................................. $ 3,031
Option to acquire equity securities--available for sale......... 373
-------
$ 3,404
=======
</TABLE>
At December 31, 1999, the cost of the investments approximated their fair
values. Gains and losses on investments are calculated using the specific
identification method.
F-13
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
4. Property and Equipment
Property and equipment consist of:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
----- -------
(In
thousands)
<S> <C> <C>
Equipment.................................................. $ 646 $ 3,762
Furniture and fixtures..................................... 189 253
Leasehold improvements..................................... 86 824
Software................................................... -- 52
----- -------
921 4,891
Accumulated depreciation and amortization.................. (143) (1,043)
----- -------
$ 778 $ 3,848
===== =======
</TABLE>
5. Employee Receivables
The Company loaned $125,000 to two shareholder employees which bear interest
at 6% per annum and mature in September 2003. The loans are secured by 300,000
shares of Series A-Junior preferred stock of the Company.
6. Short Term Notes
In connection with the acquisition of Receipt (Note 2), the Company assumed
promissory notes for $670,000 repayable with interest at 10%. The Company
repaid those notes through April 2000.
7. Long-Term Obligations
Long-term obligations consist of:
<TABLE>
<CAPTION>
December
31,
-----------
1998 1999
---- ------
(In
thousands)
<S> <C> <C>
Equipment finance obligation................................. $ -- $ 620
Convertible loan............................................. -- 142
Capital lease obligations.................................... -- 1,164
Short-term obligation subsequently refinanced under the
equipment lease line........................................ -- 1,024
---- ------
-- 2,950
Less current portion......................................... -- 710
---- ------
$ -- $2,240
==== ======
</TABLE>
F-14
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
Loan and Security Agreement
In December 1998, the Company entered into a subordinated loan and security
agreement with a finance company that provides for borrowings which are secured
by a first priority perfected security interest in the assets of the Company.
Borrowings under the loan mature thirty-six months from the date of each
borrowing. The loan bears interest at 11%. Prepayments during the first twelve
months of a note will be subject to a penalty equal to 1.5% of the principal
balance being paid. The Company had equipment finance obligations of $620,000
and capital lease obligations of $1,117,000 outstanding under this subordinated
loan and security agreement at December 31, 1999.
In connection with the loan and security agreement, the Company granted a
warrant to buy 35,489 shares of the Series C preferred stock at an exercise
price of $3.61 per share expiring in 5 years from date of grant or upon the
effectiveness of an initial public offering. The fair value of the warrant of
approximately $95,000 is being amortized to interest expense over the period of
the agreement. The fair value was determined using the Black-Scholes model with
the following assumptions: expected life 3.5 years; risk-free interest rate of
4.74%; volatility of 60% and no dividend during the expected term.
Convertible Loan
In connection with the acquisition of Receipt (Note 2), the Company assumed
$142,000 due under a convertible loan bearing interest at the Federal Funds
rate (8.5% at December 31, 1999). The loan, payable in monthly installments of
approximately $6,000 through November 2001, is convertible at the option of the
holder into shares of common stock at the market price of common stock on the
date of conversion in the event of an equity financing in which the Company
receives in excess of $2 million.
Line of Credit
In September 1998, the Company entered into a $1,000,000 line of credit
agreement with a bank under which a maximum of $500,000 may be used to purchase
equipment, software and furniture. The line of credit bears interest at a rate
of one-half percent plus prime per annum (8.5% at December 31, 1999) and is
secured by the assets of the Company. The Company had no amounts outstanding
under this line of credit at December 31,1999.
On April 18, 2000, the Company amended the terms of the agreement with the
bank to borrow up to a maximum $2,500,000 at a rate of interest of one quarter
percent over the prime rate. The terms of the revolving facility contain, among
other provisions, requirements for maintaining certain financial covenants. The
Company granted the bank a warrant to purchase 3,333 shares of the Series C
preferred stock at an exercise price of $12.00 per share. The warrant expires
five years from the issuance date. The Company determined the fair value of the
warrant to be nominal.
Equipment Lease Line
In December 1999, the Company entered into an equipment lease line with a
finance company that provides for borrowings up to $2,000,000, secured by the
assets acquired
F-15
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
through the financing. In January 2000, the Company granted the finance company
a warrant to buy 14,925 shares of Series C preferred stock at an exercise price
of $4.02 per share in connection with this equipment lease line. The warrant
expires seven years from the issuance date and has a fair value of $29,000
which will be amortized over the financing term.
The Company determined the fair value of the warrants by using the Black-
Scholes model with the following assumptions: expected life 3.5 years; risk-
free interest rate of 6.6%; volatility of 60%; and no dividend during the
expected term. Subsequent to year end, the Company drew on this line to
refinance $1,024,000 which was due to suppliers of capital equipment as of
December 31, 1999. As a result, the amount refinanced has been shown as a long-
term obligation at December 31, 1999.
Capital Leases--Receipt.com, Inc.
In conjunction with the acquisition of Receipt (Note 2), the Company assumed
obligations under capital leases repayable in monthly installments due through
fiscal 2002. At December 31, 1999, approximately $47,000 was due under these
obligations.
Annual maturities under the long-term obligations are as follows:
<TABLE>
<CAPTION>
Capital
Fiscal Year Ending December 31, Leases Other Total
------------------------------- ------- ------ ------
(In thousands)
<S> <C> <C> <C>
2000.............................................. $ 365 $ 482 $ 847
2001.............................................. 469 562 1,031
2002.............................................. 475 534 1,009
2003.............................................. 188 208 396
------ ------ ------
Total............................................... 1,497 $1,786 $3,283
====== ======
Amount representing interest........................ 333
------
Present value....................................... 1,164
Current portion..................................... 228
------
Long term portion................................... $ 936
======
</TABLE>
Equipment and leasehold improvements with a net book value of $1,191,000 at
December 31, 1999 (net of accumulated amortization of $183,000) have been
leased under capital leases.
8. Operating Lease Commitments
The Company leases its facilities under noncancelable operating leases for
which rent expense is ratably recognized over the lease term. The Company
subleases certain office space with an expiration date on December 2000. In
March 2000, the Company entered into a lease for office space in Mountain View,
California. Under the agreement, the Company is required to initially furnish
an unconditional irrevocable standby letter of credit for $1,000,000 as a
security deposit. The Company's obligations under the lease are included in the
future
F-16
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 Unaudited and 2000 (Unaudited)
minimum lease payments disclosed below. Rent expense was approximately $368,000
and $1,049,900 in 1998 and 1999, respectively. Rental income was $4,000 and
$251,000 in 1997 and 1999, respectively. There was no rental income in 1998.
Future minimum payments under the Company's operating leases are:
<TABLE>
<CAPTION>
Operating Sublease
Leases Income
--------- --------
(In thousands)
<S> <C> <C>
2000.................................................... $ 2,497 $160
2001.................................................... 3,105 --
2002.................................................... 3,180 --
2003.................................................... 2,678 --
2004.................................................... 2,645 --
Thereafter.............................................. 6,382 --
------- ----
Total................................................... $20,487 $160
======= ====
</TABLE>
9. Redeemable Preferred Convertible Stock and Stockholders' Equity
Redeemable Convertible Preferred Stock
The significant terms of the convertible preferred stock are as follows:
. In March, April and October 1996, 922,319 shares of Series A-junior and
1,850,000 shares of Series A-senior convertible preferred stock were
sold at prices ranging from $0.016 to $0.15 and a range of $0.16 to
$1.50 per share, respectively; in January and May 1997, 14,734 shares of
Series A-junior convertible preferred stock were issued at $0.15 and
$0.04 per share; in May 1998, 4,923,811 shares of Series B and 15,237
shares of Series A-senior convertible preferred stock were sold at $1.26
and $1.50 per share, respectively; and in July 1999 and August 1999,
4,871,892 and 840,958 shares of Series C convertible preferred stock
were sold at $4.02 per share.
. Each share of Series A-junior, Series A-senior, Series B and Series C
preferred stock is convertible into one share of common stock, at the
option of the holder, subject to adjustments for dilution. Additionally,
each share of Series A-senior preferred stock is convertible into Series
A-junior, at the option of the holder, on a 1-to-1 conversion ratio,
subject to adjustment for dilution. Each share of Series A-senior,
Series A-junior, Series B and Series C preferred stock automatically
converts into the number of shares of common stock into which such
shares are convertible at the then effective conversion ratio upon (1)
the closing of a public offering of common stock at a per share price of
at least $5 with gross proceeds of at least $15,000,000 or other
transactions which result in a change in control, or (2) the consent of
the holders of the majority of preferred stock.
. Each share of Series A-junior, Series A-senior, Series B and Series C
preferred stock has voting rights equivalent to the number of shares of
common stock into which it is convertible. The Series B and Series C
stockholders are additionally entitled to some protective provisions
relating to changes in their rights and preferences.
F-17
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 Unaudited and 2000 (Unaudited)
. Holders of Series B and Series C preferred stock are entitled to receive
noncumulative dividends at the per annum rate of $0.063 per share and
$0.201 per share, respectively, when and if declared by the Board of
Directors prior and in preference to any declaration or payment of any
dividend on the Series A-senior, Series A-junior and common stock. The
holders of Series A-senior are entitled to receive noncumulative
dividends at the per annum rate of $0.015 per share when and if declared
by the Board of Directors prior and in preference to any declaration or
payment of any dividend on Series A-junior and common stock. The holders
of Series A-junior are entitled to receive noncumulative dividends at
the per annum rate of $0.015 per share when and if declared by the Board
of Directors prior and in preference to any declaration or payment of
any dividend on common stock. No dividends on preferred stock have been
declared by the Board from inception through March 31, 2000.
. In the event of any liquidation, dissolution or winding up of the
Company, including a merger, acquisition or sale of assets, where the
beneficial owners of the Company's stock hold less than 50% of the
voting power of the surviving entity, the holders of Series B and Series
C preferred stock are entitled to receive $1.26 per share and $4.02 per
share, respectively, plus all declared but unpaid dividends prior and in
preference to any distribution to the holders of Series A-senior, Series
A-junior and common stock. Upon completion of the initial distribution,
the holders of Series A-senior are entitled to receive $0.15625 per
share plus all declared but unpaid dividends prior and in preference to
any distribution to the holders of Series A junior and common stock.
Upon completion of the initial and secondary distributions, the Series
A-junior are entitled to receive $1.00 per share plus declared but
unpaid dividends prior and in preference to any distribution to the
holders of common stock. Upon completion of the initial, secondary and
tertiary distributions, the holders of common stock are entitled to
receive the remaining assets of the Company.
. The convertible preferred shareholders have certain registration rights.
The Company and certain holders of Series C preferred stock have entered
into a "right of first refusal and co-sale agreement" with two founders in
respect of the Series A-junior preferred stock, Series B preferred stock and
common stock warrants held by the founders of the Company.
Restricted Stock
The Company has the right to repurchase the unvested portion of restricted
common stock exercised by employees under the 1998 stock plan at the original
purchase price. The Company's right to repurchase these shares expires over 48
months from the grant date. Additionally, certain officers and employees
exercised unvested stock options with full recourse notes. The related shares
of common stock are subject to repurchase by the Company at the original
purchase price per share upon the purchaser's cessation of service prior to the
vesting of such shares. The restricted stock continues to vest in accordance
with the terms of the original stock option. The related notes bear interest at
6% and mature five years from the loan date. At December 31, 1999, 1,837,000
outstanding shares of such stock were subject to repurchase.
F-18
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
Warrants
In connection with a loan, the Company issued warrants to an officer of the
Company to purchase 39,682 shares of Series B preferred stock for $1.26 per
share in April 1998. Such warrants are outstanding at December 31, 1999 and
expire in 2008. The Company determined that the warrants had nominal fair value
at the date of grant.
In connection with promissory notes subsequently converted to preferred
stock, the Company issued warrants to purchase 164,118 shares of Series A-
junior preferred stock for $0.2333 per share in February 1997. Such warrants
are outstanding at December 31, 1999 and expire in 2007. The Company determined
that the warrants had nominal fair value at the date of grant.
In connection with an advisory agreement, the Company issued warrants to
purchase 40,000 shares of Series A-junior preferred stock for $1.50 per share
in August 1997. Such warrants are outstanding at December 31, 1999 and expire
in 2007. The Company determined that the warrants had nominal fair value at the
date of grant.
In connection with the conversion of notes into Series B preferred stock,
the Company issued warrants to purchase 55,554 shares of Series A-junior
preferred stock at $1.26 per share in May 1998. Such warrants are outstanding
at December 31, 1999 and expire in 2008. The Company determined that the
warrants had nominal fair value at the date of grant.
In June, October and December 1998, the Company issued warrants to employees
to purchase 287,500 shares of common stock at prices ranging from $12.00 to
$12.60 per share. Such warrants vest monthly over a 42-month period and expire
in 2008.
During 1999, the Company issued warrants to employees to purchase 475,000
shares of common stock at $12.60 per share. Such warrants generally vest over a
42 or 48- month period and expire in 2009.
In connection with the acquisition of Receipt, the Company assumed a warrant
to purchase 43,175 shares of common stock at $3.18 per share.
Deferred Stock Compensation
In connection with grants of stock options to employees and issuance of
options upon the Receipt merger, the Company recorded deferred compensation of
$6,005,000 and $2,440,000 in fiscal 1999 and in the three months ended March
31, 2000, respectively, representing the difference between the deemed fair
value for accounting purposes and the stock price as determined by the Board of
Directors on the date of grant. This amount has been presented as a reduction
of stockholders' equity and is being amortized to expense over the vesting
period of the related stock options (generally four years). Amortization of
deferred stock compensation for the year ended December 31, 1999 and the three-
month period ended March 31, 2000 was $162,000 and $457,000, respectively.
F-19
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
Stock Incentive Plans
The Company has adopted several stock plans ("Plans") that provide for grant
of options and restricted stock to employees, consultants and directors.
Incentive stock options are granted at fair value as determined by the Board of
Directors at the date of grant, nonstatutory options may be offered at not less
than 85% of the fair market value. Options generally vest between three and
four years and have a maximum term of ten years. Under these Plans, the Company
was authorized to grant a total of 6,963,535 shares of common stock and
2,829,209 shares of the Series A-junior preferred stock. The following is the
summary of the stock option activity for the years ended December 31, 1997,
1998 and 1999 and the three months ended March 31, 2000.
Common Stock
<TABLE>
<CAPTION>
Weighted
Options Average
Available Number of Option Price
for Grant Options Per Share
---------- ---------- ------------
<S> <C> <C> <C>
Balances at January 1, 1998............ -- -- $ --
Authorized for grant................... 3,000,000 -- --
Granted (weighted average fair value of
$0.036)............................... (2,119,828) 2,119,828 0.1600
Canceled............................... 88,000 (88,000) 0.1600
---------- ---------- -------
Balances, December 31, 1998............ 968,172 2,031,828 0.1600
Authorized for grant................... 3,963,535 -- --
Granted (weighted average fair value of
$0.83)................................ (1,655,860) 1,655,860 0.8393
Assumed upon Receipt.com acquisition--
Note 2 (weighted average fair value of
$2.82)................................ (1,618,535) 1,618,535 1.2317
Exercised.............................. -- (2,158,378) 0.2596
Canceled............................... 107,057 (107,057) 0.2188
---------- ---------- -------
Balances, December 31, 1999............ 1,764,369 3,040,788 1.0272
Granted (weighted average fair value of
$2.25)................................ (1,041,547) 1,041,547 3.452
Exercised.............................. -- (1,175,437) 1.3434
---------- ---------- -------
Balances, March 31, 2000 .............. 722,822 2,906,898 $1.5590
========== ========== =======
Options vested and exercisable at
December 31, 1998..................... 88,575 $0.1600
========== =======
</TABLE>
F-20
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.16-$0.20 496,003 8.92 $0.1600 57,818 $0.1600
0.40-0.60 574,428 9.55 0.4632 140,931 0.4380
0.90 80,000 9.94 0.9000 -- --
1.30-1.70 1,890,357 9.84 1.4315 13,799 1.3604
----------- --------- ---- ------- ------- -------
$0.16-$1.70 3,040,788 9.64 $1.0272 212,547 $0.4220
=========== ========= ==== ======= ======= =======
</TABLE>
During fiscal 1999, 1,402,823 stock options with a weighted average exercise
price of $0.96 and a weighted average fair value of $0.24 were issued at less
than the estimated fair value at grant date.
Series A-Junior Stock
<TABLE>
<CAPTION>
Weighted
Options Average
Available Options Exercise
for Grant Outstanding Price
----------- ----------- --------
<S> <C> <C> <C>
Balances, January 1, 1997................ 568,747 2,852,697 $0.02594
Shares authorized for grant.............. 2,400,000 -- --
Granted (weighted average fair value
$0.010)................................. (2,311,456) 2,311,456 0.03001
Exercised................................ -- (3,200,000) 0.07959
Canceled................................. 240,500 (240,500) 0.02580
----------- ----------- --------
Balances, December 31, 1997.............. 897,791 1,723,653 0.0462
Shares removed from plan................. (270,791) -- --
Granted (weighted average fair value
$0.014)................................. (627,000) 627,000 0.0680
Exercised................................ -- (321,237) 0.0561
Canceled................................. -- -- --
----------- ----------- --------
Balances, December 31, 1998.............. -- 2,029,418 0.0514
Exercised................................ -- (1,367,846) 0.0502
Canceled................................. -- (121) 0.0700
----------- ----------- --------
Balances, December 31, 1999 ............. -- 661,451 0.0545
Exercised................................ -- (249,346) 0.0684
----------- ----------- --------
Balances, March 31, 2000................. -- 412,105 $ 0.0482
=========== =========== ========
Options vested and exercisable at
December 31, 1998....................... 1,563,082 $ 0.0460
=========== ========
</TABLE>
F-21
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
<TABLE>
<CAPTION>
Options Vested and
Options Outstanding at Exercisable at
December 31, 1999 December 31, 1999
----------------------- --------------------
Weighted
Average
Remaining Weighted
Contractual Average
Exercise Number Life Number Exercise
Price Outstanding (Years) Exercisable Price
-------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$0.0156 171,430 6.12 171,430 $ 0.0156
0.0200 43,000 7.67 43,000 0.0200
0.0500 65,000 8.09 43,095 0.0500
0.0700 329,346 8.13 134,286 0.0700
0.1000 16,800 6.32 16,800 0.1000
0.1500 35,875 6.98 35,875 0.1500
------- ---- ------- --------
661,451 7.46 444,486 $ 0.0498
======= ==== ======= ========
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value option pricing model
with the following weighted average assumptions: expected life of generally 5
years; risk free interest rate, 6.22% in 1997, 4.56% in 1998 and 4.6% to 6% in
1999; and no dividends during the expected term. The Company's calculations are
based on a single option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the 1997, 1998 and 1999 awards had
been amortized to expense over the vesting period of the awards, pro forma net
loss (net of amortization of deferred compensation expense already recorded for
the year ended December 31, 1999, as discussed above) would have been
approximately $0.55 million ($0.59 per basic and diluted share) in 1997, $4.03
million ($5.39 per basic and diluted share) in 1998 and $12.89 million ($32.77
per basic and diluted share) in 1999.
At December 31, 1999, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock..................................... 19,411,994
Issuance available under stock plans.............................. 5,466,608
Exercise of warrants.............................................. 1,140,517
----------
Total............................................................. 26,019,119
==========
</TABLE>
F-22
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
10. Net Loss per Share
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------- -------------------
1997 1998 1999 1999 2000
------ ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Net loss (numerator), basic
and diluted............... $ (530) $(3,990) $(12,802) $ (1,764) $(5,458)
Shares (denominator):
Weighted average common
shares outstanding...... 934 747 1,076 1 5,879
Weighted average common
shares stock subject to
repurchase.............. -- -- (681) (2,257)
Weighted average common
shares outstanding held
in Escrow............... -- -- (2) -- (76)
------ ------- -------- ---------- -------
Shares used in computation,
basic and diluted......... 934 747 393 1 3,546
------ ------- -------- ---------- -------
Net loss per share, basic
and diluted............... $(0.57) $ (5.34) $ (32.55) $(1,548.40) $ (1.54)
====== ======= ======== ========== =======
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following (in thousands):
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Convertible preferred stock,
Series A-senior, A-junior,
Series B and Series C......... 5,987 11,247 19,412 11,407 19,629
Shares of common stock subject
to repurchase................. (4,689) (2,380) (1,471) (733) (2,256)
Outstanding options............ 1,724 4,061 3,702 5,259 3,319
Warrants....................... 204 587 1,141 635 1,166
------- ------- ------- ------- -------
Total.......................... 3,226 13,515 22,784 16,568 21,858
------- ------- ------- ------- -------
Weighted average exercise price
of options.................... $0.0462 $0.1057 $0.8534 $0.3412 $2.7368
------- ------- ------- ------- -------
Weighted average exercise price
of warrants................... $0.4821 $6.2443 $7.1080 $6.1754 $9.3526
======= ======= ======= ======= =======
</TABLE>
F-23
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
11. Income Taxes
The Company's deferred income tax assets (liabilities) are comprised of the
following at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforward............................ $1,552 $7,515
Accruals deductible in different periods................... -- 523
Deferred revenue........................................... -- 162
Credits.................................................... 62 382
Depreciation and amortization.............................. -- 319
------ ------
1,614 8,901
Less valuation allowance..................................... (1,614) (7,998)
------ ------
Deferred tax assets.......................................... -- 903
Deferred tax liabilities--purchased intangibles.............. -- (903)
------ ------
Net deferred tax............................................. $ -- $ --
====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
income tax rate on pre-tax income is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Statutory federal rate.......................... (35.00)% (35.00)% (35.00)%
Nondeductible charge for acquired in-process
technology..................................... 7.40 -- --
Research and development tax credit............. (2.98) (1.61) (2.04)
Other........................................... 1.01 0.30 0.34
Valuation allowance............................. 29.57 36.31 36.70
------ ------ ------
Effective tax rate.............................. -- % -- % -- %
====== ====== ======
</TABLE>
At December 31, 1998 and 1999, the Company has fully reserved its net
deferred tax assets of approximately $1,614,000 and $7,998,000, respectively,
to reduce them to amounts that are more likely than not to be realized.
At December 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $17,494,000 and $11,365,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2019 while
the state NOL carryforwards expire through 2004.
At December 31, 1999, the Company also has research and development credit
carryforwards of approximately $168,000 and $215,000 available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2019, while the state credit carryforward has no expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
F-24
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
12. Related Party Transactions
An affiliate of one of the stockholders provides software development and
consulting services to the Company. Such services totaled $147,000 and $682,000
for the year ended December 31, 1998 and 1999, respectively. Software license
revenues for fiscal 1999 include an aggregate of $132,000 from three investors
in the Company of which $126,000 was included in the accounts receivable
balance at December 31, 1999.
13. Segment Information, Operations by Geographic Area and Significant
Customers
The Company operates primarily in one industry segment: the development and
marketing of internet cryptographic software products. Geographic revenue
information is based on the ship-to location of the customer. Geographic long-
lived asset information is based on the physical location of the assets at each
period end. No single country outside of the United States accounted for 10% or
more of long-lived assets.
Geographic Information
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------------- ------------------------
1997 1998 1999 1999 2000
-------- --------------- --------------- -------- ---------------
(Unaudited)
(In thousands)
Long- Long- Long-
Lived Lived Lived
Revenues Revenues Assets Revenues Assets Revenues Revenues Assets
-------- -------- ------ -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... $ -- $60 $963 $ 859 $4,077 $ 96 $1,243 $4,402
Korea................... -- -- -- -- -- -- 235 --
Japan................... -- -- -- 164 -- -- -- --
United Kingdom.......... -- -- -- 272 -- -- -- --
Rest of the world....... -- -- -- 340 -- 72 398 --
---- --- ---- ------ ------ ---- ------ ------
$ -- $60 $963 $1,635 $4,077 $168 $1,876 $4,402
==== === ==== ====== ====== ==== ====== ======
</TABLE>
Significant Customers
There was no revenue earned during 1997, and during 1998, one customer
accounted for 100% of total revenues. During 1999, two customers accounted for
21% and 14% of total revenues.
14. Employee Benefit Plan
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 2% to 20% up to the maximum allowed under IRS rules). Company
contributions are discretionary; no such Company contributions have been made
since the inception of this plan.
15. Subsequent Events
On May 5, 2000 ValiCert's Board of Director's approved the following:
. Subject to approval of the Secretary of the State of Delaware (which was
received , 2000), a one-for-two reverse split of the outstanding
shares of common and convertible preferred
F-25
<PAGE>
VALICERT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1998 and 1999 and the
Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)
stock. The stock split will be effective prior to consummation of the
initial public offering. All share and per share amounts in these
financial statements have been adjusted to give effect to the reverse
stock split.
. Increasing the authorized capital of the Company to 100,000,000 shares
of Common Stock, $ 0.001 par value and authorizing the issuance of
2,000,000 shares of Preferred Stock, $ 0.001 par value.
. An amendment to the 1998 Stock Plan to increase the number of shares of
common stock that can be issued under the plan by 2,000,000 to a total
of 5,672,500 shares on a post split basis. In addition, the number of
shares reserved under the plan will automatically increase on the first
day of each fiscal year by an amount equal to the lesser of 5% of the
common stock outstanding on the last day of the preceding fiscal year,
3,672,500 shares or a lesser number of shares as determined by the board
of directors.
. The 2000 Employee Stock Purchase Plan was approved subject to
stockholder approval. The Plan becomes effective upon the closing of the
initial public offering. The Company reserved 500,000 shares for
issuance under the 2000 Employee Stock Purchase Plan which will
automatically increase annually by 2% of the common shares outstanding
on the first day of the preceding fiscal year.
* * * * *
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
"To the Board of Directors and Stockholders of
Receipt.com, Inc.:
We have audited the accompanying statements of operations and comprehensive
loss and cash flows of Receipt.com, Inc. (the "Company") for the year ended
December 31, 1998 and the period from January 1, 1999 to December 30, 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
above stated periods in conformity with accounting principles generally
accepted in the United States of America.
San Jose, California
March 3, 2000
(May 5, 2000 as to Note 7)"
The above opinion is in the form that will be signed by Deloitte & Touche
LLP, upon the effectiveness of the stock split of the common stock of ValiCert,
Inc. with whom the Company merged (see Note 7 to the financial statements),
assuming that from May 5, 2000 to the effective date of such events, no other
events shall have occurred that would affect the accompanying financial
statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
May 5, 2000
F-27
<PAGE>
RECEIPT.COM, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Period From
Year Ended January 1, 1999
December 31, to December 30,
------------ ---------------
1998 1999
------------ ---------------
(In thousands)
<S> <C> <C>
Revenues:
License revenue................................ $ 835 $ 1,079
Service revenue................................ 98 233
------- -------
Total revenues............................... 933 1,312
------- -------
Cost of revenues.................................
License revenue................................ 15 103
Service revenue................................ 4 120
------- -------
Total cost of revenues....................... 19 223
------- -------
Gross profit..................................... 914 1,089
Operating expenses:
Sales and marketing............................ 258 1,409
Research and development....................... 741 1,192
General and administrative..................... 2,272 1,925
Amortized stock compensation................... -- 25
------- -------
Total operating expenses..................... 3,271 4,551
------- -------
Loss from operations............................. (2,357) (3,462)
Other income (expense):
Interest income................................ 31 11
Interest expense............................... (24) (186)
------- -------
Total other income (expense)................. 7 (175)
------- -------
Net loss......................................... (2,350) (3,637)
Other comprehensive income--unrealized gain on
investments, net of taxes of $0................. -- 373
------- -------
Comprehensive loss............................... $(2,350) $(3,264)
======= =======
</TABLE>
See notes to financial statements.
F-28
<PAGE>
RECEIPT.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 1,
Year Ended 1999 to
December 31, December 30,
1998 1999
------------ ------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(2,350) $(3,637)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 38 125
Amortization of warrants issued.................. 3 146
Amortization of deferred stock compensation...... -- 25
Changes in assets and liabilities:
Accounts receivable............................ (287) 309
Deposit........................................ 6 (35)
Accounts payable............................... 134 (3)
Accrued compensation and related benefits...... 22 9
Other accrued liabilities...................... (2) 263
Deferred revenues.............................. 186 611
------- -------
Net cash used in operating activities........ (2,250) (2,187)
------- -------
Cash flows used in investing activities--
Property and equipment additions................... (251) (251)
------- -------
Cash flows from financing activities:
Sale of preferred stock............................ 3,710 --
Exercise of stock options.......................... -- 19
Exercise of common stock warrants, net of
stockholders' receivables......................... -- 118
Repayment of obligations........................... (50) (78)
Borrowing under loan agreement..................... -- 2,035
Borrowing under bank line of credit................ -- 650
Repayments under bank line of credit............... -- (650)
------- -------
Net cash provided by financing activities.... 3,660 2,094
------- -------
Net increase (decrease) in cash and equivalents...... 1,159 (344)
Cash and equivalents--beginning of period............ 19 1,178
------- -------
Cash and equivalents--end of period.................. $ 1,178 $ 834
======= =======
Noncash investing and financing activities:
Property and equipment acquired under capital
leases............................................ $ -- $ 61
======= =======
Conversion of notes payable into stock............. $ 250 $ 1,377
======= =======
Unrealized gain on marketable securities........... $ -- $ 373
======= =======
</TABLE>
See notes to financial statements.
F-29
<PAGE>
RECEIPT.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999
1. Business and Significant Accounting Policies
Business--Receipt.com, Inc. (the "Company"), formerly named Digital Commerce
Corporation and Differential, Inc., incorporated in California in 1994, a
provider of secure data transfer software. On December 30, 1999, the Company
consummated its merger with ValiCert, Inc. (Note 7). The financial statements
for the period ended December 30, 1999 reflect the transactions up to the date
of the merger.
Property and equipment are stated at cost. Computer software costs for
internal use are capitalized and accounted for in accordance with Statement of
Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use issued by the American Institute of Certified Public
Accountants (AICPA). Depreciation is computed using the straight-line method
over estimated useful lives of three years for software and computer equipment
and seven years for office equipment.
Impairment of Long-Lived Assets--The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Computer Software To
Be Sold, Leased or Otherwise Marketed. Because the Company believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
Revenue Recognition--Revenue consists primarily of fees for licenses of the
Company's software products, maintenance and customer support.
License Revenue--Revenue from software licenses is recognized upon
shipment of the software or delivery of authorization codes if collection
of the resulting receivable is probable, an agreement has been signed, the
fee is fixed or determinable and vendor-specific objective evidence exists
to allocate a portion of the total fee to any undelivered elements of the
arrangement. Such undelivered elements in these arrangements typically
consist of services. Vendor specific evidence is based on the price
generally charged when an element is sold separately or, if not yet sold
separately, is established by management. If the license fees are not fixed
on determinable revenue is recognized as payments are due.
Service Revenue--Revenue from customer training, support and consulting
services is recognized as the services are performed. Maintenance revenue
is recognized ratably over the term of the maintenance contract. If
maintenance or services are included in an arrangement that includes a
license agreement, amounts related to maintenance are allocated based on
vendor specific objective evidence.
F-30
<PAGE>
RECEIPT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999
In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition.
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The Company
adopted the provisions of SOP 97-2 in fiscal 1998.
Research and Development--Research and development costs are expensed as
incurred.
Income Taxes--Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets,
net of valuation allowances, for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities and net operating loss and tax credit
carryforwards.
Stock Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Major Customers--During 1998, three customers accounted for 24%, 12% and
11% of total revenues. During 1999, one customer accounted for 29% of total
revenues.
Significant Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Certain Significant Risks and Uncertainties--The Company operates in the
software industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company in
terms of its future financial position, results of operations and cash flows;
ability to obtain additional financing; regulatory changes; fundamental
changes in the technology underlying software products; market acceptance of
the Company's products under development; development of sales channels;
litigation or other claims against the Company; the hiring, training and
retention of key employees; successful and timely completion of product
development efforts; and new product introductions by competitors.
Comprehensive Income--The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires an
enterprise to report, by major components and as a single total, the change in
its net assets during the period from nonowner sources. The Company's only
source of comprehensive income is the unrealized gain on its investments.
2. Long-Term Obligations
In January 1997, the Company secured a $260,000 convertible loan which
bears interest at the Federal Funds Rate (8.5% at December 30, 1999). The loan
is payable in 48 monthly installments and is convertible, at the option of the
holder, into shares of capital stock under an equity financing in which the
company receives in excess of $2 million.
F-31
<PAGE>
RECEIPT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999
In September 1999, the Company issued $1,535,000 of convertible promissory
notes bearing interest at 5.36% to various investors. In connection with the
merger of the Company (see Note 7), the noteholders agreed to either convert
their notes into common stock at $0.75 per share before a merger or to be paid
for the outstanding indebtedness plus 10% immediately after the merger date. In
December 1999, noteholders converted $877,000 of the promissory notes and
accrued interest into 1,169,941 shares of common stock.
In conjunction with the sale of the notes, the Company issued warrants to
purchase 409,333 shares of common stock at $0.75 per share, expiring five years
from issuance. The fair value of such warrants at the date of issuance of
$79,000 is being recorded as interest expense. At December 30, 1999, holders of
such warrants to buy 226,667 shares of common stock had exercised their rights.
3. Line of Credit
In April 1999, the Company entered into a $650,000 line of credit with a
bank which expired in December 1999. Borrowings under the line bear interest at
the bank's base rate (8.5% at December 30, 1999) plus 1%. At December 30, 1999,
there were no borrowings under the line. In connection with the line of credit,
the Company issued warrants to purchase up to 173,163 shares of Series B
preferred stock expiring five years from issuance at an exercise price of $1.04
per share. The fair value of the warrants of $45,000 has been charged to
interest in 1999.
4. Lease Commitments
The Company leases equipment under capital leases and its principal facility
under a noncancelable operating lease expiring in 2001. Rent expense under
operating leases was $97,654 and $253,709 in 1998 and 1999, respectively.
5. Stockholders' Equity
Deferred Stock Compensation
In connection with grants of stock options to employees, the Company
recorded $2,955,000 as the difference between the deemed fair value for
accounting purposes and the stock price as determined by the Board of Directors
on the date of grant in fiscal 1999. This amount is amortized to expense over
the vesting period of the related stock options, generally four years.
Amortization of deferred stock compensation for the period ended December 30,
1999 was $25,000.
Stock Option Plan
The Company has reserved 6,932,644 shares of common stock for issuance, at
the discretion of the Board of Directors, to officers, directors, employees and
consultants pursuant to its 1996 Stock Plan. At December 30, 1999, there were
no shares available for future grant.
Options granted under the 1996 Stock Plan must be granted at not less than
fair market value at the date of grant as determined by the Board of Directors,
generally vest over four years and expire ten years from the date of grant.
F-32
<PAGE>
RECEIPT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999
Additional information with respect to options under the 1996 Stock Plan is
as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Outstanding, January 1, 1998 (37,500 exercisable at
a
weighted average exercise price of $0.10).......... 150,000 $0.10
Granted (weighted average fair value of $0.04 per
share)............................................. 1,099,975 0.10
Canceled............................................ (474,475) 0.10
--------- -----
Outstanding, December 31, 1998 (278,821 exercisable
at a weighted average exercise price of $0.10)..... 775,500 0.10
Granted (weighted average fair value of $0.14 per
share)............................................. 6,991,684 0.29
Exercised........................................... (192,593) 0.10
Canceled............................................ (559,514) 0.10
Expired............................................. (167,083) 0.10
--------- -----
Outstanding, December 30, 1999...................... 6,847,994 $0.29
========= =====
</TABLE>
Additional information regarding options outstanding as of December 30, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 1,394,842 8.00 $0.10 468,273 $0.10
0.34 5,453,152 9.96 0.34 60,709 0.34
- ----------- --------- ---- ----- ------- -----
$0.10-$0.34 6,847,994 9.55 $0.29 528,982 $0.13
========= ==== ===== ======= =====
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value option pricing model
with the following weighted average assumptions: expected life, 48 months
following vesting in 1998 and 1999; risk free interest rate, 6% in 1998 and 7%
in 1999; and no dividends during the expected term. The Company's calculations
are based on a single option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the 1998 and 1999 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $2,353,000 in 1998 and $3,662,000 in 1999.
F-33
<PAGE>
RECEIPT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999
6. Income Taxes
The Company's effective tax rate differs from the federal statutory tax rate
at December 31, 1998 and December 30, 1999 due to the increase in the valuation
allowance on the deferred tax assets.
At December 30, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $5,281,000 and $2,845,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2010,
while the state NOL carryforwards expire through 2004. The net operating loss
carryforwards available for state tax purposes are substantially less than for
federal tax purposes, primarily because only 50% of state net operating losses
can be utilized to offset future state taxable income.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
7. Subsequent Event
After year end, the Company consummated a merger with ValiCert, Inc.
("ValiCert"). Under the terms of the agreement, stockholders of the Company
received 3,273,208 shares of common stock and 1,048,068 of Series C convertible
preferred stock of ValiCert. ValiCert also assumed and exchanged all of the
Company's outstanding options for options to purchase shares of ValiCert common
stock. The fair value consideration paid was approximately $17.65 million. The
merger, approved by the shareholders of both the Company and ValiCert and the
regulatory authorities, was accounted for under the purchase method.
* * * * *
F-34
<PAGE>
VALICERT, INC.
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENT
Year Ended December 31, 1999 (Unaudited)
On December 30, 1999, ValiCert acquired all of the outstanding shares and
assumed the outstanding options of Receipt.com, Inc. (Receipt), a company which
develops and markets software products which enable users to conduct secure and
nonrepudiated electronic transactions over the Internet. As consideration for
the acquisition, ValiCert issued shares of Series C preferred stock and shares
of common stock, and issued options to purchase common stock in exchange for
Receipt.com stock options.
The acquisition was accounted for using the purchase method of accounting.
The aggregate purchase price was allocated to the assets and liabilities
acquired based on their fair value. The total consideration is expected to
exceed the fair value of the net assets acquired by approximately $17,537,000,
which represents the following intangible estimated assets (in thousands):
<TABLE>
<CAPTION>
Period of
Amount(s) Amortization
--------- ------------
<S> <C> <C>
Intangible assets:
In-process research and development................. $ 2,780 --
Purchased technology................................ 1,833 3
Acquired workforce.................................. 433 3
Goodwill............................................ 12,491 5
-------
$17,537
=======
</TABLE>
The acquired technology provides a comprehensive framework to manage and
provide legally binding proof that a transaction occurred through capture of
digital signatures of the sender and receiver and verifiable time stamping. The
in-process research and development represents technology which has not yet
reached technological feasibility and does not have alternative future uses.
This amount of $2,780,000 was charged to ValiCert's operations in December 1999
when the transaction was consummated. The in-process research and development
was identified and valued through extensive interviews and discussions with
ValiCert and Receipt management and the analysis of data provided by Receipt
concerning developmental products, their respective stage of development, the
time and resources needed to complete them, their expected income generating
ability, target markets and associated risks. The income approach, which
includes an analysis of the markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing the
in-process research and development project. A portion of the purchase price
was allocated to the developmental project based on the appraised fair value of
such project.
The accompanying pro forma financial statements are presented in accordance
with Article 11 of Regulation S-X.
The unaudited pro forma condensed combining statements of operations were
prepared as if the acquisition was completed at the beginning of the period
presented. To prepare the pro forma unaudited condensed combining statements of
operations, the ValiCert statement of operations for the year ended December
31, 1999 has been combined with the statement of operations of Receipt for the
period from January 1, 1999 to December 30, 1999. This method of combining the
companies is only for presentation of pro forma unaudited condensed combining
financial statements.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the historical financial statements of ValiCert and
Receipt.
The unaudited pro forma condensed combining statements of operations do not
include the one-time $2.8 million charge for purchased in-process technology
arising from this acquisition, as it is a material nonrecurring charge. This
charge is included in the actual consolidated statement of operations of
ValiCert from the date of the acquisition.
F-35
<PAGE>
VALICERT, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
Year Ended December 31, 1999 (Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ValiCert Receipt Adjustments Notes Combined
-------- ------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Software licenses............. $ 874 $ 1,079 $ -- $ 1,953
Subscription fees and other
services..................... 761 233 -- 994
-------- ------- ------ --------
Total revenues.............. 1,635 1,312 -- 2,947
-------- ------- ------ --------
Cost of revenues
Software licenses............. 93 103 196
Subscription fees and other
services..................... 134 120 254
-------- ------- ------ --------
Total cost of revenues...... 227 223 -- 450
-------- ------- ------ --------
Gross profit................... 1,408 1,089 -- 2,497
Operating expenses:
Research and development...... 5,608 1,192 6,800
Sales and marketing........... 4,583 1,409 5,992
General and administrative.... 1,373 1,925 3,298
Acquired in-process research
and development.............. 2,780 (2,780) 1 --
Amortization of stock
compensation................. 162 25 933 3 1,120
Amortization of intangibles... 3,253 2 3,253
-------- ------- ------ --------
Total operating expenses.... 14,506 4,551 1,406 20,463
-------- ------- ------ --------
Operating loss................. (13,098) (3,462) -- (17,966)
Other income (expense), net.... 296 (175) -- 121
-------- ------- ------ --------
Net loss....................... $(12,802) $(3,637) $1,406 $(17,845)
======== ======= ====== ========
Pro forma basic and diluted
loss per share................ $ (32.57) $ (4.87)
======== ========
Shares used in pro forma basic
and diluted loss per share.... 393 3,273 3,666
======== ====== ========
</TABLE>
See notes to pro forma condensed combining financial statements.
F-36
<PAGE>
VALICERT, INC.
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENT
Year Ended December 31, 1999 (Unaudited)
The following pro forma adjustments have been made to the pro forma
condensed combining financial statements:
1. Reflects the one-time charge of $2,780,000 for acquired in-process
research and development identified in the purchase price allocation.
2. Reflects pro forma amortization of the purchased intangibles over the
estimated useful lives as follows (in thousands):
<TABLE>
<CAPTION>
1999
Period Of Amortization
Intangible Asset Amount Amortization Charge
- ---------------- ------- ------------ ------------
<S> <C> <C> <C>
Purchased technology.......................... $ 1,833 3 years $ 611
Acquired workforce............................ 433 3 years 144
Goodwill...................................... 12,491 5 years 2,498
------- ------
$14,757 $3,253
======= ======
</TABLE>
3. Reflects the pro forma adjustments of the deferred compensation relating
to the unvested options to employees of Receipt which were assumed upon the
acquisition (in thousands):
<TABLE>
<CAPTION>
1999
Amount of Deferred
Deferred Period of Compensation
Compensation Amortization Charge
------------ ------------ ------------
<S> <C> <C>
$3,733 4 years $933
</TABLE>
F-37
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 36
Management............................................................... 56
Related Party Transactions............................................... 67
Principal Stockholders................................................... 70
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 77
Underwriting............................................................. 79
Legal Matters............................................................ 82
Experts.................................................................. 82
Where You Can Find More Information...................................... 82
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 2000, 25 days after the date of this prospectus, all
dealers that buy, sell or trade in these securities, whether or not
participating in this offering, may be required to deliver a prospectus.
Dealers are also obligated to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
[ValiCert Logo]
Shares
Common Stock
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette
Wit SoundView
Prospectus
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions payable by us, in connection with the
sale and distribution of the common stock being registered. All amounts shown
are estimates except for the Securities and Exchange Commission registration
fee, the NASD filing fee and the Nasdaq National Market application fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 15,840
NASD filing fee................................................. 30,500
Nasdaq National Market application fee..........................
Blue sky qualification fees and expenses........................
Printing and engraving expenses.................................
Legal fees and expenses.........................................
Accounting fees and expenses....................................
Director and officer liability insurance........................
Transfer agent and registrar fees...............................
Miscellaneous expenses..........................................
-----------
Total......................................................... $
===========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. Our certificate of incorporation and
bylaws provide that we shall indemnify our directors, officers, employees and
agents to the full extent permitted by Delaware General Corporation Law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. In addition, we intend to enter into separate
indemnification agreements (Exhibit 10.1) with our directors and officers
which would require us, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from willful misconduct of a culpable nature). We also
intend to maintain director and officer liability insurance, if available on
reasonable terms. These indemnification provisions and the indemnification
agreements may be sufficiently broad to permit indemnification of our officers
and directors for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
The underwriting agreement (Exhibit 1.1) provides for indemnification by
the underwriters and our officers and directors for certain liabilities
arising under the Securities Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities.
Since January 1, 1997, ValiCert has issued and sold the following
unregistered securities:
(1) From January 1, 1997 through April 30, 2000, ValiCert granted options
to purchase an aggregate of 2,829,209 shares of stock under its 1996 equity
incentive plan, of which 2,606,165 have been exercised. ValiCert issued common
stock issued under the 1996 equity incentive plan before April 30, 1998. On
April 30, 1998, all exercised and unexercised options issued under the 1996
equity incentive plan were converted into options to acquire shares of series
A junior preferred stock.
II-1
<PAGE>
(2) From April 30, 1998 through April 30, 2000, ValiCert granted options to
purchase an aggregate of 5,206,984 shares of common stock under its 1998 stock
plan, of which 3,022,839 have been exercised.
(3) On December 30, 1999, ValiCert assumed all unexercised options issued
under the Receipt.com stock plan. As of April 30, 1999, options to purchase an
aggregate of 1,618,535 shares of common stock have been granted, of which
428,201 have been exercised.
(4) On May 6, 1998, ValiCert sold a total of 4,923,811 shares of our series
B preferred stock at a price of $1.26 per share for a total purchase price of
$6,204,002.
(5) In November 1997, ValiCert issued 2,000 shares of common stock to Martha
Denhow, a consultant, in exchange for services rendered in October 1997, at a
price of $0.15 per share for a total value of $300.
(6) In July and August 1999, ValiCert sold a total of 4,871,892 and 840,958
shares, respectively, of series C preferred stock at a price of $4.02 per share
for a total purchase price of $22,965,657.
(7) In December 1999, Receipt.com became a wholly-owned subsidiary of
ValiCert. 10,201,726 shares of Receipt.com common stock were converted into
2,411,177 shares of ValiCert common stock, 3,985,626 shares of Receipt.com
preferred stock were converted into 1,048,058 shares of ValiCert series C
preferred stock and 3,646,917 shares of Receipt.com preferred stock were
converted into 861,948 shares of ValiCert common stock.
(8) In January 1997, ValiCert sold 12,734 shares of common stock to K.B.
Siriam at a purchase price of $0.15 per share for a total purchase price of
$1,910.
(9) In November 1998, ValiCert sold 158,730 shares of series B preferred
stock at a purchase price of $1.26 per share for a total purchase price of
$199,999.
(10) In January 1999, ValiCert sold 158,730 shares of series B preferred
stock to Comdisco at a purchase price of $1.26 per share for a total purchase
price of $199,999.80.
(11) In December 1999, ValiCert issued 5,000 shares of common stock to
Cynthia Pilkington in lieu of compensation for services performed in June 1996,
at a purchase price of $0.15 per share for a total purchase price of $750.
(12) In March 2000, ValiCert issued to the Anita M. Vanni Family Limited
Partnership 3,169 shares of common stock in connection with a real estate
lease.
(13) In March 2000, ValiCert issued to the David V. Vanni Family Limited
Partnership 2,464 shares of common stock in connection with a real estate
lease.
(14) In March 2000, ValiCert issued to the Donald E. Vanni Limited
Partnership 2,556 shares of common stock in connection with a real estate
lease.
(15) In March 2000, ValiCert issued to the Christopher E. Vanni Limited
Partnership 3,500 shares of common stock in connection with a real estate
lease.
(16) In March 2000, ValiCert issued to Alice Bautista Vanni 810 shares of
common stock in connection with a real estate lease.
(17) In June 1998, ValiCert issued a warrant to purchase 90,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $1,134,000 which expires June 2008.
(18) In October 1998, ValiCert issued a warrant to purchase 50,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $630,000 which expires October 2008.
II-2
<PAGE>
(19) In December 1998, ValiCert issued a warrant to purchase 17,500 shares
of common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $220,500 which expires December 2008.
(20) In February 1999, ValiCert issued a warrant to purchase 12,500 shares
of common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $157,500 which expires February 2009.
(21) In July 1999, ValiCert issued a warrant to purchase 12,500 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $157,500 which expires July 2009.
(22) In August 1999, ValiCert issued a warrant to purchase 125,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $1,575,000 which expires August 2009.
(23) In August 1999, ValiCert issued a warrant to purchase 250,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $3,150,000 which expires August 2009.
(24) In August 1999, ValiCert issued a warrant to purchase 50,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $630,000 which expires August 2009.
(25) In November 1999, ValiCert issued a warrant to purchase 25,000 shares
of common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $315,000 which expires November 2009.
(26) In February 2000, ValiCert issued a warrant to purchase 50,000 shares
of common stock to an employee with an exercise price of $12.60 for a total
purchase price of $630,000 which expires February 2010.
(27) In April 2000, ValiCert issued a warrant to purchase 10,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $126,000 which expires April 2010.
(28) In April 2000, ValiCert issued a warrant to purchase 10,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $126,000 which expires April 2010.
(29) In April 2000, ValiCert issued a warrant to purchase 5,000 shares of
common stock to an employee with an exercise price of $12.60 per share for a
total purchase price of $63,000 which expires April 2010.
(30) In June 1998, ValiCert issued a warrant to purchase 130,000 shares of
common stock to an employee with an exercise price of $12.00 per share for a
total purchase price of $1,560,000 which expires June 2008.
(31) In February 1997, ValiCert issued a warrant to purchase 107,033 shares
of series A junior preferred stock to a sophisticated investor with an exercise
price of $0.234 per share for a total purchase price of $25,046. This investor
exercised the warrant in April 2000.
(32) In February 1997, ValiCert issued a warrant to purchase 35,678 shares
of series A junior preferred stock to a sophisticated investor with an exercise
price of $0.234 per share for a total purchase price of $8,349. This investor
exercised the warrant in February 2000.
II-3
<PAGE>
(33) In February 1997, ValiCert issued a warrant to purchase 21,407 shares
of series A junior preferred stock to a sophisticated investor with an exercise
price of $0.234 per share for a total purchase price of $5009. This investor
exercised the warrant in March 2000.
(34) In August 1997, ValiCert issued a warrant to purchase 40,000 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.50 per share for a total purchase price of $60,000 which expires
August 2007.
(35) In April 1998, ValiCert issued a warrant to purchase 9,920 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $12,499. This investor
transferred the warrant to a sophisticated investor in December 1999. This
investor exercised the warrant in December 1999.
(36) In April 1998, ValiCert issued a warrant to purchase 9,920 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase of $12,499 which expires April
2008.
(37) In April 1998, ValiCert issued a warrant to purchase 992 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $1,249. This investor
exercised the warrant in February 2000.
(38) In April 1998, ValiCert issued a warrant to purchase 3,968 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $4,999 which expires
April 2008.
(39) In April 1998, ValiCert issued a warrant to purchase 1,984 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $2,499 which expires
April 2008.
(40) In April 1998, ValiCert issued a warrant to purchase 4,960 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $6,249 which expires
April 2008.
(41) In April 1998, ValiCert issued a warrant to purchase 2,976 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $3,749 which expires
April 2008.
(42) In April 1998, ValiCert issued a warrant to purchase 2,976 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $3,749 which expires
April 2008.
(43) In April 1998, ValiCert issued a warrant to purchase 2,976 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $3,749 which expires
April 2008.
(44) In April 1998, ValiCert issued a warrant to purchase 2,976 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $3,749 which expires
April 2008.
(45) In April 1998, ValiCert issued a warrant to purchase 1,984 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $2,499 which expires
April 2008.
(46) In April 1998, ValiCert issued a warrant to purchase 9,920 shares of
series A junior preferred stock to a sophisticated investor with an exercise
price of $1.26 per share for a total purchase price of $12,499 which expires
April 2008.
II-4
<PAGE>
(47) In April 1998, ValiCert issued a warrant to purchase 39,682 shares of
series B preferred stock to a sophisticated investor with an exercise price of
$1.26 per share for a total purchase price of $50,000 which expires April 2008.
(48) In January 2000, ValiCert issued a warrant to purchase 14,925 shares of
series C preferred stock to a sophisticated investor with an exercise price of
$4.02 per share for a total purchase price of $60,001 which expires January
2010.
(49) In April 2000, ValiCert issued a warrant to purchase 3,333 shares of
series C preferred stock to a sophisticated investor with an exercise price of
$12.00 for a total purchase price of $39,996 which expires April 2010.
(50) In July 1999, ValiCert issued a warrant to purchase 35,489 shares of
series C preferred stock to a sophisticated investor with an exercise price of
$3.62 per share for a total purchase price of $128,470 which expires upon the
closing of this offering.
The issuances described in Items 4 through 50 were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
The issuances described in Items 1 through 3 were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about ValiCert, Inc. or had access,
through employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- ----------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Amendment of the Third Amended and Restated Certificate
of Incorporation of Registrant to be filed prior to the closing of
this offering.
3.2 Amended Bylaws of Registrant.
3.3 Restated Certificate of Incorporation of Registrant to be filed after
the closing of this offering.
4.1 Form of Amended and Restated Rights Agreement dated July 21, 1999
among Registrant and certain stockholders.
*4.2 Specimen certificate representing the common stock.
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 Form of Indemnity Agreement.
10.2 1996 Equity Incentive Plan.
10.3 1998 Stock Plan.
10.4 Receipt.com Stock Plan.
*10.5 2000 Employee Stock Purchase Plan.
10.6 Lease Agreement.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- ----------------------------------------------------------------------
<C> <S>
*23.1 Consent of Deloitte & Touche LLP, independent public accountants.
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
*23.3 Consent of PricewaterhouseCoopers LLP, independent public accountant.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of ours
pursuant to the foregoing provisions or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of ours 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
hereunder, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) 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 the form of
prospectus filed by us 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; and
(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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mountain View, State of
California, on May 15, 2000.
VALICERT, INC.
(Registrant)
/s/ Joseph (Yosi) Armran
By: _________________________________
Joseph (Yosi) Amram
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Joseph (Yosi) Amram and Timothy
Conley, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, with full power of each to act alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Joseph (Yosi) Arman President and Chief Executive May 15, 2000
_________________________________ Officer
Joseph (Yosi) Amram (Principal Executive Officer)
/s/ Timothy Conley Vice President, Finance, and Chief May 15, 2000
_________________________________ Financial Officer (Principal
Timothy Conley Financial and Accounting Officer)
/s/ Srinivasan (Chini) Director May 15, 2000
Krishnan
_________________________________
Srinivasan (Chini) Krishnan
/s/ Taher Elgamal Director May 15, 2000
_________________________________
Taher Elgamal
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ John Johnston Director May 15, 2000
_________________________________
John Johnston
/s/ Scott J. Loftesness Director May 15, 2000
_________________________________
Scott J. Loftesness
/s/ Magdalena Yesil Director May 15, 2000
_________________________________
Magdalena Yesil
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- ----------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Amendment of the Third Amended and Restated
Certifticate of Incorporation to be filed prior to the closing of this
offering.
3.2 Amended Bylaws of Registrant.
3.3 Restated Certificate of Incorporation of Registrant to be filed after
the closing of this offering.
4.1 Form of Amended and Restated Rights Agreement dated July 21, 1999
among Registrant and certain stockholders.
*4.2 Specimen certificate representing the common stock.
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 Form of Indemnity Agreement.
10.2 1996 Equity Incentive Plan.
10.3 1998 Stock Plan.
10.4 Receipt.com Stock Plan.
*10.5 2000 Employee Stock Purchase Plan.
10.6 Lease Agreement.
*23.1 Consent of Deloitte & Touche LLP, independent public accountants.
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
*23.3 Consent of PricewaterhouseCoopers LLP, independent public accountants.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VALICERT, INC.
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, Yosi Amram and Srinivasan Krishnan, President and Secretary,
respectively, of ValiCert, Inc. (hereinafter called the "Corporation"),
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY
CERTIFY:
That (a) the Board of Directors at a meeting held on May 5, 2000 duly
adopted a resolution pursuant to Section 242 of the General Corporation Law of
the State of Delaware proposing that this Certificate of Amendment to the Third
Amended and Restated Certificate of Incorporation (the "Amendment") be approved
and declaring the adoption of such Amendment to be advisable; and (b) the
stockholders of the Corporation duly approved this Amendment by written consent
in accordance with Sections 228 and 242 of the General Corporation Law of the
State of Delaware. The resolution setting forth the Amendment is as follows:
"RESOLVED, Article III of the Third Amended and Restated Certificate
of Incorporation of the Corporation is amended by deleting the current
language of said Article III and replacing it with the following
language:
The total number of shares of stock that the corporation shall have
authority to issue is One Hundred and Two Million (102,000,000),
consisting of One Hundred Million (100,000,000) shares of Common
Stock, $0.001 par value per share, and Two Million (2,000,000) shares
of Preferred Stock, $0.001 par value per share.
Effective upon filing of this Certificate of Amendment to the Third
Amended and Restated Certificate of Incorporation as set forth herein,
each outstanding share of Common Stock is split into one-half share of
Common Stock."
1
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this First Amendment to
Third Amended and Restated Certificate of Incorporation to be signed by its
President this ____ day of May, 2000.
______________________________________
Joseph (Yosi) Amram, President
______________________________________
Srinivasan (Chini) Krishnan, Secretary
2
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
VALICERT, INC.
Pursuant to Section 245
of the General Corporation Law of
the State of Delaware
-----------------------------------------
ValiCert, Inc. (hereinafter called the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
At a meeting of the Board of Directors of the Corporation, a resolution was
duly adopted, pursuant to Section 245 of the General Corporation Law of the
State of Delaware, setting forth a Restated Certificate of Incorporation of the
Corporation and declaring said Restated Certificate of Incorporation to be
advisable. The resolution setting forth the Restated Certificate of
Incorporation is as follows:
RESOLVED: That this Restated Certificate of Incorporation only restates
--------
and integrates and does not further amend the provisions the Corporation's
Certificate of Incorporation as heretofore amended or supplemented and there is
no discrepancy between such provisions and the provisions of this Restated
Certificate of Incorporation. The Certificate of Incorporation of the
Corporation, which was originally filed with the Secretary of State of the State
of Delaware on February 5, 1998 be and hereby is restated in its entirety so
that the same shall read as follows:
FIRST: The name of the Corporation is ValiCert, Inc.
- -----
SECOND: The address of its registered office in the State of Delaware is 15
- ------ East North Street in the City of Dover, County of Kent. The name of
its registered agent at such address is Incorporating Services, Ltd.
THIRD: 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 Delaware.
FOURTH: The total number of shares of all classes of stock which the
- ------ Corporation shall have authority to issue is (i) 100,000,000 shares of
Common Stock, $0.0001 par value per share ("Common Stock") and (ii)
500,000 shares of Preferred Stock, $0.0001 par
<PAGE>
value per share ("Preferred Stock"). The Board of Directors is
authorized, subject to any limitations prescribed by law, to provide
for the issuance of shares of Preferred Stock in series and, by filing
a certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereon. The number of authorized shares
of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the Common Stock without a vote of the
holders of the Preferred Stock, or of any series thereof, unless a
vote of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Stock.
FIFTH: The following provisions are inserted for the management of the
- ----- business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by
this Certificate of Incorporation or the Bylaws of the Corporation,
the directors are hereby empowered to exercise all such powers and do
all such acts and things as may be exercised or done by the
Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
C. Effective upon the closing of the Corporation's initial public
offering of its common stock, any action required or permitted to be
taken by the stockholders of the Corporation must be effected at a
duly called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing by such
stockholders. At all times prior to the closing of the Corporation's
initial public offering of its common stock, any action which may be
taken at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in writing,
setting forth the actions so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes
which would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted.
All such consents shall be filed with the Secretary of the Corporation
and shall be maintained in the corporate records. Prompt notice of the
taking of a corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not
consented in writing.
D. Special meetings of stockholders of the Corporation may be called only
by either the Board of Directors, the Chairman of the Board of
Directors or the President and Chief Executive Officer.
<PAGE>
SIXTH:
- -----
A. The number of directors shall initially be seven (7) and thereafter
shall be fixed from time to time exclusively by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board of Directors for adoption). Effective upon the
closing of the closing of the Corporation's initial public offering of
its common stock, the Board of Directors shall be divided into three
classes with the term of office of the first class to expire at the
first annual meeting of the stockholders following the Effective Date,
the term of office of the second class to expire at the second annual
meeting of stockholders held following the Effective Date, the term of
office of the third class to expire at the third annual meeting of
stockholders following the Effective Date, and thereafter for each
such term to expire at each third succeeding annual meeting of
stockholders after such election. All directors shall hold office
until the expiration of the term for which elected, and until their
respective successors are elected, except in the case of the death,
resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation or other cause
(including removal from office by a vote of the stockholders) may be
filled only by a majority vote of the directors then in office, though
less than a quorum, or by the sole remaining director, and directors
so chosen shall hold office for a term expiring at the next annual
meeting of stockholders at which the term of office of the class to
which they have been elected expires, and until their respective
successors are elected, except in the case of the death, resignation,
or removal of any director.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any directors, or the entire Board of Directors, may
be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors,
voting together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
- ------- repeal Bylaws of the Corporation. The stockholders shall also have
power to adopt, amend or repeal the Bylaws of the Corporation. Any
adoption, amendment or repeal of Bylaws of the Corporation by the
stockholders shall require, in addition to any vote of the holders of
any class or series of stock of the Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
<PAGE>
EIGHTH: A director of the Corporation shall not be personally liable to the
- ------ Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights
conferred upon stockholders are granted subject to this reservation;
provided, however, that, notwithstanding any other provision of this
-------- -------
Certificate of Incorporation or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any vote
of the holders of any class or series of the stock of this Corporation
required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 66-2/3% of the voting
power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to
amend or repeal this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH or Article EIGHTH.
[THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Sixth Amended and Restated Certificate of Incorporation
to be signed by its President and attested by its Secretary this day of May
----
2000.
VALICERT, INC.
By: __________________________________
Yosi Amram, President
ATTEST:
- ----------------------------------------------
Srinivasan Krishnan, Secretary
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
OF
VALICERT, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Article 1. Stockholders............................................... 1
1.1 Place of Meetings.......................................... 1
1.2 Annual Meeting............................................. 1
1.3 Special Meetings........................................... 1
1.4 Notice of Meetings......................................... 1
1.5 Voting List................................................ 1
1.6 Quorum..................................................... 2
1.7 Adjournments............................................... 2
1.8 Voting and Proxies......................................... 2
1.9 Action at Meeting.......................................... 3
1.10 Notice of Stockholder Business............................. 3
1.11 Conduct of Business........................................ 4
1.12 Stockholder Action Without Meeting......................... 4
Article 2. Board of Directors......................................... 5
2.1 General Powers............................................. 5
2.2 Number and Term of Office.................................. 5
2.3 Vacancies and Newly Created Directorships.................. 5
2.4 Resignation................................................ 5
2.5 Regular Meetings........................................... 5
2.6 Special Meetings........................................... 6
2.7 Notice of Special Meetings................................. 6
2.8 Participation in Meetings by Telephone Conference Calls.... 6
2.9 Quorum..................................................... 6
2.10 Action at Meeting.......................................... 6
2.11 Action by Consent.......................................... 6
2.12 Removal.................................................... 7
2.13 Committees................................................. 7
2.14 Compensation of Directors.................................. 7
2.15 Nomination of Director Candidates.......................... 7
Article 3. Officers................................................... 8
3.1 Enumeration................................................ 8
3.2 Election................................................... 9
3.3 Qualification.............................................. 9
3.4 Tenure..................................................... 9
3.5 Resignation and Removal.................................... 9
3.6 Chairman of the Board...................................... 9
3.7 President.................................................. 9
3.8 Vice Presidents............................................ 9
3.9 Secretary and Assistant Secretaries........................ 10
3.10 Chief Financial Officer.................................... 10
3.11 Salaries................................................... 10
3.12 Delegation of Authority.................................... 10
Article 4. Capital Stock.............................................. 10
4.1 Issuance of Stock.......................................... 10
4.2 Certificates of Stock...................................... 11
</TABLE>
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<TABLE>
<S> <C> <C> <C>
4.3 Transfers.................................................. 11
4.4 Lost, Stolen or Destroyed Certificates..................... 11
4.5 Record Date................................................ 11
Article 5. General Provisions......................................... 12
5.1 Fiscal Year................................................ 12
5.2 Corporate Seal............................................. 12
5.3 Waiver of Notice........................................... 12
5.4 Actions with Respect to Securities of Other Corporations... 12
5.5 Evidence of Authority...................................... 12
5.6 Certificate of Incorporation............................... 13
5.7 Severability............................................... 13
5.8 Pronouns................................................... 13
5.9 Notices.................................................... 13
5.10 Reliance Upon Books, Reports and Records................... 13
5.11 Time Periods............................................... 13
5.12 Facsimile Signatures....................................... 13
Article 6. Amendments................................................. 14
6.1 By the Board of Directors.................................. 14
6.2 By the Stockholders........................................ 14
Article 7. Indemnification of Directors and Officers.................. 14
7.1 Right to Indemnification................................... 14
7.2 Right of Claimant to Bring Suit............................ 15
7.3 Indemnification of Employees and Agents.................... 15
7.4 Non-Exclusivity of Rights.................................. 15
7.5 Indemnification Contracts.................................. 15
7.6 Insurance.................................................. 16
7.7 Effect of Amendment........................................ 16
</TABLE>
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BY-LAWS
OF
VALICERT, INC.
Article 1. Stockholders
------------
1.1 Place of Meetings. All meetings of stockholders shall be held at such
-----------------
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors or the President and Chief Executive Officer or,
if not so designated, at the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election
--------------
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President and Chief Executive Officer at the time and place to
be fixed by the Board of Directors or the President and stated in the notice of
the meeting. If no annual meeting is held in accordance with the foregoing
provisions, the Board of Directors shall cause the meeting to be held as soon
thereafter as convenient.
1.3 Special Meetings. Special meetings of stockholders may be called at any
----------------
time by the Board of Directors, the Chairman of the Board or the President and
Chief Executive Officer. Business transacted at any special meeting of
stockholders shall be confined to the purpose or purposes stated in the notice
of meeting.
1.4 Notice of Meetings. Written notice of each meeting of stockholders,
------------------
whether annual or special, shall be given not less than ten (10) nor more than
sixty (60) days before the date on which the meeting is to be held, to each
stockholder entitled to vote at such meeting, except as otherwise provided
herein or as required by law (meaning here and hereafter, as required from time
to time by the Delaware General Corporation Law or the Certificate of
Incorporation). The notices of all meetings shall state the place, date and
hour of the meeting. The notice of a special meeting shall state, in addition,
the purpose or purposes for which the meeting is called. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least ten (10) days before each 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 (10) days prior to the meeting, 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 of the meeting, and may be inspected by any stockholder who is
present. This list shall
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preemptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of then.
1.6 Quorum. Except as otherwise provided by law or these By-laws, the
------
holders of a majority of the shares of the capital stock of the corporation
entitled to vote at the meeting, present in person or represented by proxy,
shall constitute a quorum for the transaction of business. If a quorum shall
fail to attend any meeting, the chairman of the meeting or the holders of a
majority of the shares of stock entitled to vote who are present, in person or
by proxy, may adjourn the meeting to another place, date or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any other
------------
time and to any other place at which a meeting of stockholders may be held under
these By-laws by the holders of a majority of the shares of stock present or
represented at the meeting and entitled to vote, although less than a quorum,
or, if no stockholder is present, by any officer entitled to preside at or to
act as Secretary of such meeting. When a meeting is adjourned to another place,
date or time, written notice need not be given of the adjourned meeting if the
place, date and time thereof are announced at the meeting at which the
adjournment is taken; provided, however, that if the date of any adjourned
meeting is more than thirty (30) days after the date for which the meeting was
originally noticed, or if a new record date is fixed for the adjourned meeting,
written notice of the place, date, and time of the adjourned meeting shall be
given in conformity herewith. At the adjourned meeting, the corporation may
transact any business which might have been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each share
------------------
of stock entitled to vote held of record by such stockholder and a proportionate
vote for each fractional share so held, unless otherwise provided by law. Each
stockholder of record entitled to vote at a meeting of stockholders, may vote in
person or may authorize any other person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent or by a
transmission permitted by law and delivered to the Secretary of the corporation.
No stockholder may authorize more than one proxy for his shares. Any copy,
facsimile telecommunication or other reliable reproduction of the writing or
transmission created pursuant to this Section may be substituted or used in lieu
of the original writing or transmission for any and all purposes for which the
original writing or transmission could be used, provided that such copy,
facsimile transmission or other reproduction shall be a complete reproduction of
the entire original writing or transmission.
1.9 Action at Meeting. When a quorum is present at any meeting, any
-----------------
election shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election, and all other matters shall be
determined by a majority of the votes cast affirmatively or negatively on the
matter (or if there are two or more classes of stock entitled to vote as
separate classes, then in the case of each such class, a majority of each such
class present or represented
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and voting affirmatively or negatively on the matter) shall decide such matter,
except when a different vote is required by express provision of law, the
Certificate of Incorporation or these By-laws.
All voting, including on the election of directors, but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting. The corporation may, and to the
extent required by law, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting and make a written report
thereof. The corporation may designate one or more persons as an alternate
inspector to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting may, and to the extent required by law, shall, appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath to faithfully execute the
duties of inspector with strict impartiality and according to the best of his or
her ability.
1.10 Notice of Stockholder Business. At an annual meeting of the
------------------------------
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (ii) properly
brought before the meeting by or at the direction of the Board of Directors, or
(iii) properly brought before an annual meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
Corporation's (or the Corporation's predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholders to be timely must be received not later than the
close of business on the tenth day following the day on which the date of the
annual meeting is publicly announced.
A stockholder's notice to the Secretary of the Corporation shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business.
1.11 Conduct of Business. At every meeting of the stockholders, the Chairman
-------------------
of the Board, if there is such an officer, or if not, the person appointed by
the Board of Directors, shall
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act as Chairman. The Secretary of the corporation or a person designated by the
Chairman of the meeting shall act as Secretary of the meeting. Unless otherwise
approved by the Chairman of the meeting, attendance at the stockholders' meeting
is restricted to stockholders of record, persons authorized in accordance with
Section 1.8 of these By-laws to act by proxy, and officers of the corporation.
The Chairman of the meeting shall call the meeting to order, establish the
agenda, and conduct the business of the meeting in accordance therewith or, at
the Chairman's discretion, it may be conducted otherwise in accordance with the
wishes of the stockholders in attendance. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule on
the precedence of, and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the By-laws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.11 and
Section 1.10 above. The Chairman of a meeting shall if the facts warrant,
determine and declare to the meeting that any proposed item of business was not
brought before the meeting in accordance with the provisions of this Section
1.11 and Section 1.10, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
1.12 Stockholder Action Without Meeting. Effective upon the closing of the
----------------------------------
Corporation's initial public offering of its common stock, any action required
or permitted to be taken by the stockholders of the Corporation must be effected
at a duly called annual or special meeting of stockholders of the Corporation
and may not be effected by any consent in writing by such stockholders. At all
times prior to the closing of the Corporation's initial public offering of its
common stock, any action which may be taken at any annual or special meeting of
stockholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the actions so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes which
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. All such consents shall
be filed with the Secretary of the Corporation and shall be maintained in the
corporate records. Prompt notice of the taking of a corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Article 2. Board of Directors
------------------
2.1 General Powers. The business and affairs of the corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event
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of a vacancy in the Board of Directors, the remaining directors, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
2.2 Number and Term of Office. The number of directors shall initially be
-------------------------
seven (7) and, thereafter, shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is presented
to the Board for adoption). Effective upon the closing of the Corporation's
initial public offering of its common stock, the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the Effective Date; the term of office
of the second class to expire at the second annual meeting of stockholders held
after the Effective Date; the term of office of the third class to expire at the
third annual meeting of stockholders held after the Effective Date; and
thereafter for each such term to expire at each third succeeding annual meeting
of stockholders after such election. All directors shall hold office until the
expiration of the term for which elected and until their respective successors
are elected, except in the case of the death, resignation or removal of any
director.
2.3 Vacancies and Newly Created Directorships. Subject to the rights of the
-----------------------------------------
holders of any series of Preferred Stock then outstanding, newly created
directorships resulting from any increase in the authorized number of directors
of any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification or other cause (including removal from office by a
vote of the stockholders) may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the next annual meeting of stockholders at which
the term of office of the class to which they have been elected expires. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
2.4 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.5 Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.6 Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, the President and Chief Executive
Officer, two or more directors, or by one director in the event that there is
only a single director in office.
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2.7 Notice of Special Meetings. Notice of any special meeting of directors
--------------------------
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be duly given to each director (i)
by giving notice to such director in person or by telephone or electronic voice
message system at least 24 hours in advance of the meeting, (ii) by sending a
telegram, telecopy or telex, or delivering written notice by hand, to his last
known business or home address at least 24 hours in advance of the meeting, or
(iii) by mailing written notice to his last known business or home address at
least three (3) day in advance of the meeting. A notice or waiver of notice of
a meeting of the Board of Directors need not specify the purposes of the
meeting. Unless otherwise indicated in the notice thereof, any and all business
may be transacted at a special meeting.
2.8 Participation in Meetings by Telephone Conference Calls. Directors or
-------------------------------------------------------
any members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such 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 participation by such
means shall constitute presence in person at such meeting.
2.9 Quorum. A majority of the total number of authorized directors shall
------
constitute a quorum at any meeting of the Board of Directors. In the event one
or more of the directors shall be disqualified to vote at any meeting, then the
required quorum shall be reduced by one for each such director so disqualified;
provided, however, that in no case shall less than one-third (1/3) of the number
so fixed constitute a quorum. In the absence of a quorum at any such meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice other than announcement at the meeting, until a quorum
shall be present. Interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or at a meeting of a
committee which authorizes a particular contract or transaction.
2.10 Action at Meeting. At any meeting of the Board of Directors at which a
-----------------
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorporation or these By-laws.
2.11 Action by Consent. Any action required or permitted to be taken at any
-----------------
meeting of the Board of Directors or of any committee of the Board of Directors
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent to the action in writing. Any such written consents shall
be filed with the minutes of proceedings of the Board or committee.
2.12 Removal. Subject to the rights of the holders of any series of
-------
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least a majority of the voting
power of all of the outstanding shares of capital stock entitled to vote
generally in the election of directors, voting together as a single class.
2.13 Committees. The Board of Directors may designate one or more
----------
committees, each committee to consist of one or more of the directors of the
corporation, with such lawfully delegated powers and duties as it therefor
confers, to serve at the pleasure of the Board. The
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Board may designate one 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 or disqualification of a member of a committee, the
member or members of the committee 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 and subject to the
provisions of the General Corporation Law of the State of Delaware, 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 which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by such rules, its business shall be
conducted as nearly as possible in the same manner as is provided in these By-
laws for the Board of Directors.
2.14 Compensation of Directors. Directors may be paid such compensation for
-------------------------
their services and such reimbursement for expenses of attendance at meetings as
the Board of Directors may from time to the determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
2.15 Nomination of Director Candidates. Subject to the rights of holders of
---------------------------------
any class or series of Preferred Stock then outstanding, nominations for the
election of Directors may be made by the Board of Directors or a proxy committee
appointed by the Board of Directors or by any stockholder entitled to vote in
the election of Directors generally. However, any stockholder entitled to vote
in the election of Directors generally may nominate one or more persons for
election as Directors at a meeting only if timely notice of such stockholder's
intent to make such nomination or nominations has been given in writing to the
Secretary of the Corporation. To be timely, a stockholder nomination for a
director to be elected at an annual meeting shall be received at the
corporation's principal executive offices not less than 120 calendar days in
advance of the date that the corporation's proxy statement was released to
stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
or in the event of a nomination for director to be elected at a special meeting,
notice by the stockholders to be timely must be received not later than the
close of business on the tenth day following the day on which such notice of the
date of the special meeting was mailed or such public disclosure was made. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote for the election of directors on the date of such
notice and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination
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or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Corporation if so elected.
In the event that a person is validly designated as a nominee in accordance
with this Section 2.15 and shall thereafter become unable or unwilling to stand
for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary, setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 2.15 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.15,
such nomination shall be void; provided, however, that nothing in this Section
2.15 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
Article 3. Officers
--------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President and Chief Executive Officer, a Secretary, a Chief Financial Officer
and such other officers with such other titles as the Board of Directors shall
determine, including, at the discretion of the Board of Directors, a Chairman of
the Board, and one or more Vice Presidents and Assistant Secretaries. The Board
of Directors may appoint such other officers as it may deem appropriate.
3.2 Election. Officers shall be elected annually by the Board of Directors at
--------
its first meeting following the annual meeting of stockholders. Officers may be
appointed by the Board of Directors at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more offices
-------------
may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote appointing him, or until his earlier death, resignation or removal.
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3.5 Resignation and Removal. Any officer may resign by delivering his written
-----------------------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event. Any officer may be removed at any time, with or without cause, by the
Board of Directors.
3.6 Chairman of the Board. The Board of Directors may appoint a Chairman of
---------------------
the Board. If the Board of Directors appoints a Chairman of the Board, he shall
perform such duties and possess such powers as are assigned to him by the Board
of Directors. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders, and, if he is a director, at all
meetings of the Board of Directors.
3.7 President. The President shall, subject to the direction of the Board of
---------
Directors, have responsibility for the general management and control of the
business and affairs of the corporation and shall perform all duties and have
all powers which are commonly incident to the office of chief executive or which
are delegated to him or her by the Board of Directors. The President shall be
the Chief Executive Officer of the corporation, unless otherwise designated by
the Board of Directors. The President shall perform such other duties and shall
have such other powers as the Board of Directors may from time to time
prescribe. He or she shall have power to sign stock certificates, contracts and
other instruments of the corporation which are authorized and shall have general
supervision and direction of all of the other officers, employees and agents of
the corporation, other than the Chairman of the Board.
3.8 Vice Presidents. Any Vice President shall perform such duties and possess
---------------
such powers as the Board of Directors or the President may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have at the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.9 Secretary and Assistant Secretaries. The Secretary shall perform such
-----------------------------------
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the Secretary,
including, without limitation, the duty and power to give notices of all
meetings of stockholders and special meetings of the Board of Directors, to keep
a record of the proceedings of all meetings of stockholders and the Board of
Directors, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
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<PAGE>
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.10 Chief Financial Officer. Unless otherwise designated by the Board of
-----------------------
Directors, the Chief Financial Officer shall be the Treasurer. The Chief
Financial Officer shall perform such duties and shall have such powers as may
from time to time be assigned to him by the Board of Directors or the President.
In addition, the Chief Financial Officer shall perform such duties and have such
powers as are incident to the office of chief financial officer, including
without limitation, the duty and power to keep and be responsible for all funds
and securities of the corporation, to maintain the financial records of the
corporation, to deposit funds of the corporation in depositories as authorized,
to disburse such funds as authorized, to make proper accounts of such funds, and
to render as required by the Board of Directors accounts of all such
transactions and of the financial condition of the corporation.
3.11 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.12 Delegation of Authority. The Board of Directors may from time to time
-----------------------
delegate the powers or duties of any officer to any other officers or agents,
notwithstanding any provision hereof.
Article 4. Capital Stock
-------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and subject
-----------------
to the provisions of the Certificate of Incorporation, the whole or any part of
any unissued balance of the authorized capital stock of the corporation or the
whole or any part of any unissued balance of the authorized capital stock of the
corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation shall be
---------------------
entitled to have a certificate, in such form as may be prescribed by law and by
the Board of Directors, certifying the number and class of shares owned by him
in the corporation. Each such certificate shall be signed by, or in the name of
the corporation by, the Chairman or Vice-Chairman, if any, of the Board of
Directors, or the President or a Vice President, and the Chief Financial
Officer, or the Secretary or an Assistant Secretary of the corporation. Any or
all of the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
-10-
<PAGE>
4.3 Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or authenticity of signature
as the corporation or its transfer agent may reasonably require. Except as may
be otherwise required by law, by the Certificate of Incorporation or by the By-
laws, the corporation shall be entitled to treat the record holder of stock as
shown on its books as the owner of such stock for all purposes, including the
payment of dividends and the right to vote with respect to such stock,
regardless of any transfer, pledge or other disposition of such stock until the
shares have been transferred on the books of the corporation in accordance with
the requirements of these By-laws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new
--------------------------------------
certificate of stock in place of any previously saved certificate alleged to
have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a record
-----------
date for the determination of the stockholders entitled to notice of or to vote
at any meeting of stockholders or to express consent (or dissent) to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, concession or exchange of stock, or for the purpose of any other lawful
action. Such record date 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 to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
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.
Article 5. General Provisions
------------------
5.1 Fiscal Year. The fiscal year of the corporation shall be as fixed by the
-----------
Board of Directors.
-11-
<PAGE>
5.2 Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be given
----------------
by law, by the Certificate of Incorporation or by these By-laws, a waiver of
such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telecopy, telegraph, cable or any
other available method, whether before, at or after the time stated in such
waiver, or the appearance of such person or persons at such meeting in person or
by proxy, shall be deemed equivalent to such notice.
5.4 Actions with Respect to Securities of Other Corporations. Except as the
--------------------------------------------------------
Board of Directors may otherwise designate, the President or any officer of the
corporation authorized by the President shall have the power to vote and
otherwise act on behalf of the corporation, in person or proxy, and may waive
notice of, and act as, or appoint any person or persons to act as, proxy or
attorney-in-fact to this corporation (with or without power of substitution) at
any meeting of stockholders or shareholders (or with respect to any action of
stockholders) of any other corporation or organization, the securities of which
may be held by this corporation and otherwise to exercise any and all rights and
powers which this corporation may possess by reason of this corporations
ownership of securities in such other corporation or other organization.
5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant
---------------------
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the corporation shall
as to all persons who rely on the certificate in good faith be conclusive
evidence of such action.
5.6 Certificate of Incorporation. All references in these By-laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Severability. Any determination that any provision of these By-laws is
------------
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
5.8 Pronouns. All pronouns used in these By-laws shall be deemed to refer to
--------
the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
5.9 Notices. Except as otherwise specifically provided herein or required by
-------
law, all notices required to be given to any stockholder, director, officer,
employee or agent shall be in writing and may in every instance be effectively
given by hand delivery to the recipient thereof, by depositing such notice in
the mails, postage paid, or by sending such notice by prepaid telegram,
mailgram, telecopy or commercial courier service. Any such notice shall be
addressed to such stockholder, director, officer, employee or agent at his or
her last known address as the same appears on the books of the Corporation. The
time when such notice shall be deemed to be given shall be the time such notice
is received by such stockholder, director, officer, employee or
-12-
<PAGE>
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
5.10 Reliance Upon Books, Reports and Records. Each director, each member of
----------------------------------------
any committee designated by the Board of Directors, and each officer of the
Corporation shall, in the performance of his duties, be fully protected in
relying in good faith upon the books of account or other records of the
Corporation, including reports made to the Corporation by any of its officers,
by an independent certified public accountant, or by an appraiser selected with
reasonable care.
5.11 Time Periods. In applying any provision of these By-laws which require
------------
that an act be done or not done a specified number of days prior to an event or
that an act be done during a period of a specified number of days prior to an
event, calendar days shall be used, the day of the doing of the act shall be
excluded, and the day of the event shall be included.
5.12 Facsimile Signatures. In addition to the provisions for use of facsimile
--------------------
signatures elsewhere specifically authorized in these By-laws, facsimile
signatures of any officer or officers of the Corporation may be used whenever
and as authorized by the Board of Directors or a committee thereof.
Article 6. Amendments
----------
6.1 By the Board of Directors. Except as is otherwise set forth in these By-
-------------------------
laws, these By-laws may be altered, amended or repealed or new By-laws may be
adopted by the affirmative vote of a majority of the directors present at any
regular or special meeting of the Board of Directors at which a quorum is
present.
6.2 By the Stockholders. Except as otherwise set forth in these By-laws,
-------------------
these By-laws may be altered, amended or repealed or new By-laws may be adopted
by the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the shares of the capital stock of the corporation issued
and outstanding and entitled to vote at any annual meeting of stockholders, or
at any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new By-laws shall have been stated in the
notice of such special meeting.
Article 7. Indemnification of Directors and Officers
-----------------------------------------
7.1 Right to Indemnification. Each person who was or is made a party or is
------------------------
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("proceeding"), 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 is or was serving at the request of the corporation as a director
or officer of another corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer or employee or in any other capacity while serving as a
director, officer or employee, shall be indemnified and held harmless by the
corporation to the
-13-
<PAGE>
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the corporation to provide broader
indemnification rights than said Law permitted the corporation to provide prior
to such amendment) against all expenses, liability and loss reasonably incurred
or suffered by such person in connection therewith and such indemnification
shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that except as provided in Section 7.2 of
-------- -------
this Article 7, the corporation shall indemnify any such person seeking
indemnity in connection with an action, suit or proceeding (or part thereof)
initiated by such person only if (a) such indemnification is expressly required
to be made by law, (b) the action, suit or proceeding (or part thereof) was
authorized by the Board of Directors of the corporation, (c) such
indemnification is provided by the corporation, in its sole discretion, pursuant
to the powers vested in the corporation under the Delaware General Corporation
Law, or (d) the action, suit or proceeding (or part thereof) is brought to
establish or enforce a right to indemnification under an indemnity agreement or
any other statute or law or otherwise as required under Section 145 of the
Delaware General Corporation Law. Such right shall be a contract right and shall
include the right to be paid by the corporation expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
-------- -------
that, unless the Delaware General Corporation Law then so prohibits,
the payment of such expenses incurred by a director or officer of the
Corporation in his or her capacity as a director or officer (and not in any
other capacity in which service was or is tendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of such proceeding, shall be
made only upon delivery to the corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
7.2 Right of Claimant to Bring Suit. If a claim under Section 7.1 is not paid
-------------------------------
in full by the corporation within ninety (90) 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
such suit is not frivolous or brought in bad faith, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to this
corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
-14-
<PAGE>
7.3 Indemnification of Employees and Agents. The corporation may, to the
---------------------------------------
extent authorized from time to time by the Board of Directors, grant rights to
indemnification, and to the advancement of related expenses, to any employee or
agent of the corporation to the fullest extent of the provisions of this Article
with respect to the indemnification of and advancement of expenses to directors
and officers of the corporation.
7.4 Non-Exclusivity of Rights. The rights conferred on any person in Sections
-------------------------
7.1 and 7.2 shall not be exclusive of any other right which such persons may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested directors
or otherwise.
7.5 Indemnification Contracts. The Board of Directors is authorized to enter
-------------------------
into a contract with any director, officer, employee or agent of the
corporation, or any person serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in this Article 7.
7.6 Insurance. The corporation shall maintain insurance to the extent
---------
reasonably available, at its expense, to protect itself and any such director,
officer, employee or agent of the corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
7.7 Effect of Amendment. Any amendment, repeal or modification of any
-------------------
provision of this Article 7 by the stockholders and the directors of the
corporation shall not adversely affect any right or protection of a director or
officer of the corporation existing at the time of such amendment, repeal or
modification.
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<PAGE>
EXHIBIT 3.3
RESTATED CERTIFICATE OF INCORPORATION
OF
VALICERT, INC.
Pursuant to Section 245
of the General Corporation Law of
the State of Delaware
--------------------------------
ValiCert, Inc. (hereinafter called the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
At a meeting of the Board of Directors of the Corporation, a resolution was
duly adopted, pursuant to Section 245 of the General Corporation Law of the
State of Delaware, setting forth a Restated Certificate of Incorporation of the
Corporation and declaring said Restated Certificate of Incorporation to be
advisable. The resolution setting forth the Restated Certificate of
Incorporation is as follows:
RESOLVED: That this Restated Certificate of Incorporation only restates
--------
and integrates and does not further amend the provisions the Corporation's
Certificate of Incorporation as heretofore amended or supplemented and there is
no discrepancy between such provisions and the provisions of this Restated
Certificate of Incorporation. The Certificate of Incorporation of the
Corporation, which was originally filed with the Secretary of State of the State
of Delaware on February 5, 1998 be and hereby is restated in its entirety so
that the same shall read as follows:
FIRST: The name of the Corporation is ValiCert, Inc.
- -----
SECOND: The address of its registered office in the State of Delaware is 15
- ------
East North Street in the City of Dover, County of Kent. The name of
its registered agent at such address is Incorporating Services, Ltd.
THIRD: 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 Delaware.
FOURTH: The total number of shares of all classes of stock which the
- ------
Corporation shall have authority to issue is (i) 100,000,000 shares of
Common Stock, $0.0001 par value per share ("Common Stock") and (ii)
500,000 shares of Preferred Stock, $0.0001 par
<PAGE>
value per share ("Preferred Stock"). The Board of Directors is
authorized, subject to any limitations prescribed by law, to provide
for the issuance of shares of Preferred Stock in series and, by filing
a certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereon. The number of authorized shares
of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the Common Stock without a vote of the
holders of the Preferred Stock, or of any series thereof, unless a
vote of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Stock.
FIFTH: The following provisions are inserted for the management of the
- -----
business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by
this Certificate of Incorporation or the Bylaws of the Corporation,
the directors are hereby empowered to exercise all such powers and do
all such acts and things as may be exercised or done by the
Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
C. Effective upon the closing of the Corporation's initial public
offering of its common stock, any action required or permitted to be
taken by the stockholders of the Corporation must be effected at a
duly called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing by such
stockholders. At all times prior to the closing of the Corporation's
initial public offering of its common stock, any action which may be
taken at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in writing,
setting forth the actions so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes
which would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted.
All such consents shall be filed with the Secretary of the Corporation
and shall be maintained in the corporate records. Prompt notice of the
taking of a corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not
consented in writing.
D. Special meetings of stockholders of the Corporation may be called only
by either the Board of Directors, the Chairman of the Board of
Directors or the President and Chief Executive Officer.
<PAGE>
SIXTH:
- -----
A. The number of directors shall initially be seven (7) and thereafter
shall be fixed from time to time exclusively by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board of Directors for adoption). Effective upon the
closing of the closing of the Corporation's initial public offering of
its common stock, the Board of Directors shall be divided into three
classes with the term of office of the first class to expire at the
first annual meeting of the stockholders following the Effective Date,
the term of office of the second class to expire at the second annual
meeting of stockholders held following the Effective Date, the term of
office of the third class to expire at the third annual meeting of
stockholders following the Effective Date, and thereafter for each
such term to expire at each third succeeding annual meeting of
stockholders after such election. All directors shall hold office
until the expiration of the term for which elected, and until their
respective successors are elected, except in the case of the death,
resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation or other cause
(including removal from office by a vote of the stockholders) may be
filled only by a majority vote of the directors then in office, though
less than a quorum, or by the sole remaining director, and directors
so chosen shall hold office for a term expiring at the next annual
meeting of stockholders at which the term of office of the class to
which they have been elected expires, and until their respective
successors are elected, except in the case of the death, resignation,
or removal of any director.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any directors, or the entire Board of Directors, may
be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors,
voting together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
- -------
repeal Bylaws of the Corporation. The stockholders shall also have
power to adopt, amend or repeal the Bylaws of the Corporation. Any
adoption, amendment or repeal of Bylaws of the Corporation by the
stockholders shall require, in addition to any vote of the holders of
any class or series of stock of the Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
<PAGE>
EIGHTH: A director of the Corporation shall not be personally liable to the
- ------
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any provision
- -----
contained in this Certificate of Incorporation in the manner prescribed
by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided,
--------
however, that, notwithstanding any other provision of this Certificate
-------
of Incorporation or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any vote of the holders of
any class or series of the stock of this Corporation required by law or
by this Certificate of Incorporation, the affirmative vote of the
holders of at least 66-2/3% of the voting power of all of the then
outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal this Article NINTH,
Article FIFTH, Article SIXTH, Article SEVENTH or Article EIGHTH.
[THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Sixth Amended and Restated Certificate of Incorporation
to be signed by its President and attested by its Secretary this ____day of May
2000.
VALICERT, INC.
By:______________________________
Yosi Amram, President
ATTEST:
- ----------------------------------------------
Srinivasan Krishnan, Secretary
<PAGE>
EXHIBIT 4.1
VALICERT, INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
JULY 21, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
----
<S> <C>
1. Registration Rights........................................................ 1
1.1 Definitions.......................................................... 1
1.2 Request for Registration............................................. 2
1.3 Company Registration................................................. 4
1.4 Form S-3 Registration................................................ 4
1.5 Obligations of the Company........................................... 5
1.6 Furnish Information.................................................. 6
1.7 Expenses of Registration............................................. 7
1.8 Underwriting Requirements............................................ 7
1.9 Delay of Registration................................................ 8
1.10 Indemnification...................................................... 8
1.11 Reports Under Securities Exchange Act of 1934........................ 10
1.12 Assignment of Registration Rights.................................... 11
1.13 Limitations on Subsequent Registration Rights........................ 11
1.14 "Market Stand-Off" Agreement......................................... 11
1.15 Termination of Registration Rights................................... 12
2. Covenants of the Company................................................... 12
2.1 Delivery of Financial Statements..................................... 12
2.2 Inspection........................................................... 13
2.3 Right of First Offer................................................. 13
2.4 Termination of Covenants............................................. 14
2.5 Board Related Expenses............................................... 14
2.6 Equity Incentives.................................................... 15
2.7 Key Man Insurance.................................................... 15
3. Right of First Refusal..................................................... 15
4. Miscellaneous.............................................................. 17
4.1 Successors and Assigns............................................... 17
4.2 Amendments and Waivers............................................... 17
4.3 Notices.............................................................. 17
4.4 Severability......................................................... 18
4.5 Governing Law........................................................ 18
4.6 Counterparts......................................................... 18
4.7 Titles and Subtitles................................................. 18
4.8 Aggregation of Stock; Adjustment of Share Numbers; Adjustment of
Share Numbers........................................................ 18
4.9 Termination of Pre-Existing Registration Rights...................... 18
4.10 Confidentiality and Non-Disclosure................................... 18
4.11 Intel Observer....................................................... 19
4.12 Observer Rights...................................................... 20
4.13 Additional Parties................................................... 21
</TABLE>
-i-
<PAGE>
VALICERT, INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
------------------------------------------------
This Amended and Restated Investors' Rights Agreement (the "Agreement") is
made as of July 21, 1999 by and among ValiCert, Inc., a Delaware corporation
(the "Company"), the investors listed on Exhibit A-1 hereto, each of which is
-----------
herein referred to as a "Prior Purchaser", the purchasers listed on Exhibit A-2,
-----------
hereto, each of whom is herein referred to as a "Purchaser," and the persons
listed on Exhibit A-3, hereto, each of whom is herein referred to as a
-----------
"Founder." The Prior Purchasers and the Purchasers are collectively referred to
herein as "Investors."
RECITALS
--------
A. The Prior Purchasers and the Founders are parties to that certain
Investors' Restated Rights Agreement dated as of May 6, 1998 among the Company
and such Prior Purchasers and Founders (the "Prior Agreement").
B. Concurrently herewith, the Purchasers and the Company are entering into
a Series C Preferred Stock Purchase Agreement (the "Series C Agreement")
pursuant to which the Purchasers are purchasing from the Company shares of its
Series C Preferred Stock.
C. The Prior Purchasers beneficially owning at least a majority of the
Company's outstanding shares held by all Prior Purchasers which are subject to
the Prior Agreement wish to amend the Prior Agreement to grant registration,
information and other rights to the Purchasers identical to the registration,
information and other rights of the Prior Purchasers.
D. The Purchasers desire to become a party to the Prior Agreement as
amended and restated hereby.
E. By this Agreement, the Company, the Investors and the Founders desire
to provide for certain registrations and other rights as set forth herein.
AGREEMENT
---------
The parties hereby agree as follows:
1. REGISTRATION RIGHTS. The company and the investors covenant and
-------------------
agree as follows:
1.1 DEFINITIONS. For purposes of this Section 1:
-----------
(a) The terms "register," "registered," and "registration"
-------- ---------- ------------
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "Securities Act"), and the declaration or ordering of effectiveness
of such registration statement or document;
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(b) The term "Registrable Securities" means (i) the shares of
----------------------
Common Stock issuable or issued upon conversion of the Series C Preferred Stock,
Series B Preferred Stock and the Series A-Senior Preferred Stock, (ii) the
shares of Common Stock issuable or issued to the Founders upon conversion of
Series A-Junior Preferred Stock or under any stock plan of the Company (the
"Founders' Stock"), provided, however, that for the purposes of Section 1.2, 1.4
-------- -------
or 1.13 the Founders' Stock shall not be deemed Registrable Securities and the
Founders shall not be deemed Holders, and (iii) any other shares of Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
shares listed in (i) and (ii); provided, however, that the foregoing
-------- -------
definition shall exclude in all cases any Registrable Securities sold by a
person in a transaction in which his or her rights under this Agreement are not
assigned. Notwithstanding the foregoing, Common Stock or other securities shall
only be treated as Registrable Securities if and so long as they have not been
(A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer restrictions, and
restrictive legends with respect thereto, if any, are removed upon the
consummation of such sale;
(c) The number of shares of "Registrable Securities then
---------------------------
outstanding" shall be determined by the number of shares of Common Stock
- -----------
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
------
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.12 of this Agreement;
(e) The term "Form S-3" means such form under the Securities
--------
Act as in effect on the date hereof or any successor form under the Securities
Act;
(f) The term "SEC" means the Securities and Exchange
---
Commission; and
(g) The term "Qualified IPO" means an underwritten public
-------------
offering by the Company of shares of its Common Stock pursuant to a registration
statement under the Securities Act, prior to or in connection with which all
shares of the Company's Preferred Stock are converted into shares of Common
Stock.
1.2 REQUEST FOR REGISTRATION.
------------------------
(a) If the Company shall receive at any time after the earlier
of July 21, 2002, or (ii) one hundred eighty (180) days after the effective date
of the first registration statement for a public offering of securities of the
Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or an SEC Rule 145 transaction), a written request from
the Holders of a majority of the Registrable Securities then outstanding that
the Company
2
<PAGE>
file a registration statement under the Securities Act covering the registration
of at least twenty percent (20%) of the Registrable Securities then outstanding,
which would involve an anticipated aggregate offering price, net of underwriting
discounts and commissions, exceeding $10,000,000, then the Company shall, within
ten (10) days of the receipt thereof, give written notice of such request to all
Holders and shall, subject to the limitations of subsection 1.2(b), use its best
efforts to effect as soon as practicable, and in any event within sixty (60)
days of the receipt of such request, the registration under the Securities Act
of all Registrable Securities which the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
Section 3.3.
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 1.2 and the
Company shall include such information in the written notice referred to in
subsection 1.2(a). The underwriter will be selected by a majority in interest of
the Initiating Holders and shall be reasonably acceptable to the Company. In
such event, the right of any Holder to include his Registrable Securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.5(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
-------- -------
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish
to Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
the Initiating Holders; provided, however, that the Company may not utilize this
-------- -------
right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 1.2:
3
<PAGE>
(i) After the Company has effected two (2) registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective;
(ii) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date sixty (60) days after the effective date of, a registration
subject to Section 1.3 hereof; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective; or
(iii) If the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.4 below.
1.3 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 stockholders other than the Holders) any of its
stock under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan or a transaction
covered by Rule 145 under the Securities Act, a registration in which the only
stock being registered is Common Stock issuable upon conversion of debt
securities which are also being registered, or any 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 the Registrable
Securities), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 3.3, the Company shall, subject to the provisions of
Section 1.8, cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered.
1.4 FORM S-3 REGISTRATION. In case the Company shall receive from
---------------------
any Holder or Holders of Registrable Securities then outstanding a written
request or requests that the Company effect a registration on Form S-3 and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.4: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if
4
<PAGE>
any) at an aggregate price to the public (net of any underwriters' discounts or
commissions) of less than $1,000,000, (iii) if the Company shall furnish to the
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than ninety (90) days after receipt of the request of the
Holder or Holders under this Section 1.4; provided, however, that the Company
-------- -------
shall not utilize this right more than once in any twelve (12) month period;
(iv) if the Company has, within the twelve (12) month period preceding the date
of such request, already effected two (2) registrations on Form S-3 for the
Holders pursuant to this Section 1.4; (v) 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; or (vi) during the period ending ninety (90) days
after the effective date of a registration statement subject to Section 1.3 (one
hundred eighty (180) days in the case of the Company's initial public offering
of securities pursuant to a registration statement under the Securities Act).
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 1.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 1.2 or 1.3, respectively.
1.5 OBLIGATIONS OF THE COMPANY. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such 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 up to one hundred twenty (120) days. The
Company shall not be required to file, cause to become effective or maintain the
effectiveness of any registration statement that contemplates a distribution of
securities on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act.
(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 Securities Act with respect to the disposition of all
securities covered by such registration statement for up to one hundred twenty
(120) days.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
5
<PAGE>
(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 Holders,
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) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities 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, such obligation to continue for one hundred twenty (120) days.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a "comfort" letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
1.6 FURNISH INFORMATION. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
6
<PAGE>
Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in subsection
1.2(a) or subsection 1.4(b)(2), whichever is applicable.
1.7 EXPENSES OF REGISTRATION.
------------------------
(a) DEMAND REGISTRATION; COMPANY REGISTRATION. All expenses
-----------------------------------------
other than underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2 or 1.3,
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements (not to exceed $30,000) of
one counsel for the selling Holders selected by them with the approval of the
Company, which approval shall not be unreasonably withheld, 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 to Section 1.2 or
1.3 if the registration request is subsequently withdrawn at the request of the
Holders of a majority of the Registrable Securities to be registered (in which
case all participating Holders shall bear such expenses), unless the Holders of
a majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2 or 1.3, provided further, however,
-------- ------- -------
that if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition, business, or prospects of the Company that was
not known to the Holders at the time of their request, then the Holders shall
not be required to pay any of such expenses and shall retain their rights
pursuant to Section 1.2 or 1.3.
(b) REGISTRATIONS ON FORM S-3. All expenses other than
-------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications of Registrable Securities pursuant to
Section 1.4 for each Holder, including (without limitation) all registration,
filing, and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the selling Holder or Holders, shall be borne by
the selling Holder or Holders pro rata based upon the number of shares being
offered.
1.8 UNDERWRITING REQUIREMENTS. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
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 Registrable Securities, requested by stockholders 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 such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
7
<PAGE>
included to be apportioned pro rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder or in such other proportions as shall mutually be agreed to
by such selling stockholders) but in no event shall (i) any shares being sold by
a stockholder exercising a demand registration right similar to that granted in
Section 1.2 be excluded from such offering, (ii) the amount of securities of the
selling Holders included in the offering be reduced below thirty percent (30%)
of the total amount of securities included in such offering, unless such
offering is the initial public offering of the Company's securities, in which
case, except as provided in (i), the selling stockholders may be excluded if the
underwriters make the determination described above and no other stockholder's
securities are included, or (iii) any securities held by a Founder be included
if any securities held by any selling Holder are excluded. For purposes of the
preceding parenthetical concerning apportionment, for any selling stockholder
which is a holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and stockholders of such holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "selling stockholder," and any pro-rata reduction with respect to such
"selling stockholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling stockholder," as defined in this sentence.
1.9 DELAY OF REGISTRATION. No Holder shall 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.
1.10 INDEMNIFICATION. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange 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) violation or
alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and the Company will pay to
each such Holder, 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 1(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
8
<PAGE>
consent shall not be unreasonably withheld), nor shall the Company be liable to
any Holder, underwriter or controlling person 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 Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder 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 Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act, the Exchange 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
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.10(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 1.10(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 Holder, which consent shall not be unreasonably
withheld; provided, that in no event shall any indemnity under this subsection
--------
1.10(b) exceed the net proceeds from the offering received by such Holder,
except in the case of willful fraud by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 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 1.10, 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 reasonable 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
1.10, 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 1.10.
(d) If the indemnification provided for in this Section 1.10 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss,
9
<PAGE>
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; provided, that in no event
--------
shall any contribution by a Holder under this Subsection 1.10(d) exceed the net
proceeds from the offering received by such Holder, except in the case of
willful fraud by such Holder. 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 the 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 Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public so long as the
Company remains subject to the periodic reporting requirements under Sections 13
or 15(d) of the Exchange Act;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the first registration statement filed by the Company for the offering
of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied
10
<PAGE>
with the reporting requirements of SEC Rule 144 (at any time after ninety (90)
days after the effective date of the first registration statement filed by the
Company), the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) (a) by a Holder that is a
partnership, to a partner or retired partner, (b) by a Holder that is a limited
liability company, to a member or retired member, (c) by a Holder that is an
individual, to such individual's estate or by gift, will or intestate succession
to a spouse or lineal descendant or antecedent or any trust for any of the
foregoing, or (d) by a Holder to a transferee or assignee of at least 500,000
shares of such party, provided the Company is, within thirty (30) days following
--------
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
-------- -------
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act. For the purposes of determining the number
of shares of Registrable Securities held by a transferee or assignee, the
holdings of transferees and assignees of a partnership who are partners or
retired partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities by gift, will or intestate succession) shall be aggregated together
and with the partnership; provided that all assignees and transferees who would
not qualify individually for assignment of registration rights shall have a
single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under Section 1.
1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
---------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.3 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of his securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration statement being declared effective prior
to the earlier of either of the dates set forth in subsection 1.2(a) or within
one hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2.
1.14 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that,
---------------------------
during the period of duration (up to, but not exceeding, 180 days) specified by
the Company and an underwriter of Common Stock or other securities of the
Company, following the effective date of a registration statement of the Company
filed under the Securities Act, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
11
<PAGE>
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
- -------- -------
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) all officers and directors of the Company, all one-percent
securityholders, and all other persons with registration rights (whether or not
pursuant to this Agreement) shall be subject to similar restrictions.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.14.
Notwithstanding the foregoing, the obligations described in this
Section 1.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to an SEC Rule 145 transaction
on Form S-4 or similar forms which may be promulgated in the future.
1.15 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled
----------------------------------
to exercise any right provided for in this Section 1 at such date (i) seven (7)
years following the consummation of a Qualified IPO or (ii) after the Company's
initial registered public offering when all remaining Registrable Securities
held or entitled to be held by such Holder may be sold under Rule 144 during any
three (3) month period.
2. COVENANTS OF THE COMPANY.
------------------------
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to
--------------------------------
each Holder of at least 450,000 shares of Registrable Securities (as measured on
the date of such Holder's becoming a party to this Agreement) (other than a
Holder reasonably deemed by the Company to be a competitor of the Company):
(a) as soon as practicable, but in any event within ninety (90)
days after the end of each fiscal year of the Company, an income statement for
such fiscal year, a balance sheet of the Company and statement of stockholder's
equity as of the end of such year, and a statement of cash flows for such year,
such year-end financial reports to be in reasonable detail, setting forth in
each case in comparative form the figures from the Company's prior fiscal year,
prepared in accordance with generally accepted accounting principles ("GAAP"),
and audited and certified by an independent public accounting firm of nationally
recognized standing selected by the Company;
12
<PAGE>
(b) within thirty (30) days of the end of each month, an
unaudited income statement and a statement of cash flows and balance sheet for
and as of the end of such month, in reasonable detail, together with a
comparison to the Company's operating plan and budget;
(c) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget and business plan for the next
fiscal year, prepared on a monthly basis, and, as soon as prepared, any other
budgets or revised budgets prepared by the Company.
2.2 INSPECTION. The Company shall permit each Holder of at least
----------
700,000 shares of Registrable Securities (except for a Holder reasonably deemed
by the Company to be a competitor of the Company), at such Holder's expense, to
visit and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
officers, all at such reasonable times during normal business hours as may be
requested by the Investor without disrupting the Company's business. Each
Holder, other than Intel Corporation ("Intel"), agrees to hold all information
received from such inspections in confidence and not to use or disclose any of
such information to any third party, except to the extent such information is
made publicly available by the Company. Intel's obligations with respect to such
information shall be governed by Section 4.10.
2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions
--------------------
specified in this Section 2.3, the Company hereby grants to each Major Investor
(as hereinafter defined) a right of first offer with respect to future sales by
the Company of its Shares (as hereinafter defined). For purposes of this Section
2.3, a "Major Investor" shall mean any person who holds (i) at least 1,500,000
shares of the Series B Preferred Stock (or the Common Stock issued upon
conversion thereof) issued pursuant to the Prior Agreement or (ii) at least
1,500,000 shares of Series C Preferred Stock (or the Common Stock issued upon
conversion thereof) issued pursuant to the Series C Agreement. For purposes of
this Section 2.3, Major Investor includes any general partners and affiliates of
a Major Investor. A Major Investor who chooses to exercise the right of first
offer may designate as purchasers under such right itself or its partners or
affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any Additional Shares of
Common Stock (as defined in its Second Amended and Restated Certificate of
Incorporation), the Company shall first make an offering of such Additional
Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Major Investors stating (i) its bona fide intention to offer
such Additional Shares, (ii) the number of such Additional Shares to be offered,
and (iii) the price and terms, if any, upon which it proposes to offer such
Additional Shares.
(b) Within ten (10) calendar days after delivery of the Notice,
the Major Investor may elect to purchase or obtain, at the price and on the
terms specified in the Notice, up to that portion of such Additional Shares
which equals the proportion that the number of shares of Common Stock issued or
issuable to such Major Investor upon conversion of Series B Preferred Stock and
Series C Preferred Stock bears to the total number of shares of
13
<PAGE>
Common Stock then outstanding (assuming full conversion and exercise of all
outstanding convertible or exercisable securities). A written notice to the
Company indicating a Major Investor's intention to exercise its right of first
offer shall not be binding unless and until the Company obtains binding
commitments to purchase all of the Additional Shares specified in the Notice on
the terms stated in the Notice. The Company shall promptly, in writing, inform
each Major Investor that purchases all the shares available to it (each, a
"Fully-Exercising Investor") of any other Major Investor's failure to do
likewise. During the ten (10)-day period commencing after receipt of such
information, each Fully-Exercising Investor shall be entitled to obtain that
portion of the Additional Shares for which Major Investors were entitled to
subscribe but which were not subscribed for by the Major Investors that is equal
to the proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Fully-Exercising Investor bears to the total
number of shares of Common Stock issued and held, or issuable upon conversion
and exercise of all convertible or exercisable securities then held, by all
Fully-Exercising Investors.
(c) The Company may, during the 45-day period following the
expiration of the period provided in subsection 2.3(b) hereof, offer the
remaining unsubscribed portion of the Additional Shares to any person or persons
at a price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an agreement
for the sale of the Additional Shares within such period, or if such agreement
is not consummated within 60 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Additional Shares shall not be
offered unless first reoffered to the Major Investors in accordance herewith.
2.4 TERMINATION OF COVENANTS.
------------------------
(a) The covenants set forth in Sections 2.1(b) and (c) through
Section 2.3 shall terminate as to each Holder and be of no further force or
effect (i) immediately prior to the consummation of a Qualified IPO, or (ii)
when the Company shall sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any other transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of,
provided that this subsection (ii) shall not apply to a merger effected
exclusively for the purpose of changing the domicile of the Corporation.
(b) The covenants set forth in Sections 2.1(b) and (c) and 2.2
shall terminate as to each Holder and be of no further force or effect when the
Company first becomes subject to the periodic reporting requirements of Sections
13 or 15(d) of the Exchange Act, if this occurs earlier than the events
described in Section 2.4(a) above.
2.5 BOARD RELATED EXPENSES. The Company shall pay the reasonable
----------------------
travel expenses of the representative of August Capital, L.P. and of the
representative observer or Board member chosen by Lucent Venture Partners, Inc.
("LVP") on the Board of Directors, with respect to Board meetings held outside
of the San Francisco Bay Area.
14
<PAGE>
2.6 EQUITY INCENTIVES. Unless otherwise determined by the Board of
-----------------
Directors, all shares of Common Stock and Preferred Stock (other than shares
issued upon exercise of vested options) and options for Common Stock or
Preferred Stock issued to employees, directors and consultants will be subject
to vesting as follows: six (6) months after the date of grant, and each of the
following forty-one months thereafter, an equal installment of the shares or
options shall vest, unless, in the case of Preferred Stock, such shares are
issued at the same or higher price per share as most recently paid by investors
who purchase shares of the same series of Preferred Stock. In addition, the
agreements evidencing such options shall include a right of first refusal by the
Company with respect to such shares and the right of the Company to require the
holder of the shares to agree not to sell, directly or indirectly, any of the
shares during a period of up to 180 days (such period to be agreed to by the
Company and the underwriters) following the Company's initial public offering.
2.7 KEY MAN INSURANCE. As soon as reasonably possible after the
-----------------
date of this Agreement, the Company shall procure key-man life insurance
policies for such individuals as the Purchasers shall reasonably request in the
amount of $1,000,000 for each individual, naming the Company as beneficiary.
3. RIGHT OF FIRST REFUSAL. Before any shares of Series B Preferred Stock
----------------------
or Series C Preferred Stock, or Common Stock issued or issuable upon conversion
of such Series B Preferred Stock or Series C Preferred Stock ("Preferred
Shares"), held by any Investor or any transferee of such Investor (either being
sometimes referred to herein as the "Preferred Investor") may be sold or
otherwise transferred (including transfer by gift or operation of law), the
Company or its assignee(s) shall have a right of first refusal to purchase the
Preferred Shares on the terms and conditions set forth in this Section 3 (the
"Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Preferred Investor shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Preferred Investor's bona fide intention to sell or otherwise transfer such
Preferred Shares; (ii) the name of each proposed purchaser or other transferee
("Proposed Transferee"); (iii) the number of Preferred Shares to be transferred
to each Proposed Transferee; and (iv) the terms and conditions of each proposed
sale or transfer. The Preferred Investor shall offer the Preferred Shares at the
same price (the "Offered Price") and upon the same terms (or terms as similar as
reasonably possible) to the Company or its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 10
----------------------------------
business days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Preferred Investor, elect to purchase all,
but not less than all, of the Preferred Shares proposed to be transferred to any
one or more of the Proposed Transferees, at the purchase price determined in
accordance with subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for
--------------
the Preferred Shares purchased by the Company or its assignee(s) under this
Section 3 shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by an independent third party appraiser
appointed by the Board of Directors of the Company.
15
<PAGE>
(d) PAYMENT. Payment of the Purchase Price shall be made, at
-------
the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the
Preferred Investor to the Company (or, in the case of repurchase by an assignee,
to the assignee), or by any combination thereof within 30 days after receipt of
the Notice or in the manner and at the times set forth in the Notice.
(e) RIGHT TO TRANSFER. If all of the Preferred Shares proposed
-----------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section 3, then the
Preferred Investor may sell or otherwise transfer such Preferred Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 60 days after the date of the
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 3 shall continue to apply
to the Preferred Shares in the hands of such Proposed Transferee. If the
Preferred Shares described in the Notice are not transferred to the Proposed
Transferee within such period, or if the Preferred Investor proposes to change
the price or other terms to make them more favorable to the Proposed Transferee,
a new Notice shall be given to the Company, and the Company and/or its assignees
shall again be offered the Right of First Refusal before any Preferred Shares
held by the Preferred Investor may be sold or otherwise transferred.
(f) EXCEPTION FOR CERTAIN TRANSFERS. Notwithstanding anything
-------------------------------
in this Section 3 to the contrary, the following transfers of any or all of the
Preferred Shares held by a Preferred Investor shall be exempt from the
provisions of this Section 3: (i) in the case of a Preferred Investor that is an
individual, to such individual's estate or by gift, will or intestate succession
to a spouse or lineal descendant or antecedent or any trust for any of the
foregoing; (ii) in the case of a Preferred Investor that is a partnership, to a
partner or retired partner; and (iii) in the case of a Preferred Investor that
is a limited liability company, to a member or retired member. In each such
case, the transferee, or other recipient shall receive and hold the Preferred
Shares so transferred subject to the provisions of this Section 3, and there
shall be no further transfer of such Preferred Shares except in accordance with
the terms of this Section 3.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
-------------------------------------
Refusal shall terminate as to each Holder and be of no further force or effect
upon the earliest of (i) immediately prior to the consummation of the Company's
first public offering of securities pursuant to a registration statement under
the Securities Act (and shall not apply to any Preferred Shares sold by any
Preferred Investor in such offering), (ii) when the Company shall sell, convey,
or otherwise dispose of or encumber all or substantially all of its property or
business or merge into or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation) or effect any other transaction or series
of related transactions in which more than fifty percent (50%) of the voting
power of the Company is disposed of, provided that this subsection (ii) shall
not apply to a merger effected exclusively for the purpose of changing the
domicile of the Company; and (iii) such time following the date of this
Agreement as the Company issues an aggregate of 250,000 or more shares of its
securities (as adjusted for subsequent stock splits, stock dividends,
recapitalizations and similar transactions) to a single purchaser (other than
shares issuable upon exercise or conversion of exercisable or convertible
16
<PAGE>
securities outstanding as of the date of this Agreement), which shares are not
subject to a right of first refusal substantially similar to the Right of First
Refusal.
(h) LEGEND. The certificates evidencing any Preferred Shares
------
held by the Preferred Investors shall bear the following legend, which legend
the Company shall remove upon request following termination of the Right of
First Refusal:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED
ONLY IN ACCORDANCE WITH THE TERMS OF AN INVESTORS' RIGHTS
AGREEMENT AMONG THE COMPANY, THE STOCKHOLDER AND CERTAIN OTHER
PARTIES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
4. MISCELLANEOUS.
-------------
4.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this
----------------------
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties (including transferees of any of the Series A Preferred Stock or any
Common Stock issued upon conversion thereof). 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.
4.2 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
----------------------
amended or waived only with the written consent of the Company and the holders
of a majority of the Registrable Securities then outstanding, not including the
Founders' Stock; provided that if such amendment has the effect of affecting the
Founders' Stock (i) in a manner materially different than securities issued to
the Investors and (ii) in a manner materially adverse to the interests of the
holders of the Founders' Stock, then such amendment shall require the consent of
the holder or holders of a majority of the Founders' Stock. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company. Notwithstanding the foregoing, (i)
any amendment or waiver of Section 4.10 or 4.11 shall require the consent of
Intel Corporation ("Intel"), which consent shall be given or withheld at Intel's
sole discretion, and (ii) any amendment or waiver of Section 2.5 or 4.12 shall
require the consent of LVP and each Purchaser referred to in Section 4.12, which
consent shall be given or withheld at the sole discretion of LVP and each
Purchaser referred to in Section 4.12.
4.3 NOTICES. Unless otherwise provided, any notice required or
-------
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth on
the signature page on Exhibit A-1 or Exhibit A-2 hereto or as subsequently
----------- -----------
modified by written notice.
17
<PAGE>
4.4 SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
4.5 GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of California, without giving effect to principles of
conflicts of laws.
4.6 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.7 TITLES AND SUBTITLES. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
4.8 AGGREGATION OF STOCK; ADJUSTMENT OF SHARE NUMBERS; ADJUSTMENT OF
----------------------------------------------------------------
SHARE NUMBERS. All shares of the Preferred Stock held or acquired by affiliated
- -------------
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement. All share numbers in this
Agreement shall be appropriately adjusted to reflect any subsequent stock
splits, stock dividends, recapitalizations and similar transactions.
4.9 TERMINATION OF PRE-EXISTING REGISTRATION RIGHTS. Upon execution
-----------------------------------------------
and delivery of this Agreement, the holder(s) of a majority of the outstanding
shares of registrable securities covered under the Prior Agreement, which is
superseded and replaced in its entirety by this Agreement, hereby terminate(s)
the Prior Agreement.
4.10 CONFIDENTIALITY AND NON-DISCLOSURE.
----------------------------------
(a) DISCLOSURE OF TERMS. The terms and conditions of this
-------------------
Agreement, the Stock Purchase Agreement, the Right of First Refusal and the Co-
Sale Agreement and the Voting Agreement (collectively, the "Financing Terms"),
including their existence, shall be considered confidential information and
shall not be disclosed by any party hereto to any third party except in
accordance with the provisions set forth below.
(b) PRESS RELEASES, ETC. Within sixty (60) days of the
-------------------
Closing, the Company may issue a press release disclosing that the Purchasers
under the Stock Purchase Agreement (the "Purchasers") have invested in the
Company; provided that the release does not disclose any of the Financing Terms
and is approved in advance in writing by Intel. Intel, at its sole discretion,
may provide an executive quote or other material regarding its investment in the
Company. No other announcement regarding the Purchasers in a press release,
conference, advertisement, announcement, professional or trade publication, mass
marketing materials or otherwise to the general public may be made without
Intel's prior written consent, which may be given or withheld at Intel's sole
discretion.
18
<PAGE>
(c) PERMITTED DISCLOSURES. Notwithstanding the foregoing, (i)
---------------------
any party may disclose any of the Financing Terms to its current or bona fide
prospective investors, employees, investment bankers, lenders, accountants and
attorneys, in each case only where such persons or entities are under
appropriate nondisclosure obligations; (ii) any party may disclose (other than
in a press release or other public announcement described in subsection (b))
solely the fact that the Purchasers are investors in the Company to any third
parties without the requirement for the consent of any other party or
nondisclosure obligations; (iii) Intel may disclose its investment in the
Company and the Financing Terms to third parties or to the public at its sole
discretion and, if it does so, the other parties hereto shall have the right to
disclose to third parties any such information disclosed by Intel in a press
release or other public announcement.
(d) LEGALLY COMPELLED DISCLOSURE. In the event that any party
----------------------------
is requested or becomes legally compelled (including without limitation,
pursuant to securities laws and regulations) to disclose the existence of this
Agreement or any of the terms hereof in contravention of the provisions of this
Section 4.10, such party (the "Disclosing Party") shall provide the other
parties (the "Non-Disclosing Parties") with prompt written notice of that fact
so that the appropriate party may seek (with the cooperation and reasonable
efforts of the other party) a protective order, confidential treatment or other
appropriate remedy. In such event, the Disclosing Party shall furnish only that
portion of the information which is legally required and shall exercise
reasonable efforts to obtain reliable assurance that confidential treatment will
be accorded such information to the extent reasonably requested by any Non-
Disclosing Parties.
(e) OTHER INFORMATION. The provisions of this Section 4.10
-----------------
shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by any of the parties hereto with
respect to the transactions contemplated hereby. Additional disclosures and
exchange of confidential information between the Company and Intel shall be
governed by the terms of the Corporate Non-Disclosure Agreement No. 111241,
dated February 11, 1998, executed by the Company and Intel, and any Confidential
Information Transmittal Records provided in connection therewith.
4.11 INTEL OBSERVER. So long as Intel, together with its majority-
--------------
owned subsidiaries, holds at least 750,000 shares of Preferred Stock or
securities issued upon conversion of the Preferred Stock, the Company will
permit a representative of Intel (the "Observer") to attend all meetings of the
Company's Board of Directors (the "Board") and all committees thereof (whether
in person, telephonic or other) in a non-voting, observer capacity and shall
provide to Intel, concurrently with the members of the Board, and in the same
manner, notice of such meeting and a copy of all materials provided to such
members. Exchanges of confidential and proprietary information between the
Company and the Observer shall be governed by the terms of the Corporate Non-
Disclosure Agreement No. 111241, dated February 11, 1998, executed by the
Company and Intel, and any Confidential Information Transmittal Records provided
in connection therewith.
The Company acknowledges that Intel will likely have, from time to time,
information that may be of interest to the Company ("Information") regarding a
wide variety of matters including, by way of example only, (1) Intel's
technologies, plans and services, and plans and strategies relating thereto, (2)
current and future investments Intel has made, may make, may
19
<PAGE>
consider or may become aware of with respect to other companies and other
technologies, products and services that may be competitive with the Company's,
and (3) developments with respect to the technologies, products and services,
and plans and strategies relating thereto, of other companies, including,
without limitation, companies that may be competitive with the Company. The
Company recognizes that a portion of such Information may be of interest to the
Company. Such Information may or may not be known by the Intel Observer. The
Company, as a material part of the consideration for this Agreement, agrees that
Intel and its Observer shall have no duty to disclose any Information to the
Company or permit the Company to participate in any projects or investments
based on any Information, or to otherwise take advantage of any opportunity that
may be of interest to the Company if it were aware of such Information, and
hereby waives, to the extent permitted by law, any claim based on the corporate
opportunity doctrine or otherwise that could limit Intel's ability to pursue
opportunities based on such Information or that would require Intel or the
Observer to disclose any such Information to the Company or offer any
opportunity relating thereto to the Company.
4.12 OBSERVER RIGHTS. Each of LVP and any other Purchaser of
---------------
1,000,000 or more shares of Series C Preferred Stock (a "Designating Entity")
shall be entitled to designate one (1) individual reasonably acceptable to the
Company (such designee, an "Observer") who shall be entitled to notice of, to
attend and to any documentation distributed to members before, during or after,
all meetings, and, as to LVP, including any action to be take by written consent
of the Board of Directors (the "Board") of the Company and all committees
thereof; provided however, that the Company reserves the right to withhold any
information and to exclude such representative from any meeting or portion
thereof (so long as the Company notifies the Observer of such withholding and of
any action taken by the Board as a result of such meeting) if access to such
information or attendance at such meeting would, (a) in the judgment of the
Company's outside counsel, adversely affect the attorney-client privilege
between the Company and its counsel or cause the Board to breach its fiduciary
duties, or (b) in the good faith determination of a majority of the Board,
result in a conflict of interest with the Company due to the Observer's and the
Designating Entity's relationships with their affiliates. The Company will use
its best efforts to ensure that any withholding of information or any
restriction on attendance is strictly limited only to the extent necessary set
forth in the preceding sentence. The Observer shall not be (a) permitted to vote
at any meeting of the Board, or (b) counted for purposes of determining whether
there is sufficient quorum for the Board to conduct its business. The parties
hereto hereby acknowledge and agree that notwithstanding contrary authority, if
any, the Observer shall owe no fiduciary or other duties to the stockholders of
the Company or otherwise have any directorial or other duties or liabilities to
the Company or its stockholders except as specifically set forth in this Section
4.12. A Designating Entity shall designate, and may replace, the Observer with
or without cause in its sole discretion by providing written notice to the
Company at least five (5) business days prior to any such action taking effect.
The Company acknowledges that LVP will likely have, from time to time,
information that may be of interest to the Company ("Information") regarding a
wide variety of matters including, by way of example only, (1) LVP's
technologies, plans and services, and plans and strategies relating thereto, (2)
current and future investments LVP has made, may make, may consider or may
become aware of with respect to other companies and other technologies, products
and services that may be competitive with the Company's, and (3) developments
with respect to the technologies, products and services, and plans and
strategies relating thereto, of
20
<PAGE>
other companies, including, without limitation, companies that may be
competitive with the Company. The Company recognizes that a portion of such
Information may be of interest to the Company. Such Information may or may not
be known by the LVP Observer. The Company, as a material part of the
consideration for this Agreement, agrees that LVP and its Observer shall have no
duty to disclose any Information to the Company or permit the Company to
participate in any projects or investments based on any Information, or to
otherwise take advantage of any opportunity that may be of interest to the
Company if it were aware of such Information, and hereby waives, to the extent
permitted by law, any claim based on the corporate opportunity doctrine or
otherwise that could limit LVP's ability to pursue opportunities based on such
Information or that would require LVP or the Observer to disclose any such
Information to the Company or offer any opportunity relating thereto to the
Company.
4.13 ADDITIONAL PARTIES. In the event that any purchaser of Series C
------------------
Preferred Stock listed on Exhibit A to the Purchase Agreement purchase the
---------
shares of Series C Preferred Stock set forth opposite such purchaser's name on
such Exhibit A after the Closing (as such term is defined in the Purchase
---------
Agreement), any such purchaser, upon execution of a counterpart signature page
hereto and without need for an amendment hereto, shall, as of the date of
execution of such counterpart signature page, be deemed an "Investor" under this
Agreement and
21
<PAGE>
shall be entitled to all rights, and be subject to all obligations, of an
Investor under this Agreement.
The parties have executed this Investors' Rights Agreement as of the date first
above written.
COMPANY INVESTORS:
VALICERT, INC.
------------------------------------
(Print Name)
By: By:
--------------------------- --------------------------------
Joseph (Yosi) Amram Name:
President & C.E.O. -------------------------------
(print)
Address: 3160 W. Bayshore Road
Palo Alto, CA 94303
Fax: (650) 849-9866
FOUNDERS:
- -------------------------------
Signature
- -------------------------------
Printed Name
22
<PAGE>
EXHIBIT A-1
-----------
PRIOR PURCHASERS
----------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. OF NO. OF
SERIES A-JUNIOR SERIES A-SENIOR NO. OF
NAME/ADDRESS/FAX NO. PREFERRED SHARES PREFERRED SHARES SERIES B SERIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Gaitonde Living Trust 3,450,000
28020 Audrey Smith Lane
Saratoga, CA 95070
Fax No. (408) ___________________
- -------------------------------------------------------------------------------------------------------
Girish Gaitonde 1,448,066(1)
28020 Audrey Smith Lane
Saratoga, CA 95070
Fax No. (408) ___________________
- -------------------------------------------------------------------------------------------------------
Martin Hellman 71,356(2)
730 Alvaado Court
Stanford, CA 94305
Fax No. (650) 857-0839
- -------------------------------------------------------------------------------------------------------
Paul Kocher 42,814(2)
P.O. Box 8243
Stanford, CA 94309
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
August Capital, L.P. 4,523,810
Attn: Mark Wilson
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
Fax No. (650) 234-9910
- -------------------------------------------------------------------------------------------------------
Intel Corporation 1,587,302
Attn: Treasurer
2200 Mission College Boulevard
Santa Clara, CA 95052
Fax No. (408) 765-6038
cc: Intel Corporation
Attn: General Counsel
2200 Mission College Boulevard
Santa Clara, CA 95052
Fax No. (408) 765-1859
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. OF NO. OF
SERIES A-JUNIOR SERIES A-SENIOR NO. OF
NAME/ADDRESS/FAX NO. PREFERRED SHARES PREFERRED SHARES SERIES B SERIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Venture Partners V, L.P. 714,286
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Fax No. (650) 854-3018
- -------------------------------------------------------------------------------------------------------
USVP V International, L.P. 39,683
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Fax No. (650) 854-3018
- -------------------------------------------------------------------------------------------------------
2180 Associates Fund V, L.P. 22,222
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Fax No. (650) 854-3018
- -------------------------------------------------------------------------------------------------------
USVP V Entrepreneur Partners, L.P. 17,460
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Fax No. (650) 854-3018
- -------------------------------------------------------------------------------------------------------
Draper Fisher Associates Fund IV, L.P. 442,857
Attn: Steve Jurvetson
400 Seaport Court, Suite 250
Redwood City, CA 94063
Fax No. (650) 599-9726
- -------------------------------------------------------------------------------------------------------
Draper Fisher Partners IV, LLC 33,333
Attn: Steve Jurvetson
400 Seaport Court, Suite 250
Redwood City, CA 94063
Fax No. (650) 599-9726
- -------------------------------------------------------------------------------------------------------
Draper Fisher Associates Fund IV, L.P. 769,964
Attn: Steve Jurvetson
400 Seaport Court, Suite 250
Redwood City, CA 94063
Fax No. (650) 599-9726
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. OF NO. OF
SERIES A-JUNIOR SERIES A-SENIOR NO. OF
NAME/ADDRESS/FAX NO. PREFERRED SHARES PREFERRED SHARES SERIES B SERIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Draper Fisher Partners IV, LLC 57,954
Attn: Steve Jurvetson
400 Seaport Court, Suite 250
Redwood City, CA 94063
Fax No. (650) 599-9726
- -------------------------------------------------------------------------------------------------------
Tolmi, L.L.C., A Delaware 150,794
Limited Liability Company
c/o John C. Kelly
7230 Sierra Vista Way
Reno, NV 89511
Fax No. (650) 324-1808
- -------------------------------------------------------------------------------------------------------
TZM Investment Fund, A California 7,936
General Partnership
c/o Timothy Tomlinson, Esq.
Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Fax No.: (650) 324-1808
- -------------------------------------------------------------------------------------------------------
Bessemer Venture Partners IV L.P. 396,825
Attn: Robert H. Buescher
1025 Old Country Road, Suite 205
Westbury, NY 11590
Fax No: (516) 997-2371
- -------------------------------------------------------------------------------------------------------
Bessec Ventures IV L.P. 396,825
Attn: Robert H. Buescher
1025 Old Country Road, Suite 205
Westbury, NY 11590
Fax No: (516) 997-2371
- -------------------------------------------------------------------------------------------------------
VLG Investments 1998 27,778
c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax No. (650) 233-8386
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. OF NO. OF
SERIES A-JUNIOR SERIES A-SENIOR NO. OF
NAME/ADDRESS/FAX NO. PREFERRED SHARES PREFERRED SHARES SERIES B SERIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James L. Brock 11,905
c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax No. (650) 233-8386
- -------------------------------------------------------------------------------------------------------
Mark Jung 39,683
600 Walea Drive
Menlo Park, CA 94025
Fax No. (650)
- -------------------------------------------------------------------------------------------------------
Edwin H. Taylor 20,635
c/o Blakely, Sokoloff, Taylor & Zafman
1279 Oakmead Parkway
Sunnyvale, CA 94086
Fax No. (650)
- -------------------------------------------------------------------------------------------------------
North American Trust 47,619
Company TTEE FBO
Edwin Taylor
225 Broadway, Suite 500
San Diego, CA 92101
Fax No. (650) ___________________
- -------------------------------------------------------------------------------------------------------
Stephen R. Bennion 79,365
702 Woburn Court
Mountain View, CA 94040
- -------------------------------------------------------------------------------------------------------
Jeepers Inc. 82,091
60 Hickory Drive
Waltham, MA 02154
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Scott Loftesness 82,091
P.O. Box 7130
Menlo Park, CA 94026-7130
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. OF NO. OF
SERIES A-JUNIOR SERIES A-SENIOR NO. OF
NAME/ADDRESS/FAX NO. PREFERRED SHARES PREFERRED SHARES SERIES B SERIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dr. Ajay Malpani 8,210
36 Rounds Road
Bloomington, IL 61704
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Nancy Schary, Trustee 32,847
Nancy H. Schary Trust
1140 N.W. Fernwood Circle
Corvallis, OR 97330
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Itzhak & Natalie Shasha 40,784
1201 N. Olive Avenue
West Palm Beach, FL 33401
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Itzhak & Natalie Shasha 16,319
1201 N. Olive Avenue
West Palm Beach, FL 33401
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Anthony Phillip Shaya 24,635
580 E. Long Lake Road
Bloomfield Hills, MI 48304
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Dennis D. Shaya 24,627
974 Greenwood Avenue, #4
Atlanta, GA 30306
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Greg Kent Shaya 24,639
1317 Minerva Road
Ann Arbor, MI 48104
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Shaun Michael Shaya 24,635
496 W. Lincoln
Birmingham, MI 48009
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. OF NO. OF
SERIES A-JUNIOR SERIES A-SENIOR NO. OF
NAME/ADDRESS/FAX NO. PREFERRED SHARES PREFERRED SHARES SERIES B SERIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inder Singh Sidhu 16,418
3058 Capewood Lane
San Jose, CA 95132
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Thanos Triant 82,091
2170 Stockbridge Avenue
Woodside, CA 94062
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
Comdisco 317,460
[ADDRESS]
Fax No. _________________________
- -------------------------------------------------------------------------------------------------------
TOTALS: 1,562,236 3,345,000 10,165,083
- -------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
- -----
(1) Represents: (a) 328,572 shares pursuant to a stock option granted under the
1996 Equity Incentive Plan (the "1996 Plan"); (b) 905,428 shares pursuant
to a stock option granted outside of the 1996 Plan; and (c) 214,066 shares
issuable pursuant to a warrant.
(2) Represents shares issuable pursuant to a warrant.
<PAGE>
EXHIBIT A-2
-----------
PURCHASERS
----------
FIRST CLOSING
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL CASH
NAME AND ADDRESS OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------------------- ---------------- --------------
<S> <C> <C>
Lucent Venture Partners 2,238,806 $ 4,500,000.06
Attn: Hassan Parsa
2460 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Thomson - CSF Ventures 1,990,049 3,999,998.50
Attn: Francoise Lohezic
56/58, rue de Ponthieu
75008 Paris
France
August Capital, L.P. 1,119,403 2,250,000.03
Attn: Mark Wilson
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
Financial Technology Ventures (Q), LP 964,300 1,938,243.00
Attn: Scott Wu
601 California St., 22nd Floor
San Francisco, CA 94108
The Productivity Fund IV, L.P. 723,881 1,455,000.81
Attn: Howard Smith
The Sears Tower, Suite 9500
233 South Wacker Drive
Chicago, IL 60606
Intel Corporation 497,513 1,000,001.13
Attn: Treasurer
2200 Mission College Boulevard
Santa Clara, CA 95052
cc: Intel Corporation
Attn: General Counsel
2200 Mission College Boulevard
Santa Clara, CA 95052
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL CASH
NAME AND ADDRESS OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------------------- ---------------- --------------
<S> <C> <C>
SMARTFUND SA 497,513 $ 1,000,001.13
Attn: Allan Green
Candel & Partners
4, Avenue Hoche
75008 Paris
France
Draper Fisher Associates Fund IV, L.P. 370,150 744,001.50
Attn: John Fisher
400 Seaport Court, Suite 250
Redwood City, CA 94063
Bessemer Venture Partners IV L.P. 298,508 600,001.08
Attn: David Cowan
535 Middlefield Road, Suite 245
Menlo Park, CA 94025
COMPAGNIE DE TAYNINH 248,757 500,001.57
Attn: Allan Green
Candel & Partners
4, Avenue Hoche
75008 Paris
France
Mitsui & Co., Ltd. 248,757 500,001.57
Attn: Tsuchiya Sosuke, General Manager, Solution
Business Division
2-1, OHTEMACHI 1-CHOME
CHIYODA-KU
TOKYO 100-0004
JAPAN
U.S. Venture Partners V, L.P. 223,881 450,000.81
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Bessec Ventures IV L.P. 199,005 400,000.05
Attn: David Cowan
535 Middlefield Road, Suite 245
Menlo Park, CA 94025
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL CASH
NAME AND ADDRESS OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------------------- ---------------- --------------
<S> <C> <C>
Financial Technology Ventures, LP 35,700 $ 71,757.00
Attn: Scott Wu
601 California St., 22nd Floor
San Francisco, CA 94108
Draper Fisher Partners IV, LLC 27,860 55,998.60
Attn: John Fisher
400 Seaport Court, Suite 250
Redwood City, CA 94063
The Productivity Fund IV Advisors Fund, L.P. 22,388 44,999.88
Attn: Howard Smith
The Sears Tower, Suite 9500
233 South Wacker Drive
Chicago, IL 60606
Edmund Jensen 12,438 25,000.38
1100 Union Street
San Francisco, CA 94109
USVP V International, L.P. 12,438 25,000.38
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
2180 Associates Fund V, L.P. 6,965 13,999.65
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
USVP V Entrepreneur Partners, L.P. 5,473 11,000.73
Attn: Magdalena Yesil
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
TOTALS 9,743,785 $19,585,007.86
</TABLE>
<PAGE>
EXHIBIT A-2
-----------
SCHEDULE OF PURCHASERS
----------------------
SECOND CLOSING
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL CASH
NAME AND ADDRESS OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------------------- ---------------- --------------
<S> <C> <C>
Frank E. and Peggy B. Wiley Trust 50,000 $ 100,500.00
U/A dated June 3, 1992
995 Roble Ridge
Palo Alto, CA 94306
CIBC WMC Inc. 995,025 2,000,000.25
BCE Place, P.O. Box 500
161 Bay Street, 8th Floor
Toronto, ON M5J 2S8
Innovacom 248,757 500,001.57
Attn: Aymerik Renard,
1000 Marina Boulevard
Suite 3000
Brisbane, CA 94005
Milind Joshi 5,000 10,050.00
4763 148th Avenue NE #P202
Bellevue, WA 98007
Rohit Wad 5,000 10,050.00
2900 1st Avenue Apt. S402
Seattle, WA 98121
Amit Dekate 5,000
9219 NE 121st Court 10,050.00
Kirkland, WA 98034
Korea Technology Banking Corporation 373,134 750,001.35
45-21 yuoido-dong
Youngdeungpo-Ku
Seoul 150-000
Korea
TOTALS 1,681,916 $3,380,653.17
</TABLE>
<PAGE>
EXHIBIT A-3
-----------
FOUNDERS
--------
- --------------------------------------------------------------------------
NAME/ADDRESS/FAX NO. NO. OF SHARES
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Srinivasan Krishnan 4,116,000(1)
c/o ValiCert, Inc.
3610 W. Bayshore Road
Palo Alto, CA 94303
Fax No. (650) 849-9866
- --------------------------------------------------------------------------
Joseph (Yosi) Amram 3,807,551(2)
c/o ValiCert, Inc.
3610 W. Bayshore Road
Palo Alto, CA 94303
Fax No. (650) 849-9866
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
TOTAL: 7,923,551
- --------------------------------------------------------------------------
NOTES:
- -----
(1) Reflects (a) 3,800,000 shares of Series A-Junior Preferred Stock and
(b) 316,000 shares of Common Stock issued upon exercise of a stock option.
(2) Includes: (a) 3,300,000 shares of Series A-Junior Preferred Stock;
(b) 79,365 shares of Series B Preferred Stock issuable under a warrant;
and (c) 428,186 shares of Common Stock issued upon exercise of a stock
option.
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of __________, 2000, is made by and
between ValiCert, Inc., a Delaware corporation (the "Company"), and
__________________(the "Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgments and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for
<PAGE>
itself maximum liability for expenses and damages in connection with claims
against such directors, officers and agents in connection with their service to
the Company and its subsidiaries, and has further concluded that the failure to
provide such contractual indemnification could result in great harm to the
Company and its subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which the
Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
-----------
(a) Agent. For the purposes of this Agreement, "agent" of the
-----
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include all
--------
out of pocket expenses costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided, however, that "expenses" shall not include any judgments, fines, ERISA
excise taxes or penalties, or amounts paid in settlement of a proceeding.
<PAGE>
(c) Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
-------------------
(a) Maintenance of D&O Insurance. The Company hereby covenants and
----------------------------
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
-------------------
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
---------------------------------------------------
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
------------------
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever
<PAGE>
actually and reasonably incurred by him in connection with the investigation,
defense or appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is
------------------
a party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
------------------------------------
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
Indemnitee under a valid and collectible insurance policy of D&O Insurance, or
under a valid and enforceable indemnity clause, by-law or agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise
<PAGE>
taxes and penalties, and amounts paid in settlement) incurred by him in the
investigation, defense, settlement or appeal of a proceeding, but not entitled,
however, to indemnification for all of the total amount hereof, the Company
shall nevertheless indemnify the Indemnitee for such total amount except as to
the portion hereof to which the Indemnitee is not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
---------------------------------
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense; or (C) the Company shall not, in fact, have employed counsel
to assume the defense of such proceeding, the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
<PAGE>
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
------------------------
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and advancement
---------------
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by this
-----------
Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in
any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its
stockholders) that such indemnification is improper, shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who
<PAGE>
shall execute all documents required and shall do all acts that may be necessary
to secure such rights and to enable the Company effectively to bring suit to
enforce such rights.
12. Survival of Rights.
------------------
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
---------------------------
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
------------
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
-----------------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Governing Law. This Agreement shall be governed exclusively by and
-------------
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
<PAGE>
18. Consent to Jurisdiction. The Company and the Indemnitee each hereby
-----------------------
consent to the jurisdiction of the courts of the State of Delaware with respect
to any action or proceeding which arises out of or relates to this Agreement.
[THIS SECTION INTENTIONALLY BLANK]
<PAGE>
The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
THE COMPANY:
VALICERT, INC.
By_________________________________
Its________________________________
Address: 1215 Terra Bella Avenue,
Mountain View, CA 94043
INDEMNITEE:
___________________________________
[NAME]
Address: ___________________________________
___________________________________
<PAGE>
EXHIBIT 10.2
ValiCert, Inc.
1996 EQUITY INCENTIVE PLAN
As Amended April 30, 1998
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the
--------------------------
total number of Shares reserved and available for grant and issuance pursuant to
this Plan will be 5,658,418 shares. Subject to Sections 2.2 and 18, Shares will
again be available for grant and issuance in connection with future Awards under
this Plan that: (a) are subject to issuance upon exercise of an Option but cease
to be subject to such Option for any reason other than exercise of such Option,
(b) are subject to an Award granted hereunder but are forfeited or are
repurchased by the Company as set forth herein, or (c) are subject to an Award
that otherwise terminates without Shares being issued. At all times the Company
will reserve and keep available a sufficient number of Shares as will be
required to satisfy the requirements of all outstanding Options granted under
this Plan and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the shareholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be paid in cash at Fair
Market Value of such fraction of a Share or will be rounded up to the nearest
whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
-----------
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants and advisors of the
Company or any Parent or Subsidiary of the Company; provided such consultants
--------
and advisors render bona fide services not in connection with the offer and sale
of securities in a capital-raising transaction. A person may be granted more
than one Award under this Plan.
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or the Board acting as the Committee. Subject to the general purposes,
terms and conditions of this Plan, and to the direction of the Board, the
Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
<PAGE>
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in this Plan, any Award, any Award Agreement, or
any Exercise Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the Committee
---------------------
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
5. OPTIONS. The Committee may grant Options to eligible persons and will
-------
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will
--------------------
be evidenced by an Award Agreement which will expressly identify the Option as
an ISO or an NQSO ("Stock Option Agreement"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the date
-------------
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable immediately (subject
---------------
to repurchase pursuant to Section 12 of this Plan) or may be exercisable within
the times or upon the events determined by the Committee as set forth in the
Stock Option Agreement governing such Option; provided, however, that no Option
-------- -------
will be exercisable after the expiration of ten (10) years from the date the
Option is granted; and provided further that no ISO granted to a person who
-------- -------
directly or by attribution owns more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of any Parent or
Subsidiary of the Company ("Ten Percent Shareholder") will be exercisable after
the expiration of five (5) years from the date the ISO is granted. The Committee
also may provide for the exercise of Options to become exercisable at one time
or from time to time, periodically or otherwise, in such number of Shares or
percentage of Shares as the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may not be less than
85% of the Fair Market Value of the Shares on the date of grant; provided that
(i) the Exercise Price of an ISO will not be less than 100% of the Fair Market
Value of the Shares on the date of grant and (ii) the Exercise Price of any
Option granted to a Ten Percent Shareholder will not be
2
<PAGE>
less than 110% of the Fair Market Value of the Shares on the date of grant.
Payment for the Shares purchased must be made in accordance with Section 8 of
this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to
------------------
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price, and any applicable taxes, for the
number of Shares being purchased.
5.6 Termination. Subject to earlier termination pursuant to
-----------
Subsection 18.1 and notwithstanding the exercise periods set forth in the Stock
Option Agreement, exercise of an Option will always be subject to the following:
(a) If the Participant is Terminated for any reason except
death, Disability or for Cause, then the Participant may
exercise such Participant's Options only to the extent that
such Options would have been exercisable upon the
Termination Date no later than three (3) months after the
Termination Date (or such shorter time period, not less than
thirty (30) days, as may be specified in the Stock Option
Agreement) or such longer time period not exceeding five (5)
years after the Termination Date as may be determined by the
Committee, with any exercise beyond three (3) months after
the Termination Date deemed to be an NQSO, but in any event,
no later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's
death or Disability (or the Participant dies within three
(3) months after a Termination other than because of
Participant's death or Disability or Cause), then
Participant's Options may be exercised only to the extent
that such Options would have been exercisable by Participant
on the Termination Date and must be exercised by Participant
(or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the
Termination Date (or such shorter time period, not less than
six (6) months, as may be specified in the Stock Option
Agreement) or such longer time period not exceeding five (5)
years after the Termination Date as may be determined by the
Committee, with any exercise beyond (a) three (3) months
after the Termination Date when the Termination is for any
reason other than the Participant's death or disability,
within the meaning of Section 22(e)(3) of the Code, or (b)
twelve (12) months after the Termination Date when the
Termination is for Participant's death or disability, within
the meaning of Section 22(e)(3) of the Code, deemed to be an
NQSO, but in any event no later than the expiration date of
the Options.
(c) If the Participant is terminated for Cause, then
Participant's options shall expire on such Participant's
Termination Date, or at such later time and on such
conditions as determined by the Committee.
5.7 Limitations on Exercise. The Committee may specify a reasonable
-----------------------
minimum number of shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISOs. The aggregate Fair Market Value (determined
-------------------
as of the date of grant) of Shares with respect to which ISOs are exercisable
for the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company or any Parent or
Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of
Shares on the date of grant with respect to which ISOs are exercisable for the
first time by a Participant during any calendar year exceeds $100,000, then the
Options for the first $100,000 worth of Shares to become exercisable in such
calendar year will be ISOs and the
3
<PAGE>
Options for the amount in excess of $100,000 that become exercisable in that
calendar year will be NQSOs. In the event that the Code or the regulations
promulgated thereunder are amended after the Effective Date (as defined in
Section 19 below) of this Plan to provide for a different limit on the Fair
Market Value of Shares permitted to be subject to ISOS, then such different
limit will be automatically incorporated herein and will apply to any Options
granted after the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify,
----------------------------------
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
- -------- -------
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in
-------------------
this Plan, no term of this Plan relating to ISOs will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
----------------
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the Purchase Price, the restrictions to which the Shares
will be subject, and all other terms and conditions of the Restricted Stock
Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
------------------------------
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along with
full payment for the Shares to the Company within thirty (30) days, then the
offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
--------------
Restricted Stock Award will be determined by the Committee and will be at least
85% of the Fair Market Value of the Shares on the date the Restricted Stock
Award is granted, except in the case of a sale to a Ten Percent Shareholder, in
which case the Purchase Price will be 100% of the Fair Market Value. Payment of
the Purchase Price may be made in accordance with Section 8 of this Plan.
6.3 Restrictions. Restricted Stock Awards may be subject to the
------------
restrictions set forth in Section 12 of this Plan or such other restrictions (if
any) as the Committee may impose.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
-----------------------
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based
4
<PAGE>
upon the achievement of the Company, Parent or Subsidiary and/or individual
performance factors or upon such other criteria as the Committee may determine;
provided, however, that performance-based bonuses shall be restricted to
individuals earning at least $60,000 per year and of adequate sophistication and
sufficiently empowered to achieve the performance goals.
7.2 Terms of Stock Bonuses. The Committee will determine the number
----------------------
of Shares to be awarded to the Participant and whether such Shares will be
Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of
performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee will determine: (a) the nature, length and starting date of any period
during which performance is to be measured (the "Performance Period") for each
Stock Bonus; (b) the performance goals and criteria to be used to measure the
performance, if any; (c) the number of Shares that may be awarded to the
Participant; and (d) the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares may be
fixed or may vary in accordance with such performance goals and criteria as may
be determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may be paid
---------------
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash,
whole Shares, including Restricted Stock, or a combination thereof, either in a
lump sum payment or in installments, all as the Committee will determine.
7.4 Termination During Performance Period. If a Participant is
-------------------------------------
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Stock Bonus only to the extent earned as of the date of Termination in
accordance with the Performance Stock Bonus Agreement, unless the Committee will
determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this Plan may
-------
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid
for within the meaning of SEC Rule 144 (and, if such shares
were purchased from the Company by use of a promissory note,
such note has been fully paid with respect to such shares);
or (2) were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing
interest at a rate sufficient to avoid imputation of income
under Sections 483 and 1274 of the Code; provided, however,
-------- -------
that Participants who are not employees or directors of the
Company will not be entitled to purchase Shares with a
promissory note unless the note is adequately secured by
collateral other than the Shares.
(d) by waiver of compensation due or accrued to the Participant
for services rendered;
(e) with respect only to purchases upon exercise of an Option,
and provided that a public market for the Company's stock
exists:
5
<PAGE>
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for
---------------
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. WITHHOLDING TAXES.
-----------------
9.1 Withholding Generally. Whenever Shares are to be issued in
---------------------
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee for such elections and be in writing in a form
acceptable to the Committee.
10. PRIVILEGES OF STOCK OWNERSHIP.
-----------------------------
10.1 Voting and Dividends. No Participant will have any of the
--------------------
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Unvested
Shares that are repurchased pursuant to Section 12.
10.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
6
<PAGE>
11. TRANSFERABILITY. Awards granted under this Plan, and any interest
---------------
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution or as consistent with the specific
Plan and Award Agreement provisions relating thereto. During the lifetime of the
Participant an Award will be exercisable only by the Participant, and any
elections with respect to an Award, may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement (a)
a right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, and/or (b) a
right to repurchase Shares held by a Participant following such Participant's
Termination at any time within ninety (90) days after the later of Participant's
Termination Date and the date Participant purchases Shares under the Plan for
cash and/or cancellation of purchase money indebtedness, at: (A) with respect to
Vested Shares, the Fair Market Value of such Shares on Participant's Termination
Date, provided, that such right of repurchase terminates when the Company's
--------
securities become publicly traded; or (B) with respect to Unvested Shares, the
Participant's Exercise Price or Purchase Price, as the case may be, provided,
--------
that to the extent the Participant is not an officer, director or consultant of
the Company, such right of repurchase at the Exercise Price or Purchase Price,
as the case may be, lapses at the rate of at least twenty percent (20%) per year
over five (5) years from: (i) the date of grant of the Option or (ii) in the
case of Restricted Stock, the date the Participant purchases the Shares.
13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Unvested Shares, the Committee may require the Participant to
deposit all certificates representing Shares, together with stock powers or
other instruments of transfer approved by the Committee, appropriately endorsed
in blank, with the Company or an agent designated by the Company to hold in
escrow until such restrictions have lapsed or terminated (provided, however,
that such Shares may be retained in escrow so long as such Shares secure any
debts to the Company), and the Committee may cause a legend or legends
referencing such restrictions to be placed on the certificates. Any Participant
who is permitted to execute a promissory note as partial or full consideration
for the purchase of Shares under this Plan will be required to pledge and
deposit with the Company all or part of the Shares so purchased as collateral to
secure the payment of Participant's obligation to the Company under the
promissory note; provided, however, that the Committee may require or accept
-------- -------
other or additional forms of collateral to secure the payment of such obligation
and, in any event, the Company will have full recourse against the Participant
under the promissory note notwithstanding any pledge of the Participant's Shares
or other collateral. In connection with any pledge of the Shares, Participant
will be required to execute and deliver a written pledge agreement in such form
as the Committee will from time to time approve. The Shares purchased with the
promissory note may be released from the pledge on a pro rata basis as the
promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
-----------------------------
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
----------------------------------------------
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable, and/or (b) compliance with any exemption
or completion of any registration or other qualification of such Shares under
any state or federal law or ruling of any governmental body that the Company
determines to be necessary or advisable. The Company will be
7
<PAGE>
under no obligation to register the Shares with the SEC or to effect compliance
with the exemption, registration, qualification or listing requirements of any
state securities laws, stock exchange or automated quotation system, and the
Company will have no liability for any inability or failure to do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
-----------------------
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. In the event
------------------------------------------------
of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the shareholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder which merges, or which owns or controls another
corporation which merges, with the Company in such merger) cease to own their
shares or other equity interests in the Company, or (d) the sale of
substantially all of the assets of the Company, any or all outstanding Awards
may be assumed, converted or replaced by the successor corporation (if any),
which assumption, conversion or replacement will be binding on all Participants.
In the alternative, the successor corporation may substitute equivalent Awards
or provide substantially similar consideration to Participants as was provided
to shareholders (after taking into account the existing provisions of the
Awards). The successor corporation may also issue, in place of outstanding
Shares of the Company held by the Participant, substantially similar shares or
other property subject to repurchase restrictions and other provisions no less
favorable to the Participant than those which applied to such outstanding Shares
immediately prior to such transaction described in this Subsection 18.1. In the
event such successor corporation (if any) refuses to assume or substitute
Awards, as provided above, pursuant to a transaction described in this
Subsection 18.1, then notwithstanding any other provision in this Plan to the
contrary, such Awards will expire on such transaction at such time and on such
conditions as the Board will determine.
18.2 Other Treatment of Awards. Subject to any greater rights
-------------------------
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation or sale of assets.
18.3 Assumption of Awards by the Company. The Company, from time to
-----------------------------------
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (a) granting an Award under this Plan in substitution of
such other company's award, or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
------
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date that it is adopted by the Board (the "Effective Date"). This Plan will
be approved by the shareholders of the Company (excluding Shares issued pursuant
to this Plan), consistent with applicable laws, within twelve (12) months before
or after the Effective Date. Upon the Effective Date, the Board may grant Awards
pursuant to this Plan; provided, however, that: (a) no Option may be exercised
-------- -------
prior to initial shareholder approval of this Plan; (b) no Option granted
pursuant to an increase in the number of Shares subject to this Plan approved by
the Board will be
8
<PAGE>
exercised prior to the time such increase has been approved by the shareholders
of the Company; and (c) in the event that shareholder approval of such increase
is not obtained within the time period provided herein, all Awards granted
hereunder will be canceled, any Shares issued pursuant to any Award will be
canceled and any purchase of Shares hereunder will be rescinded.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the Effective Date or, if
earlier, the date of shareholder approval. This Plan and all agreements
thereunder shall be governed by and construed in accordance with the laws of the
State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
--------------------------------
or amend this Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to this Plan;
provided, however, that the Board will not, without the approval of the
- -------- -------
shareholders of the Company, amend this Plan in any manner that requires such
shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration by the Participant of a common law fraud or
any unlawful use by the Participant of drugs or other controlled substances,
(ii) the Participant's commission of an act of personal dishonesty which
involves personal profit in connection with the Company or any other entity
having a business relationship with the Company, (iii) any material breach by
the Participant of any provision of any agreement or understanding between the
Company and the Participant regarding the terms of the Participant's service as
an employee, director, consultant, independent contractor or adviser to the
Company or a Parent or Subsidiary of the Company, including without limitation,
the willful and continued failure or refusal of the Participant to perform the
material duties required of such Participant as an employee, director,
consultant, independent contractor or adviser of the Company or a Parent or
Subsidiary of the Company, other than as a result of being Disabled, or a breach
of any applicable invention assignment and confidentiality agreement or similar
agreement between the Company and the Participant, (iv) Participant's disregard
of the policies of the Company so as to cause loss, damage or injury to the
property, reputation or employees of the Company or a Parent or Subsidiary of
the Company, or (v) any other misconduct by the Participant which is materially
injurious to the financial condition or business reputation of, or is otherwise
materially injurious to, the Company or a Parent or Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer
this Plan, or if no committee is appointed, the Board.
"Company" means ValiCert, Inc. or any successor corporation.
9
<PAGE>
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on
the last trading day prior to the date of determination as
reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, its closing price on the
last trading day prior to the date of determination on the
principal national securities exchange on which the Common
Stock is listed or admitted to trading as reported in The
---
Wall Street Journal;
-------------------
(c) if such Common Stock is publicly traded but is not quoted on
the Nasdaq National Market nor listed or admitted to trading
on a national securities exchange, the average of the
closing bid and asked prices on the last trading day prior
to the date of determination as reported by The Wall Street
---------------
Journal (or, if not so reported, as otherwise reported by
-------
any newspaper or other source as the Board may determine);
or
(d) if none of the foregoing is applicable, by the Committee in
good faith.
"Insider" means an officer or director of the Company or any
other person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
"Option" means an award of an option to purchase Shares pursuant
to Section 5.
"Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"Participant" means a person who receives an Award under this
Plan.
"Plan" means this ValiCert, Inc. 1996 Equity Incentive Plan, as
amended from time to time.
"Purchase Price" means the price at which a Participant may
purchase Restricted Stock.
"Restricted Stock Award" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
10
<PAGE>
"Stock Bonus" means an award of Shares, or cash in lieu of
Shares, pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant or advisor to the
Company or a Parent or Subsidiary of the Company. An employee will not be deemed
to have ceased to provide services in the case of (i) sick leave, (ii) military
leave, or (iii) any other leave of absence approved by the Committee, provided
that such leave is for a period of not more than 90 days unless reemployment
upon the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to formal policy adopted from time to time by
the Company and issued and promulgated to employees in writing. In the case of
any employee on an approved leave of absence, the Committee may make such
provisions respecting suspension of vesting of the Award while on leave from the
employ of the Company or a Subsidiary as it may deem appropriate, except that in
no event may an Option be exercised after the expiration of the term set forth
in the Stock Option Agreement. The Committee will have sole discretion to
determine whether a Participant has ceased to provide services and the effective
date on which the Participant ceased to provide services (the "Termination
Date").
"Unvested Shares " means "Unvested Shares" as defined in the
Award Agreement.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
11
<PAGE>
EXHIBIT 10.3
VALICERT, INC.
1998 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1998 Stock Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Change of Control" means (i) the acquisition of the Company by
-----------------
another person or entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation, but excluding any merger effected exclusively for the purpose of
changing the domicile of the Company); or (ii) a sale of all or substantially
all of the assets of the Company, unless in the case of either (i) or (ii) the
Company's shareholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale (by virtue
of securities issued as consideration for the Company's acquisition or sale or
otherwise) hold at least 50% of the voting power of the surviving or acquiring
entity in approximately the same relative percentages after such acquisition or
sale as before such acquisition or sale.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) or (b) of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means ValiCert, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(i) "Continuous Status as an Employee or Consultant" means the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
<PAGE>
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
transfers between locations of the Company or between the Company, its
Subsidiaries or their respective successors. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute an interruption of Continuous Status as an Employee or
Consultant.
(j) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a director shall not be sufficient to constitute "employment"
of such director by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock, for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(o) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(p) "Option Agreement" means a written agreement between an Optionee
----------------
and the Company reflecting the terms of an Option granted under the Plan and
includes any documents attached to such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(q) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(r) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(s) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(t) "Plan" means this 1998 Stock Plan.
----
(u) "Reporting Person" means an officer, director, or greater than 10%
----------------
stockholder of the Company within the meaning of Rule 16a-2 under the Exchange
Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange
Act.
(v) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 10.
(w) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between a holder of a Stock Purchase Right and the Company reflecting the terms
of a Stock Purchase Right granted under the Plan and includes any documents
attached to such agreement.
(x) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(y) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(z) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(aa) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 10 below.
(bb) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 4,000,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. In
addition,
-3-
<PAGE>
any Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares repurchased by the Company pursuant to any
repurchase right which the Company may have shall not be available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a Committee appointed by the Board.
(b) Plan Procedure After the Date, if any, Upon Which the Company
-------------------------------------------------------------
Becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule
------------------------------
16b-3, grants under the Plan may be made by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) Administration With Respect to Reporting Persons. With
------------------------------------------------
respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a Committee designated by the Board to make grants to Reporting Persons
under the Plan, which Committee shall be constituted in such a manner as to
permit grants under the Plan to comply with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
make grants to Reporting Persons under the Plan, all to the extent permitted by
Rule 16b-3.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options or Stock Purchase Rights to
- ---------
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of Incentive Stock Option plans, if
any, of applicable corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
---------------
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
-4-
<PAGE>
(c) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights or any combination thereof may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights;
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
holders of Options or Stock Purchase Rights.
5. Eligibility
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted
-5-
<PAGE>
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he or she is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Type of Option. Each Option shall be designated in the Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon the holder of any Option or Stock
Purchase Right any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way with
such holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than 10% of the
total combined voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
-6-
<PAGE>
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender or such other period as may be
required to avoid a charge to the Company's earnings, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator and reflected in the Option Agreement, which
may include vesting requirements and/or performance criteria with respect to the
Company and/or the Optionee; provided, however, that such Option shall become
exercisable at the rate of at least 20% per year over five years from the date
the Option is granted. In the event that any of the Shares issued upon exercise
of an Option should be subject to a right of repurchase in the Company's favor,
such repurchase right shall lapse at the rate of at least 20% per year over five
years from the date the Option is granted. Notwithstanding the above, in the
case of an Option granted to an officer, director or Consultant of the Company
or any Parent or Subsidiary of the Company, the Option may become fully
exercisable, and a repurchase right, if any, in favor of the Company shall
lapse, at any time or during any period established by the Administrator.
-7-
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 9(c) below, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three months (or such other period of time not less than 30 days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
the Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee, or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), such Optionee may, but only within twelve months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of
-8-
<PAGE>
total and permanent disability (as set forth in Section 22(e)(3) of the Code),
such Optionee may, but only within six months from the date of such termination
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), exercise the Option to the extent otherwise
entitled to exercise it at the date of such termination. However, to the extent
that such Optionee fails to exercise an Option which is an Incentive Stock
Option (within the meaning of Section 422 of the Code) within three months of
the date of such termination, the Option will not qualify for Incentive Stock
Option treatment under the Code. To the extent that the Optionee was not
entitled to exercise the Option at the date of termination, or if the Optionee
does not exercise such Option to the extent so entitled within six months from
the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee during
-----------------
the period of Continuous Status as an Employee or Consultant since the date of
grant of the Option, or within 30 days following termination of the Optionee's
Continuous Status as an Employee or Consultant, the Option may be exercised, at
any time within six months following the date of death (but in no event later
than the expiration date of the term of such Option as set forth in the Option
Agreement), by such Optionee's estate or by a person who acquired the rights to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of death or, if earlier, the date
of termination of the Optionee's Continuous Status as an Employee or Consultant.
To the extent that the Optionee was not entitled to exercise the Option at the
date of death or termination, as the case may be, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall comply with
----------
Rule 16b-3 and shall contain such additional conditions or restrictions as may
be required thereunder to qualify for the maximum exemption for Plan
transactions.
10. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer), and the time within which such person must accept such
offer, which shall in no event exceed 30 days from the date upon which the
Administrator made the determination to grant the Stock Purchase Right. The
offer shall be accepted by execution of a Restricted Stock Purchase Agreement in
the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company
-9-
<PAGE>
for any reason (including death or disability). The purchase price for Shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original purchase price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option shall
lapse at such rate as the Administrator may determine; provided, however, that
with respect to an Optionee who is not an officer, director or Consultant of the
Company or of any Parent or Subsidiary of the Company, it shall lapse at a
minimum rate of 20% per year.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash or check payment, (b) out of
the Optionee's current compensation, (c) if permitted by the Administrator, in
its discretion, by surrendering to the Company Shares that (i) in the case of
Shares previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (ii) have a fair market value
on the date of surrender equal to or less than the Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a Fair Market Value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
--------
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
-10-
<PAGE>
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets.
------------------------
(i) Assumption of Options and Stock Purchase Rights. In the
-----------------------------------------------
event of a proposed sale of all or substantially all of the Company's assets or
a merger of the Company with or into another corporation where the successor
corporation issues its securities to the Company's stockholders, each
outstanding Option or Stock Purchase Right shall be assumed or an equivalent
option or right shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the successor corporation
does not agree to
-11-
<PAGE>
assume the Option or Stock Purchase Right or to substitute an equivalent option
or right, in which case such Option or Stock Purchase Right shall terminate upon
the consummation of the merger or sale of assets. For purposes of this Section
12(c), an Option or a Stock Purchase Right shall be considered assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
such merger or sale of assets, each holder of an Option or a Stock Purchase
Right would be entitled to receive upon exercise of the Option or Stock Purchase
Right the same number and kind of shares of stock or the same amount of
property, cash or securities as such holder would have been entitled to receive
upon the occurrence of such transaction if the holder had been, immediately
prior to such transaction, the holder of the number of Shares of Common Stock
covered by the Option or the Stock Purchase Right at such time (after giving
effect to any adjustments in the number of Shares covered by the Option or Stock
Purchase Right as provided for in this Section 12).
(ii) Acceleration of Vesting. The Administrator shall have the
-----------------------
right to provide for the acceleration of vesting of Option and Purchase Rights
upon a Change of Control and to determine the terms of such acceleration, if
any.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or the holder of Stock Purchase Rights only by the Optionee or the
holder of Stock Purchase Rights.
14. Time of Granting Options and Stock Purchase Rights. The date of
--------------------------------------------------
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 or with Section 422
of the Code (or any other applicable law or
-12-
<PAGE>
regulation, including the requirements of any Stock Exchange), the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. No amendment or termination of
----------------------------------
the Plan shall adversely affect Options already granted, unless mutually agreed
otherwise between the Optionee and the Board, which agreement must be in writing
and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
19. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve months before or after
the date the Plan is adopted. Such stockholder approval shall be obtained in the
degree and manner required under applicable state and federal law and the rules
of any Stock Exchange upon which the Common Stock is listed. All Options and
Stock Purchase Rights issued under the Plan shall become void in the event such
approval is not obtained.
20. Information and Documents to Optionees and Purchasers. The Company
-----------------------------------------------------
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the
-13-
<PAGE>
Company assure their access to equivalent information. In addition, at the time
of issuance of any securities under the Plan, the Company shall provide to the
Optionee or the purchaser a copy of the Plan and any agreement(s) pursuant to
which securities granted under the Plan are issued.
-14-
<PAGE>
EXHIBIT 10.4
RECEIPT.COM, INC.
1996 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1996 Stock Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of Directors
---------
in accordance with Section 4(a) of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Receipt.com, Inc., a California corporation.
-------
(g) "Consultant" means any person, including an advisor, who is engaged
----------
by the Company or any Parent or Subsidiary to render services and is compensated
for such services, and any director of the Company whether compensated for such
services or not.
(h) "Continuous Status as an Employee or Consultant" means the absence
----------------------------------------------
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other
leave of absence approved by the Administrator, provided that such leave is for
a period of not more than ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute an Interruption of Continuous Status as an
Employee or Consultant.
(i) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment
1
<PAGE>
determined based upon such minimum number of hours or periods worked as shall be
determined by the Administrator in its discretion, subject to any requirements
of the Code. The payment by the Company of a director's fee to a Director shall
not be sufficient to constitute "employment" of such Director by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the fair market value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system including without limitation the National Market of
the National Association of Securities Dealers, Inc. Automated Quotation
("Nasdaq") System, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported), as quoted on such
system or exchange, or the exchange with the greatest volume of trading in
Common Stock for the last market trading day prior to the time of determination,
as reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not on
the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(m) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option, as designated in the applicable written option
agreement.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(p) "Optionee" means an Employee or Consultant who receives an Option or
--------
a Stock Purchase Right.
(q) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(r) "Plan" means this 1996 Stock Plan.
----
2
<PAGE>
(s) "Reporting Person" means an officer, director, or greater than ten
----------------
percent shareholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(t) "Restricted Stock" means shares of Common Stock acquired pursuant to
----------------
a grant of a Stock Purchase Right under Section 10 below.
(u) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as
----------
the same may be amended from time to time, or any successor provision.
(v) "Share" means a share of the Common Stock, as adjusted in accordance
-----
with Section 12 of the Plan.
(w) "Stock Exchange" means any stock exchange or consolidated stock price
--------------
reporting system on which prices for the Common Stock are quoted at any given
time.
(x) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 10 below.
(y) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the
-------------------------
Plan, the maximum aggregate number of Shares that may be optioned and sold under
the Plan is 1,250,000 shares of Common Stock. The Shares may be authorized, but
unissued, or reacquired Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares that were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan. In addition,
any Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares repurchased by the Company pursuant to any
repurchase right which the Company may have shall not be available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a committee appointed by the Board.
(b) Plan Procedure After the Date, if any, Upon Which the Company
---------------------------------------------------------------------
Becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
grants under the Plan may be made by different bodies with respect to directors,
non-director officers and Employees or Consultants who are not Reporting
Persons.
3
<PAGE>
(ii) Administration With Respect to Reporting Persons. With respect
------------------------------------------------
to grants of Options or Stock Purchase Rights to Employees who are Reporting
Persons, such grants shall be made by (A) the Board if the Board may make grants
to Reporting Persons under the Plan in compliance with Rule 16b-3, or (B) a
committee designated by the Board to make grants to Reporting Persons under the
Plan, which committee shall be constituted in such a manner as to permit grants
under the Plan to comply with Rule 16b-3. Once appointed, such committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the committee and thereafter directly make grants to
Reporting Persons under the Plan, all to the extent permitted by Rule 16b-3.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With Consultants who are not Reporting Persons, the Plan shall be
- ---------
administered by (A) the Board or (B) a committee designated by the Board, which
committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of California corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
---------------
committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees who whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder;
4
<PAGE>
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights;
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in or in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
holders of Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock Purchase
--------------------
Rights may be granted to Employees and Consultants. Incentive Stock Options may
be granted only to Employees. An Employee or Consultant who has been granted an
Option Stock Purchase Right may, if he or she is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with such Optionee's right or the Company's right
to terminate his or her employment or consulting relationship at any time, with
or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
------------
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as
5
<PAGE>
described in Section 19 of the Plan. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in the
--------------
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the written option agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as determined by the Board and set
forth in the applicable agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant of such
Option, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
(B) granted to any person, the per Share exercise price shall
be no less than 85% of the Fair Market Value per Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the
6
<PAGE>
Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, and reflected in the written option
agreement, which may include vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided that such Option shall
become exercisable at the rate of at least twenty percent (20%) per year over
five (5) years from the date the Option is granted. In the event that any of the
Shares issued upon exercise of an Option should be subject to a right of
repurchase in the Company's favor, such repurchase right shall lapse at the rate
of at least twenty percent (20%) per year over five (5) years from the date the
Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such
7
<PAGE>
other period of time not less than thirty (30) days as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option and not exceeding three (3)
months) after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
---
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within six
months (6) from the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee during
-----------------
the period of Continuous Status as an Employee or Consultant since the date of
grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of Optionee's Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
8
<PAGE>
(e) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the price shall not be less than one hundred percent (100%) of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
----------------
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, but at a minimum of 20% per year.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date of the Stock Purchase Right is exercised, except as provided in Section
12 of the Plan.
9
<PAGE>
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or less than Optionee's marginal tax rate times
the ordinary income recognized, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
--------
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(c) all elections shall be subject to the consent or disapproval of the
Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or
10
<PAGE>
expiration of an Option or Stock Purchase Right, as well as the price per share
of Common Stock covered by each such outstanding Option or Stock Purchase Right,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination, recapitalization or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale of all
------------------------
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option or Stock Purchase Right shall terminate upon the consummation of the
merger or sale of assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or Stock Purchase Rights Holder only by the Optionee or Stock
Purchase Rights Holder.
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided
however that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each
11
<PAGE>
Employee or Consultant to whom an Option or Stock Purchase Right is so granted
within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 or with Section 422
of the Code (or any other applicable law or regulation, including the
requirements of any Stock Exchange), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an Option,
the Company may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
12
<PAGE>
20. Information and Documents to Optionees and Purchasers. The Company
-----------------------------------------------------
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan, the Company
shall provide to the Optionee or the Purchaser a copy of the Plan and a copy of
the agreement(s) pursuant to which securities under the Plan are issued.
13
<PAGE>
EXHIBIT 10.6
VANNI BUSINESS PARK INDUSTRIAL LEASE
------------------------------------
ARTICLE I
---------
PARTIES
-------
This Lease, dated, for reference purposes only, March 6, 2000, is made by
and between the Vanni Business Park, LLC, a Delaware limited liability company
("Lessor"), and Valicert, Inc., a Delaware corporation ("Lessee").
ARTICLE II
----------
PREMISES
--------
Section 2.01. Premises. Lessor hereby leases to Lessee and Lessee leases
------------- --------
from Lessor for the term, at the rental, and upon all of the terms and
conditions set forth herein, the premises (the "Premises") situated in the City
of Mountain View, County of Santa Clara, State of California, commonly known as
Building A of Vanni Business Park (the "Business Park"), 339 North Bernardo
Avenue, Mountain View, California 94043, and more particularly described on the
site plan attached hereto as Exhibit "A" and incorporated herein by this
-----------
reference. The Premises consist only of the building identified on such site
plan as the "Premises." The Premises are deemed for purposes of this Lease to
contain 48,384 square feet of floor space. In the absence of a condemnation of
a portion of the Premises that reduces the size of the Premises, or Lessee's
leasing of additional space within the Business Park which increases the size of
the Premises, no remeasurement of the square footage of the Premises by either
party will result in any increase or decrease in rent or any other number in
this Lease which is a function of the square footage of the Premises.
Section 2.02. Business Park. The Premises comprises one of the six
------------- -------------
buildings situated in the Business Park as of the date of this Lease. The
Business Park is shown on the site plan attached hereto as Exhibit "A". All
-----------
areas outside the buildings within the Business Park are herein called the
"Common Areas." Lessee shall be entitled to park in its prorata share of
parking spaces within the parking areas provided from time to time in the Common
Areas; provided that, in all events Lessee shall be entitled to park in no less
than 3.7 parking spaces per 1,000 square feet of floor space within the
Premises. Lessee shall also be entitled to use such exercise facilities as may
exist thereon from time to time, on a nonexclusive basis with other tenants of
the Business Park and their respective employees and invitees. Lessee
acknowledges that there are no parking spaces specifically assigned or
designated for the exclusive use of Lessee. Lessor reserves the right to
designate for each tenant of the Business Park a pro rata share of parking
within the Business Park, in which event Lessee shall thereafter cause its
employees, agents, contractors, and other invitees to park only in the spaces so
designated for Lessee's parking and shall not cause or permit such entities to
park in other areas of the Business Park. In the event Lessor designates
specific parking areas for
<PAGE>
each tenant of the Business Park, the location and size of the parking area
designated for Lessee shall be subject to Lessee's approval, which approval
shall not unreasonably be withheld or delayed.
ARTICLE III
-----------
TERM
----
Section 3.01. Term. The term of this lease shall be for seven (7) years,
------------- ----
commencing on April 15, 2000 ("Commencement Date"), and ending on April 14,
2007.
Section 3.02. Early Possession. If Lessee occupies the Premises prior to
------------- ----------------
the Commencement Date, such occupancy shall be subject to all provisions hereof,
and Lessee shall pay base rent (at the rate payable for the first month of the
term), all triple net expenses, and all other expenses under this Lease for such
period.
Section 3.03. Delivery of Possession. Lessee acknowledges that the
------------- ----------------------
Premises are currently leased to another tenant. Lessor has advised Lessee that
the term of said tenant's lease expires on February 29, 2000. Lessor shall
deliver possession of the Premises to Lessee on April 15, 2000. If Lessor for
any reason whatsoever does not deliver possession of the Premises to Lessee on
April 15, 2000, (i) this Lease shall not be void or voidable nor shall Lessor be
liable to Lessee for any loss or damage resulting therefrom, (ii) Lessee agrees
to take possession of the Premises when Lessor is able to deliver possession
thereof, and (iii) until Lessor so delivers possession of the Premises to
Lessee, Lessee shall not be obligated to pay rent or other charges under this
Lease, or to perform its other obligations under this Lease, except that Lessee
shall deposit the first month's rent upon execution of this Lease, and (iv) the
scheduled Commencement Date (i.e., April 15, 2000) and ending date (i.e. April
14, 2007) of the lease term set forth in Section 3.01 shall be extended by the
period of time between April 15, 2000 and the date on which Lessor delivers
possession of the Premises to Lessee. Lessor may, but is not obligated to,
deliver to Lessee upon or after the Commencement Date a letter specifying the
Commencement Date and the end of the seven year term; upon written request by
Lessor, Lessee shall acknowledge such dates by signing a copy of such letter and
returning the same to Lessor within ten (10) days after receipt thereof from
Lessor. Notwithstanding the foregoing, in the event Lessor is unable to deliver
possession of the Premises by July 15, 2000, then Lessee, at its sole option,
shall be entitled to terminate this Lease. Any such termination shall be
effectuated by written notice to Lessor within five (5) days after the end of
such ninety (90) day period. Time is of the essence with respect to the time of
exercise of any such right of termination. Upon such termination, neither party
shall have any further obligation to the other under this Lease, provided that
Lessor shall return to Lessee any sums previously deposited by Lessee with
Lessor hereunder to the extent required to do so by law and this Lease.
ARTICLE IV
----------
<PAGE>
RENT: SPECIAL NET LEASE
------------------------
Section 4.01. Base Rent. Lessee shall pay to Lessor base rent for the
------------- ---------
Premises in advance on the first day of each month based on the following
schedule of rents:
<TABLE>
<CAPTION>
Rent Per Square Monthly
Months Square Foot Footage Base Rent
- ---------- --------------- ---------------- ---------------
<S> <C> <C> <C>
01-12 $4.00 "NNN" 48,384 sq. ft. $193,536.00
13-24 $4.15 "NNN" 48,384 sq. ft. $200,793.60
25-36 $4.30 "NNN" 48,384 sq. ft. $208,051.20
37-48 $4.45 "NNN" 48,384 sq. ft. $215,308.80
49-60 $4.60 "NNN" 48,384 sq. ft. $222,566.40
61-72 $4.75 "NNN" 48,384 sq. ft. $229,824.00
73-84 $4.90 "NNN" 48,384 sq. ft. $237,081.60
</TABLE>
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment. Rent shall be payable
in lawful money of the United States, without prior notice or demand, to Lessor
at the address stated herein or to such other persons or at such other places as
Lessor may designate in writing. Upon execution of this Lease, Lessee shall pay
the sum of $193,536 as and for the first month's rent.
Section 4.02. Special Net Lease. This Lease is what is commonly called a
------------- -----------------
"Net, Net, Net Lease", it is being understood that the Lessor shall receive the
rent set forth in Section 4.01 free and clear of any and all impositions, taxes,
liens, charges or expenses of any nature relating to the Premises except as
otherwise provided in this Lease. In addition to the rent reserved by Section
4.01., Lessee shall pay to the parties respectively entitled thereto all
insurance premiums, taxes, assessments, operating charges, management fees,
maintenance charges, and any other charges, costs and expenses which arise or
may be contemplated under any provisions of this Lease for the entire Premises
during the term hereof. All of such charges, costs and expenses shall
constitute additional rent, and upon the failure of Lessee to pay any of such
costs, charges or expenses, Lessor shall have the same rights and remedies as
otherwise provided in this Lease for the failure of Lessee to pay rent. It is
the intention of the parties hereto that this Lease shall not be terminable for
any reason by Lessee except as set forth in Section 3.01, and that Lessee shall
in no event be entitled to any abatement of or reduction in rent payable under
this Lease, except as herein expressly provided. Any present or future law to
the contrary shall not alter this agreement of the parties.
ARTICLE V
---------
SECURITY DEPOSIT
----------------
<PAGE>
Section 5.01. Cash Security Deposit. Lessee shall deposit with Lessor,
------------- ---------------------
upon execution of this Lease, as a security deposit for Lessee's faithful
performance of Lessee's obligations hereunder, cash in the amount of Two Hundred
Thousand Dollars ($200,000). If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may, without waiving or releasing Lessee from any obligation under this
Lease, and without waiving Lessor's right to treat such failure as a default
hereof, use, apply, or retain all or any portion of said cash deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said cash deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount hereinabove
stated and Lessee's failure to do so shall be a material breach of this Lease.
Said cash deposit, less sums which Lessor is entitled to deduct therefrom
pursuant to this paragraph, shall be returned to Lessee (or, at Lessee's option,
to the last assignee, if any, of Lessee's interest hereunder), without interest,
at the expiration of the term hereof and within twenty one (21) days after
Lessee has vacated the Premises. No trust relationship is created herein
between Lessor and Lessee with respect to said security deposit, and Lessor may
commingle it, use it in ordinary business, transfer or assign it, or use it in
any combination of those ways. In the event Lessor transfers its interest in
this Lease, Lessor shall transfer said deposit to Lessor's successor in
interest, whereupon Lessor shall no longer have any liability for the return of
such deposit or the accounting therefor.
Section 5.02. Letter of Credit. Lessee shall also deposit with Lessor,
------------- ----------------
upon execution of this Lease, as a security deposit for Lessee's faithful
performance of Lessee's obligations an unconditional irrevocable standby letter
of credit (the "Letter of Credit"). The Letter of Credit shall be in the amount
of One Million Dollars ($1,000,000), subject to later reduction as set forth in
this Article V. The Letter of Credit shall be in form reasonably satisfactory
to Lessor. In all events, such form shall provide that Lessor may draw upon the
Letter of Credit solely upon making demand to the issuing bank for the amount
specified by Lessor in its demand, and by presenting evidence to the issuing
bank of the identity of Lessor. Lessor shall not be required to satisfy any
conditions in order to draw upon the Letter of Credit, it being understood that
the Letter of Credit shall be unconditional and irrevocable. However, Lessor
shall have access to the funds represented by the Letter of Credit only for the
purposes and under the conditions set forth herein, and shall not make any such
demand for a draw unless Lessor is entitled under this Article V to draw upon
the Letter of Credit. Lessee shall cause the Letter of Credit to be renewed on
an annual basis and shall renew the same at least thirty (30) days prior to the
scheduled maturity thereof each year (and deliver evidence thereof to Lessor
promptly after such renewal). The Letter of Credit shall contain language
requiring the issuer to deliver written notice (by certified mail, return
receipt requested) to Lessor which notice meets the notice requirements of this
Lease for notice from Lessee to Lessor in the event the Letter of Credit is not
renewed by Lessee for at least a one year period at least thirty (30) days prior
to the scheduled maturity thereof each year. In the event Lessee fails
<PAGE>
timely to so renew the Letter of Credit, Lessor shall be entitled to draw the
full amount of the Letter of Credit before expiration thereof, whereupon Lessor
shall hold the same as a cash security deposit together with all other cash held
by Lessor as a security deposit pursuant to this Article V; provided that, if
Lessee thereafter obtains a new letter of credit satisfying the requirements of
this paragraph, such new letter of credit shall be deemed the Letter of Credit
hereunder, and promptly after such new Letter of Credit is issued to Lessor and
Lessor is notified thereof, Lessor shall return to Lessee all but Two Hundred
Thousand Dollars ($200,000) of the cash security deposit (which Two Hundred
Thousand Dollars ($200,000) shall continue in place as the cash portion of the
security deposit as specified in the first sentence of this Article V above).
The preceding sentence shall not be deemed a limitation of Lessor's remedies for
any such failure by Lessee to observe its obligations under this paragraph.
Lessee shall cause the Letter of Credit, as the same may be renewed from time to
time, to remain in effect until the later of thirty (30) days after the
expiration of the term, or thirty (30) days after Lessee has vacated the
Premises. In the event Lessee fails to cause the Letter of Credit to remain in
effect for such thirty (30) day period following expiration of the term or
Lessee's vacation of the Premises, whichever later occurs, Lessor shall be
entitled to draw the full amount of the Letter of Credit before expiration
thereof without any obligation to give Lessee notice thereof, whereupon Lessor
shall hold the same as a cash security deposit together with all other cash held
by Lessor as a security deposit pursuant to this Article V. If Lessee fails to
pay as and when due Base Rent or any other sums payable by Lessee hereunder or
otherwise fails to perform any other obligation of Lessee under this Lease as
and when obligated to perform the same, Lessor may draw from the Letter of
Credit and use, apply or retain the proceeds therefrom to the extent (and only
to the extent) applied (i) to the payment of such sum which has not been paid,
or (ii) to compensate Lessor for the payment of any other sum which Lessor
incurs or becomes obligated to spend as a result of Lessee's failure to so
perform its obligations and/or Lessor's cure of such failure by Lessee, or (iii)
to compensate Lessor for any expenditures, loss or damage which Lessor may
suffer thereby. The intent of the preceding sentence is to limit the amount of
draws by Lessor against the Letter of Credit to sums actually applied pursuant
to clauses (i) through (iii)of the preceding sentence. Lessor may draw and use,
apply or retain such amounts without prejudice to any other remedy Lessor may
have by reason of Lessee's failure to perform its obligations hereunder. If
Lessor so draws all or any portion of the Letter of Credit, Lessee shall, within
twenty (20) days after demand in writing therefor, obtain and deposit with
Lessor a new letter of credit on the terms specified above applicable to the
Letter of Credit but only in the amount of the amount so drawn, and thereafter
such new letter of credit together with the remaining undrawn balance of any one
or more prior letters of credit constituting the Letter of Credit shall
collectively herein be deemed the "Letter of Credit." Lessor shall not be
required to keep any amounts drawn from the Letter of Credit separate from its
general funds, and shall not be deemed a trustee with respect to such amounts.
In the event Lessor transfers its interest in this Lease, Lessee at Lessor's
request shall cause a new Letter of Credit to be issued to Lessor's successor in
interest in replacement of the Letter of Credit issued to Lessor, whereupon
Lessor shall no longer have any liability for the accounting therefor. At such
time as Lessee demonstrates to Lessor's reasonable satisfaction that its
Tangible Net Worth (as defined below) exceeds
<PAGE>
Twenty Million Dollars ($20,000,000), and Lessee deposits additional cash with
Lessor such that the cash portion of the security deposit referenced in Section
5.01 above is increased to Two Hundred Thirty Seven Thousand Eighty One Dollars
and Sixty Cents ($237,081.60), and provided no Event of Default has occurred and
is continuing, then from and after such point in time and for so long as
Lessee's Tangible Net Worth continues to exceed Twenty Million Dollars
($20,000,000) Lessee shall have no obligation to deposit the Letter of Credit
with Lessor and shall be entitled to terminate or otherwise permit the then
existing Letter of Credit to lapse or expire. "Tangible Net Worth" shall mean
Lessee's net worth, determined and certified as true and accurate by a
California licensed certified public accountant, in accordance with GAAP,
excluding good will and other intangible assets. Notwithstanding the preceding
sentence, in the event Lessee sells company stock in an initial public offering
and in conjunction therewith financial statements of Lessee are prepared and
submitted to the U.S. Securities and Exchange Commission ("SEC"), then the
requirement in the preceding sentence that the Tangible Net Worth of Lessee be
certified as true and accurate by a California licensed certified public
accountant shall be deemed replaced by a requirement that such determination be
certified by both the President and Chief Financial Officer of Lessee based on
the financial statements so submitted to the SEC provided that such statements
clearly and unambiguously segregate from the other assets of Lessee all goodwill
and other intangible assets and are prepared in accordance with GAAP. From and
after such time, if ever, that Lessee is first permitted to allow the Letter of
Credit to be terminated pursuant to the foregoing, Lessee shall every year
thereafter (and as often as every 3 months if Lessee's Tangible Net Worth
reasonably appears to Lessor to be less than Twenty Million Dollars
($20,000,000) and Lessor requests the same of Lessee) provide evidence
reasonably satisfactory to Lessor that Lessee continues to meet the Tangible Net
Worth minimum amount specified above. In the event Lessee does not provide such
evidence, as determined by Lessor in its reasonable discretion, then Lessee
shall once again deposit the full One Million Dollar ($1,000,000) Letter of
Credit, and thereupon shall be entitled once again to lower the cash portion of
the security deposit to Two Hundred Thousand Dollars ($200,000).
ARTICLE VI
----------
USE
---
Section 6.01. Use. The Premises shall be used and occupied for general
------------- ---
offices, warehouse, research and development, laboratories, light assembly,
wholesale sales, and any other incidental related legal use which is otherwise
in compliance with the reasonable rules and regulations that may be imposed by
Lessor from time to time on the Business Park. Such incidental related uses may
include, without limitation, the right on the part of Lessee to use
telecommunications equipment for internal business purposes, and to have a call
center comprised of a technical support group answering telephone lines. Lessee
shall not use nor permit the use of the Premises in any manner that will tend to
create waste or a nuisance or tend to unreasonably disturb any other tenants.
This Lease does not grant to Lessee any
<PAGE>
exclusive use rights that would prevent other tenants or lessees from conducting
businesses or operations within the Business Park similar to the business or
operations of Lessee.
Section 6.02. Compliance with Law.
------------- -------------------
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the Commencement Date, but without regard to the use for which Lessee will
use the Premises, (i) does not violate any laws, or permits, licenses, or
covenants or restrictions of record, or any applicable building code, regulation
or ordinance in effect upon completion of the initial construction thereof, and
(ii) to the actual knowledge of Lessor has not received notice from any
governmental authority with jurisdiction over the Premises that the Premises are
in violation of any laws, permits, or building code, regulation or ordinance in
effect as of the date this Lease is executed which violation remains uncured.
(b) Except as provided in Section 6.02(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants, and restrictions of record in effect during the
term or any part of the term hereof regulating the use, condition, or occupancy
of the Premises. Without limiting the generality of the foregoing, Lessee shall
be obligated at its sole expense to make all alterations or improvements to the
Premises which may be required by lawful governmental authority due to new laws,
codes, ordinances or other promulgations of lawful governmental authority which
come into effect during the term of this Lease. Notwithstanding the preceding
sentence, if any structural alterations to the Premises are required as a result
of a change in laws, codes, ordinances, rules, or regulations (collectively,
"Laws") existing on the date this Lease is executed or as a result of additional
Laws enacted after the date this Lease is executed which changed or additional
Laws are applicable to buildings generally (including the Premises) and are not
applicable to the Premises because of Lessee's particular use of the Premises or
any improvements, additions or alterations (collectively, "Alterations") thereto
by Lessee, then Lessor shall cause such Alterations to be made, and the
Amortized Portion (as defined below) of such cost shall be paid by Lessee to
Lessor as additional rent each month together with and in the same manners as
payments of rent under Section 4.01 above. The "Amortized Portion" of costs of
items, as reasonably determined by Lessor, shall mean an amount equal to a
fraction of the cost of such item the numerator of which is the lesser of (i)
number of years remaining in the term, (ii) the number of years of the estimated
useful life of such item as reasonably determined by Lessor, and the denominator
of which is the number of years of the estimated useful life of such item as
reasonably determined by Lessor, with such amount amortized monthly over the
remainder of the term as of the date such cost is incurred assuming an interest
rate (the "Assumed Interest Rate") equal to the rate of interest on any loan
obtained by Lessor to pay for such item, or if Lessor does not obtain a loan to
pay for such item, then assuming an interest rate equal to the rate of interest
Lessor would have to pay if Lessor were to borrow such funds, as reasonably
determined by Lessor. If Lessee later exercises any option to extend the Term,
upon commencement of each such extended term, if such item was not previously
fully amortized pursuant to the preceding sentence, then Lessee
<PAGE>
shall pay as additional rent each month together with and in the same manner as
payments of rent under Section 4.01 an additional Amortized Portion of the cost
of such item equal to a fraction the numerator of which is the lesser of (i)
five, or (ii) the same number of years of the estimated useful life of such item
as originally determined by Lessor as reduced by the number of years Represented
in the numerator determined pursuant to the preceding sentence, and the
denominator of which is the same number of years of the estimated useful life of
such item as originally determined by Lessor (with no reduction in such number
reflecting any time which has passed since the item was made), with such portion
amortized monthly over the five year extended term assuming interest thereon
over such period at the Assumed Interest Rate.
(c) By executing this Lease, Lessee acknowledges that it has reviewed
and satisfied itself as to its compliance, or intended compliance, with the
applicable zoning and permit laws, hazardous waste requirements, and all other
statutes, laws, or ordinances relevant to the uses stated in Section 6.01 above.
Section 6.03. Condition of Premises.
------------- ---------------------
(a) On the Commencement Date, Lessor shall deliver the Premises to
Lessee clean and free of debris, with all life and safety, electrical, plumbing,
gas, HVAC, and other mechanical systems in good operating condition. Lessor
warrants to Lessee that the Premises were upon completion of the initial
construction thereof built in accordance with the approved plans therefor in a
workmanlike manner. In the event that it is determined that any of these
covenants or warranties has been violated, then it shall be the obligation of
Lessor, after receipt of written notice from Lessee setting forth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessor shall not have any liability for any claimed
violation by Lessor of the foregoing covenants or warranties unless and except
to the extent Lessor receives written notice from Lessee thereof within thirty
(30) days after the Commencement Date.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Commencement Date, subject to
all zoning, municipal, county, state, and other applicable laws governing and
regulating the use of the Premises, and any covenants or restrictions of record,
and accepts this Lease subject thereto. Lessee acknowledges that neither Lessor
nor Lessor's agent has made any representation or warranty as to the present or
future suitability of the Premises for the conduct of Lessee's business. Except
as specified in Section 6.03(a) above, Lessee acknowledges that Lessor has no
obligation to make any improvements or repairs to the Premises at the outset of
the Lease, and except as provided in Section 6.02(a) above is not warranting
that as of the Commencement Date the interior or exterior of the Premises is in
compliance with all ordinances, rules, codes and regulations of applicable
governmental authority, as Lessee is taking possession of the Premises in their
"as-is" physical condition and will be solely responsible for making any and all
repairs and improvements to the Premises as may be necessary to operate the
Premises for the use specified herein and to bring the Premises into
<PAGE>
compliance with all such ordinances, rules, codes and regulations, all of which
repairs and/or improvements shall be made in strict accordance with the
provisions of this Lease and at the sole cost and expense of Lessee.
Section 6.04. Prohibited Uses. Notwithstanding anything to the contrary
------------- ---------------
contained in Section 6.01 above, in no event shall the Premises be used for any
retail use, or for any of the other following uses: (i) health club, spa or
gymnasium, (ii) night club or discotheque, (iii) mobile home park, trailer
court, labor camp, junkyard, or stockyard (except that this provision shall not
prohibit the temporary use of construction trailers during periods of
construction provided Lessee has obtained Lessor's prior written consent
thereto), (iv) any dumping, disposing, incineration, or reduction of garbage
(exclusive of dumpsters located adjacent to the rear of and outside the
Premises), (v) any close-out, odd lot, fire sale, bankruptcy sale (unless
pursuant to a court order) or auction house operation, (vi) automobile, truck,
trailer or R.V. leasing, display or repair, (vii) skating rink or roller rink,
(viii) living quarters, sleeping apartments, or lodging rooms, (ix) veterinary
hospital or animal raising or grooming facilities, (x) mortuary, (xi)
educational or training facility, (xvii) any movie theater or other theater use,
(xviii) any use which creates vibrations or offensive odors which are noticeable
outside of the Premises, or any noise or sound which can be heard outside of the
Premises and which is offensive due to intermittency, beat, frequency,
shrillness or loudness, provided any usual paging system shall be allowed.
ARTICLE VII
-----------
HAZARDOUS OR TOXIC MATERIALS
----------------------------
Section 7.01. Hazardous or Toxic Materials. As used herein, "Hazardous
------------- ----------------------------
Materials" means any hazardous, toxic, environmentally damaging or radioactive
materials, substances or wastes, including, but not limited to, those materials,
substances or wastes; (1) defined or listed as hazardous or extremely hazardous
materials or wastes pursuant to Title 22, Division 4.5, Chapter 10 et seq., of
the California Code of Regulations, as may be amended; (2) defined or listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S) 9601, et seq. and regulations
------
promulgated thereunder, as may be amended; (3) defined or listed as hazardous or
acutely hazardous wastes pursuant to the Resource Conservation and Recovery Act,
42 U.S.C. (S) 6901, et seq. and regulations promulgated thereunder, as may be
------
amended; and/or (4) which consists in whole or part of petroleum, petroleum
fractions, petroleum products or petroleum distillates.
Section 7.02. Compliance with Laws. Lessee, at its sole expense, shall
------------- --------------------
comply with all applicable governmental rules, regulations, codes, ordinances,
statutes, directives and other requirements (collectively, "Environmental Laws")
respecting protection of the environment and/or the transport, use, storage,
maintenance, generation, manufacture, handling, discharge, release or disposal
of Hazardous Materials in, on or about the Premises. To the extent such
<PAGE>
investigations, cleanup or other response actions referred to below in this
sentence result from or are connected with the transport, use, storage,
maintenance, generation, manufacture, handling, discharge, release or disposal
by Lessee or agents, employees, contractors, assignees, sublessees or invitees
of Lessee of Hazardous Materials in or on the Premises or the Business Park or
in the groundwater or soils underneath the same occurring at any time prior to
the expiration or sooner termination of the term of this Lease and vacation of
the Premises by Lessee, then Lessee, at its sole cost, shall perform all
investigations, cleanup and other response actions in, on, or about the Premises
which may be required of Lessee or Lessor by any governmental authority. All
actions by Lessee pursuant to the preceding sentence shall be taken in full
compliance with all Environmental Laws. Without limiting the generality of the
foregoing, Lessee shall at its sole cost: (1) at all times use, handle,
generate, store, transport, and dispose of Hazardous Materials in compliance
with all Environmental Laws; (2) make any and all improvements to the Premises
necessary to assure the lawful and safe use, handling, generation, storage,
transportation, and disposal of Hazardous Materials; and (3) ensure that valid
permits have been obtained and maintained as required by all Environmental Laws
concerning the activities of Lessee and its agents, employees, contractors,
assignees, sublessees and invitees.
Section 7.03. No Underground Tanks. Under no circumstances shall Lessee
------------- --------------------
install or permit the installation of, temporarily or permanently, any
underground tanks relating to the use, storage or disposal of Hazardous
Materials.
Section 7.04. Indemnity. Lessee hereby indemnities and agrees to
------------- ---------
protect, defend (by legal counsel selected by Lessee and reasonably approved by
Lessor) and hold harmless Lessor, its members, partners, directors, employees,
assigns, lenders, successors, agents, representatives and their respective
insurers from and against all costs (including, but not limited to,
environmental response costs), expenses, claims, judgments, losses, demands,
liabilities, causes of action, governmental directives, proceedings and
hearings, including attorneys' and experts' fees and costs, relating to the
transport, use, storage, maintenance, generation, manufacture, handling,
discharge, release or disposal of Hazardous Materials by Lessee or agents,
employees, contractors, assignees, sublessees or invitees of Lessee, in or on
the Premises or in the groundwater or soils underneath the same occurring at any
time prior to the expiration or sooner termination of the term of this Lease and
vacation of the Premises by Lessee, and/or relating to the breach of any of the
obligations of Lessee under this Article VII. Without limiting the foregoing,
the foregoing indemnity shall include (A) the cost of environmental consultants,
attorneys, and other consultants as Lessor determines are appropriate to assist
Lessor in (1) investigating the source, extent, and composition of such
Hazardous Materials, (2) cleaning up or otherwise remediating the same, (3)
dealing with any potential or actual liability of Lessor and/or Lessee
respecting such Hazardous Materials, and (4) otherwise dealing with such
Hazardous Materials, and (B) losses in or reductions to rental income, and (C)
any diminution in the fair market value of the Premises or other affected
property.
<PAGE>
Section 7.05. Notification Responsibility. Lessee shall notify Lessor
------------- ---------------------------
orally immediately upon becoming aware of, and in writing within 48 hours after
becoming aware of: (1) any environmental investigation, cleanup or other
environmental response action requested, demanded, instituted or to be
instituted by any person, including a governmental entity, relating to the
transport, use, storage, maintenance, generation, manufacture, handling,
discharge, release, migration or disposal of Hazardous Materials on, in,
beneath, about, adjacent to or from the Premises; (2) any claim or demand made
or threatened by any person, including but not limited to a governmental entity,
against Lessor or Lessee, relating to damages, contribution, cost recovery,
compensation, loss or injury relating to, or claimed to result from, any
Hazardous Materials that have come to be located on, in, beneath, or about the
Premises as the result of the activities of Lessee or of Lessee's agents,
employees, contractors, assignees, sublessees or invitees, or (3) any data,
workplans, proposals or reports submitted to any governmental entity arising out
of or in connection with any Hazardous Materials on, in, about, or beneath the
Premises, including but not limited to any complaints, notices, warnings of
asserted violations in connection therewith.
Lessee, at its sole cost, shall provide Lessor with copies of all chemical
lists it provides to governmental entities regarding Lessee's activities on or
about the Premises, as well as any Community Right-to-Know information submitted
to governmental entities regarding chemicals used by Lessee on or about the
Premises, including without limitation, the information required to be submitted
pursuant to California Health and Safety Code, Chapter 6.95, any Hazardous
Materials management plan required by the County of Santa Clara, and any other
reports submitted by Lessee to any and all governmental entities respecting
Hazardous Materials.
Section 7.06. Inspection Rights. Lessor shall have the right, but not
------------- -----------------
the obligation, in its sole discretion, to enter upon the Premises to inspect,
sample and/or monitor the Premises regarding Hazardous Materials on, in, beneath
or about the Premises. Lessor shall give Lessee twenty four (24) hours advance
notice of any such inspection, except in the event of an emergency, in which
case no such notice shall be required. When conducting any such inspections,
Lessor shall avoid unreasonably disrupting Lessee's activities on the Premises.
Lessee shall reasonably cooperate with Lessor to facilitate any such inspection
by Lessor. Any such entry and inspection may be conducted by Lessor or by
Lessor's designated agents, representatives or contractors. If Lessor discovers
that Lessee is not in compliance with the terms of this Article VII, any costs
incurred by Lessor in connection with such inspections, sampling and/or
monitoring, including attorney's and/or consultants' fees, shall be due and
payable by Lessee to Lessor within five (5) days following Lessor's written
demand therefor.
Section 7.07. Return of Premises. Prior to the expiration or termination
------------- ------------------
of this Lease, Lessee shall (1) remove all Hazardous Materials which have become
located on, in, beneath or about the Premises as the result of, and (2)
decontaminate and remove any equipment, improvements or facilities used by
Lessee at the Premises in connection with the transport, use, storage,
maintenance, generation, manufacture, handling, discharge, release or disposal
<PAGE>
of Hazardous Materials by Lessee or Lessee's agents, employees, contractors,
assignees, sublessees or invitees, on, in, beneath, about or from the Premises,
such removal, and decontamination and removal to be performed in full compliance
with applicable Environmental Laws. Not later than 180 days prior to the
expiration date of the Lease or immediately upon any sooner termination, Lessee
shall submit to Lessor for Lessor's approval Lessee's written plan for such
removal, decontamination and disposal of Hazardous Materials which plan shall
identify (1) the Hazardous Materials to be removed and disposed of, (2) the
equipment or other portions of the Premises to be removed, decontaminated and/or
disposed of, (3) the method(s) by which such removal, decontamination, and
disposal will be accomplished, and (4) the licensed and bonded contractor(s) who
will perform such removal, decontamination and disposal. Prior to preparation
of such written plan, Lessee at its sole cost shall cause to be performed such
tests as Lessor may reasonably require, by an environmental consultant
reasonably designated by Lessor, to ascertain whether Hazardous Materials exist
in the soils or groundwater underneath the Premises, or in any improvements on
the Premises.
Section 7.08. Controlling Provisions; Survival of Covenants. To the
------------- ---------------------------------------------
extent any of the provisions of this Lease conflict with the provisions of this
Article VII, the provisions of this Article VII shall be controlling. The
obligations of Lessee under this Article VII shall survive the termination or
expiration of the term of this Lease.
<PAGE>
ARTICLE VIII
------------
MAINTENANCE, REPAIRS AND ALTERATIONS
------------------------------------
Section 8.01. Maintenance - Premises.
------------- ----------------------
(a) Lessor shall at its sole cost and expense keep in good and safe
condition, order and repair, and replace as and if necessary the following
components of the Premises: (i) the roof structure (but not the roof membrane or
other nonstructural components), (ii) structural elements of the exterior walls
(but not including windows, doors, painting, or other nonstructural elements
thereof), and structural elements of interior load-bearing walls, if any, and
(iii) structural elements of the foundation (but not including utility conduits
therein or other nonstructural elements thereof. Lessor shall have no
obligation to make repairs under this Section 8.01(a) until a reasonable time
after Lessor's receipt of notice from Lessee of the need for such repairs;
provided that, Lessor shall commence repairs no later than thirty (30) days
after Lessor's receipt of notice from Lessee of the need therefor and thereafter
diligently continue the same until completion thereof. The preceding sentence
shall not be construed to require physical repair work to have commenced within
such thirty (30) day period of time, as Lessor shall be deemed to have commenced
repairs merely by contacting (by telephone or otherwise) a contractor to perform
such work, whether or not such contractor is actually ultimately hired or is
able to commence physical work within such thirty (30) period. In connection
with all of Lessor's activities under this paragraph, Lessor shall make a
reasonable effort to minimize any disruption of Lessee's business, provided that
Lessor shall not be obligated to incur overtime costs to employ workers who work
after normal business hours and on weekends. Except as otherwise specifically
provided in Article X below (damage and destruction), there shall be no
abatement of rent or other sums payable by Lessee prior to or during any repairs
by Lessee or Lessor, and Lessee waives all claims for loss of business or lost
profits relating to any such repairs.
(b) Throughout the term, except as provided in Section 8.01(a) above,
Lessee agrees to keep and maintain each and every part of the Premises in good
and safe condition, order and repair, reasonable wear and tear and damage due to
casualty excepted. Lessee hereby expressly waives the provisions of any law
permitting repairs by a tenant at the expense of a landlord, including, without
limitation, all rights of Lessee under Sections 1941 and 1942 of the California
Civil Code. Lessee agrees to keep the Premises clean and in sanitary condition
as required by the health, sanitary and police ordinances and regulations of any
political subdivision having jurisdiction. Lessee further agrees to keep the
interior of the Premises, such as the windows, floors, walls, doors showcases
and fixtures clean and neat in appearance and to remove all trash and debris
which may be found in or around the Premises, and to maintain in good operating
condition all improvements and appurtenances serving the Premises including all
sewer connections, plumbing, heating and cooling appliances, wiring, and glass.
If Lessee refuses or neglects to commence such repairs and/or maintenance
required under this Lease or does not diligently prosecute same to completion
within thirty
<PAGE>
(30) days after written notice thereof, then Lessor may enter the Premises and
cause such repairs and/or maintenance to be made. Lessee agrees that upon
demand, it shall pay to Lessor the cost of any such repairs, together with
accrued interest from the date of payment at the lower of ten percent per annum
or the prime commercial lending rate then in effect at Bank of America.
Notwithstanding anything to the contrary above, Lessor may elect to enter into a
maintenance contract with a third party for the provision of all or a part of
Lessee's maintenance obligations as set forth in this Section 8.01. Upon such
election, Lessee shall be relieved from its obligations to perform only those
maintenance obligations covered by the maintenance contract, and Lessee shall
bear its pro rata share, as set forth in Section 8.02 below, of the costs of
such maintenance contract which shall be paid in advance on a monthly basis with
Lessee's rent payments.
Section 8.02. Maintenance - Common Areas. Lessor shall maintain the
------------- --------------------------
Common Areas, together with all facilities and improvements now or hereafter
located thereon, and together with all street improvements or other improvements
adjacent thereto as may be required from time to time by governmental authority.
The manner in which such areas shall be maintained and the expenditures therefor
shall be at the sole discretion of Lessor. Lessor shall at all times have
exclusive control of the Common Areas and may at any time temporarily close any
part thereof, may exclude and restrain anyone from any part thereof (except the
bona fide customers, employees and invitees of Lessee who use the Common Areas
in accordance with the rules and regulations that Lessor may from time to time
promulgate), and Lessor may change the configuration of the Common Areas or the
location of facilities thereon so long as any such change by Lessor does not
unreasonably interfere with Lessee's use of the Premises. Lessor shall also be
entitled to employ third parties to operate and maintain all or any part of such
areas on such terms and conditions as Lessor shall in its sole discretion deem
reasonable and proper. The surface parking facilities shall be available for
the automobiles of Lessee and Lessee's customers, employees and invitees on a
nonassigned, non-exclusive basis. In connection with all of Lessor's activities
under this paragraph, Lessor shall make a reasonable effort to minimize any
disruption of Lessee's business, provided that Lessor shall not be obligated to
incur overtime costs to employ workers who work after normal business hours and
on weekends. Except as otherwise specifically provided in Article X below
(damage and destruction), there shall be no abatement of rent or other sums
payable by Lessee prior to or during any repairs by Lessee or Lessor, and Lessee
waives all claims for loss of business or lost profits relating to any such
repairs. Lessee shall have the obligation to notify Lessor, in writing, of any
repairs or maintenance to the Common Areas which may be required, and Lessor
shall have a reasonable time to make repairs; provided that, Lessor shall
commence repairs no later than thirty (30) days after Lessor's receipt of notice
from Lessee of the need therefor and thereafter diligently continue the same
until completion thereof. The preceding sentence shall not be construed to
require physical repair work to have commenced within such thirty (30) day
period of time, as Lessor shall be deemed to have commenced repairs merely by
contacting (by telephone or otherwise) a contractor to perform such work,
whether or not
<PAGE>
such contractor is actually ultimately hired or is able to commence physical
work within such thirty (30) period.
Lessee shall pay to Lessor, as additional rent, in the manner and at the
time provided below, Lessee's proportionate share, as defined below, of all
costs and expenses incurred by Lessor in the operation and maintenance of the
Common Areas of the Business Park during the term of this Lease. Such costs and
expenses shall include, without limiting the generality of the foregoing, all
maintenance, pest control, security, gardening, landscaping, cost of public
liability, property damage, vandalism and malicious mischief, earthquake, and
other insurance deemed necessary by the Lessor, real property taxes, property
taxes, property management costs, including a management fee as determined by
Lessor (which shall in no event exceed 3% of the base rent payable for the
period of time covered by such fee), painting, lighting, cleaning, trash
removal, depreciation of equipment, fire protection, and similar items.
Lessee's proportionate share of such common area expenses shall be 19.88%,
which is based on the ratio between the 48,384 square feet within the Premises
and the total square footage of buildings within the Business Park which is
243,364 square feet. Such square footage is measured from the exterior surface
of all exterior walls, and includes entryways and the area under covered docks.
Lessee acknowledges that it has measured the square footage of the Premises, or
has had adequate opportunity to do so, and that the square footage of the
Premises set forth above shall be conclusive unless the area of the Premises
changes subsequent to the Commencement Date.
Lessor shall bill Lessee monthly for Lessee's proportionate share of such
common area costs, which proportionate share shall be based upon the previous
month's actual costs and expenses. Lessee shall pay such proportionate share
within 15 days of receipt of said billing statement from Lessor.
Section 8.03. Alterations and Additions. No alterations or additions
------------- -------------------------
shall be made to the Premises by Lessee without the prior written consent of
Lessor which Lessor will not unreasonably withhold. Notwithstanding the
preceding sentence, Lessee shall be entitled to make alterations and additions
to the Premises without first obtaining Lessor's consent thereto if and only if
they (i) do not affect the structural elements of the Premises or the roof
membrane of the Premises, (ii) cost in the aggregate over any 12 month period of
time no more than Twenty-Five Thousand Dollars ($25,000.00), and (iii) do not
affect the electrical, gas, plumbing, HVAC or other systems of the Premises. In
no event shall any alteration or addition be of such a nature as to reduce or
otherwise adversely affect the value of the improvements within the Premises
immediately before making such alterations or additions, or to diminish the
general utility of the Premises for the permitted uses hereunder. Lessor shall
have absolutely no obligation to consider or consent to any request by Lessee to
make any alteration or addition that affects the structural elements of the
Premises or the roof membrane of the Premises. Lessee acknowledges that Lessor
desires the interior of the Premises to remain free of interior hard wall
partitions, and Lessor shall not be deemed unreasonable for withholding consent
to any hard wall partitions proposed by Lessee, whether
<PAGE>
to create interior offices, or for a demising wall between Lessee and any entity
to whom it may sublease space, or otherwise. As a condition of giving its
consent to any proposed alterations or additions, Lessor may require that Lessee
agree to remove any such alterations or improvements at the expiration of the
term and to restore the Premises to their prior condition. As a further
condition to giving such consent, Lessor may require Lessee to provide Lessor,
at Lessee's sole cost and expense, with a lien and completion bond in an amount
equal to one and one-half (1-1/2) times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. As to any alterations or additions made by
Lessee without Lessor's consent (which Lessee has no right to make except as
specifically provided above), Lessee shall, unless otherwise requested in
writing by Lessor prior to expiration or sooner termination of the lease term,
remove the same from the Premises and restore the Premises, including any
building systems affected thereby, to its condition existing immediately prior
to such alteration or addition being made (subject to reasonable wear and tear).
All changes, alterations, or additions to be made to the Premises shall be under
the supervision of a competent architect or competent licensed structural
engineer and made in accordance with plans and specifications which have been
furnished to and approved by Lessor prior to commencement of work. If the
written consent of Lessor to any proposed alterations by Lessee shall have been
obtained, Lessee agrees to advise Lessor in writing of the date upon which such
alterations will commence in order to permit Lessor to post a notice of
nonresponsibility. All such alterations, changes and additions shall be
constructed in good and workmanlike manner in accordance with all ordinances and
laws relating thereto. Lessee shall deliver to Lessor "as built" plans of any
improvements or alterations to the Premises made by Lessee during the term of
this Lease. Any such changes, alterations or additions to or on the Premises
shall remain for the benefit of and become the property of Lessor, unless Lessor
requires their removal by giving Lessee written notice at least thirty (30) days
before the date Lessee is to vacate the Premises.
Section 8.04. Tenant Improvements. Tenant Improvements to be provided by
------------- -------------------
Lessor, if any, are set forth on Exhibit "B". Except as may be set forth on
-----------
Exhibit "B", Lessor has no obligation to make any improvements or alterations to
- -----------
the Premises.
Section 8.05. Plumbing. Lessee shall not use the plumbing facilities for
------------- --------
any purpose other than that for which they were constructed. The expense of any
breakage, stoppage or other damage relating to the plumbing and resulting from
the introduction by Lessee, its agents, employees, or invitees of foreign
substances into the plumbing facilities shall be borne by Lessee.
<PAGE>
ARTICLE IX
----------
INSURANCE
---------
Section 9.01. Property/Rental Insurance - Premises. During the term of
------------- ------------------------------------
this Lease, Lessor shall keep the Premises insured against loss or damage by
fire and those risks normally included in the term "all risk" including (a)
flood coverage, (b) earthquake coverage at the election of Lessor, (c) coverage
for loss of up to 12 months of rents (including taxes, insurance, and Common
Area costs), and (d) boiler and machinery coverage if the Lessor deems such
coverage necessary. Any deductibles shall be paid by Lessee to the extent the
deductible relates to damage to the Premises. Payment of deductibles shall be
made within fifteen (15) days after written request by Lessor therefor.
Notwithstanding the foregoing, the amount of such deductible payable by Lessee
upon request therefor by Lessor shall not exceed an amount equal to one's
month's base rent based on the monthly rent amount payable under this lease at
the time such deductible payment is so requested by Lessor, with any balance of
such deductible paid by Lessee in equal installments amortized over the then
remaining balance of the lease term, assuming interest thereon at the rate of
the lesser of 12% per annum or the highest rate then allowed under law. For
purposes of calculating the balance of the lease term pursuant to the preceding
sentence, no unexercised options to extend the term shall be taken into
consideration (in other words, any option period shall not be included in
calculating the remaining balance of the term). The amount of such insurance
shall be not less than one hundred percent (100%) of the replacement value of
the Premises. Lessor shall be entitled to procure such insurance under a
blanket policy of insurance covering one or more buildings in the Business Park
owned by Lessor. Any recovery received from said insurance policy or policies
shall be paid to Lessor, and Lessee shall have no interest in any such proceeds.
Lessee, in addition to the rent and other charges provided herein, agrees
to pay to Lessor its pro rata share of the premiums for all such insurance,
which pro rata share is identical to that provided in Section 8.02, above. The
insurance premiums shall be paid in accordance with Article IV, within fifteen
(15) days of Lessee's receipt of a copy of Lessor's statement therefor.
Section 9.02. Property Insurance - Fixtures and Inventory. During the
------------- -------------------------------------------
term, Lessee shall, at its sole expense, maintain insurance with "all risk"
coverage on any fixtures, leasehold improvements, furnishing, merchandise,
equipment, or personal property in or on the Premises, whether in place as of
the date hereof or installed hereafter, for the full replacement value thereof,
and Lessor shall not have any responsibility nor pay any costs for maintaining
any types of such insurance. Any deductibles under such insurance shall be paid
by Lessee. All proceeds from such insurance shall belong to Lessee and shall be
used to restore or replace the items damaged.
<PAGE>
Section 9.03. Lessor's Liability Insurance. During the term, Lessor may
------------- ----------------------------
maintain a policy or policies of comprehensive general liability insurance
insuring Lessor (and such others as designated by Lessor)against liability for
bodily injury, death and property damage on or about the Premises or the Common
Area of the Business Park, with combined single limit coverage of not less than
Two Million Dollars ($2,000,000).
Lessee, in addition to the rent and other charges provided herein, agrees
to pay to Lessor its pro rata share of the premiums for all such insurance,
which pro rata share is identical to that provided in Section 8.02 above. The
insurance premiums shall be paid in accordance with Article IV, within fifteen
(15) days of Lessee's receipt of a copy of Lessor's statement therefor.
Section 9.04. Lessee's Liability Insurance. Lessee shall, at its sole
------------- ----------------------------
cost and expense, obtain and keep in force during the term of this Lease
comprehensive general liability insurance applying to the condition, use,
occupancy, and maintenance of the Premises and the business operated by Lessee,
or any other occupant, on the Premises. Such insurance shall include broad form
contractual liability insurance coverage insuring all of Lessee's indemnity
obligations under this Lease. Such coverage shall have a minimum combined
single limit of liability of at least Two Million Dollars ($2,000,000). All
such policies shall be written to apply to all bodily injury, property damage,
personal injury and other covered loss, however occasioned. All such policies
shall be endorsed to add Lessor and any lender or other party named by Lessor as
an additional insured and to provide that any insurance maintained by Lessor
shall be excess insurance only. Such coverage shall also contain endorsements:
(i) deleting any employee exclusion on personal injury coverage; (ii) including
employees as additional insureds; and (iii) providing for coverage of employer's
automobile non-ownership liability. All such insurance shall provide for
severability of interests; shall provide that an act or omission of one of the
named insureds shall not reduce or avoid coverage to the other named insureds;
and shall afford coverage for all claims based on acts, omissions, injury and
damage, which claims occurred or arose (or the onset of which occurred or arose)
in whole or in part during the policy period. The limits of all insurance
described in this Section 9.04 shall not, however, limit the liability of Lessee
hereunder. Not more frequently than once each calendar year if, in the
reasonable opinion of Lessor, the amount of insurance required hereunder is not
adequate, Lessee shall increase said insurance coverage as reasonably required
by Lessor; provided that, in no event shall any such increase result in an
increase in the premium therefor of greater than twenty percent (20%) of the
amount of the premium during the preceding year of the term of this Lease. The
failure of Lessor to require any additional insurance coverage at any time shall
not relieve Lessee from the obligation to provide increased coverage at any
later time or relieve Lessee from any other obligations under this Lease.
Lessee shall furnish to Lessor prior to the Commencement Date, and at least
thirty (30) days prior to the expiration date of any policy, certificates
indicating that the liability insurance required to be carried by Lessee is in
full force and effect. Such policy of liability insurance shall specifically
provide that such policy shall not be subject to cancellation or reduction of
coverage except after at least thirty (30) days prior written notice to Lessor.
<PAGE>
The insurance shall be with insurers approved by Lessor and with policies
in form satisfactory to Lessor, provided however, that such approval shall not
be unreasonably withheld.
Section 9.05. Waiver of Subrogation. Lessor hereby releases Lessee, and
------------- ---------------------
Lessee hereby releases Lessor, and their respective officers, agents, employees
and servants, from any and all claims or demands of damages, loss, expense, or
injury to the Premises, or to the furnishings and fixtures and equipment, or
inventory or other property of either Lessor or Lessee in, or about or upon the
Premises, or claims for bodily injury or death which is caused by or results
from perils, events or happenings which are the subject of insurance carried by
the respective parties and in force at the time of any such loss; provided,
however, that such waiver shall be effective only to the extent permitted by the
insurance covering such loss and to the extent such insurance is not prejudiced
thereby. Lessor and Lessee shall each obtain such policies of insurance as
required hereunder that are not invalidated or prejudiced by the mutual release
described in this Section 9.05 so long as such policies are available at
commercially reasonable rates. Each party shall cause each insurance policy
obtained by it to provide that the insurance company waives all right of
recovery by way of subrogation against either party in connection with any
damage covered by any policy. If either party is unable to obtain such a waiver
of subrogation with respect to the applicable policies of insurance, such party
shall so notify the other party hereto in writing of such failure.
Section 9.06. Indemnification. Except in the case of Lessor's own acts
------------- ---------------
or omission, Lessee will indemnify Lessee and save it harmless from and against
any and all claims, actions, damages, liability and expense in connection with
loss of life, personal injury and/or damage to property arising from or out of
any occurrence in, upon or at the Premises, or the occupancy or use by Lessee of
the Premises or any part hereof, or caused wholly or in part by acts or
omissions of Lessee, its agents, contractors, employees, servants, licensees, or
concessionaires or by anyone permitted to be on the Premises by Lessee. In case
Lessor shall be made a party to any such litigation commenced by or against
Lessee, then Lessee shall protect and hold Lessor harmless from all claims,
liabilities, costs and expenses, and shall pay all costs, expenses and
reasonable legal fees incurred by Lessor in connection with such litigation,
except to the extent caused by the negligence of Lessor.
Section 9.07. Waiver of Claims. Except to the extent caused by the
------------- ----------------
negligence of Lessor, Lessee hereby waives any claims against Lessor for injury
to Lessee's business or any loss of income therefrom or for damage to the goods,
wares, merchandise or other property of Lessee, or for injury or death of
Lessee's agents, employees, invitees, or any other person in or about the
Premises or the Business Park from any cause whatsoever, regardless of whether
the same results from conditions existing upon the Premises or from other
sources or places, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible to Lessee. Notwithstanding
the foregoing, Lessee waives all claims against Lessor for loss of business or
other consequential damages regardless of the cause thereof, including without
limitation Lessor's negligence or wilful misconduct.
<PAGE>
Section 9.08. Plate Glass Replacement. Lessee shall replace at its sole
------------- -----------------------
expense, any and all plate glass and other glass in and about the Premises which
is damaged or broken by vandalism. If any plate glass or other glass in and
about the Premises is damaged or broken by causes other than vandalism, then
Lessor shall replace the same and Lessee shall reimburse Lessor an amount equal
to Lessor's cost of replacement, provided that such amount shall not exceed the
deductible then in effect on Lessor's insurance policy, if any, covering the
damaged glass. Nothing herein shall be construed to require Lessor to carry
plate glass insurance.
ARTICLE X
---------
DAMAGE OR DESTRUCTION
---------------------
Section 10.01. Right to Terminate on Destruction of Premises. Lessor
-------------- ---------------------------------------------
shall have the right to terminate this Lease if, during the term, the Premises
are damaged to an extent exceeding thirty-three percent (33%) of the then
reconstruction cost of the Premises as a whole. Lessor shall also have the
right to terminate this Lease if any portion of the Premises is damaged by an
uninsured peril. In either case, Lessor may elect to terminate as provided
above by written notice to Lessee delivered within sixty (60) days of the
happening of such damage. Both Lessee and Lessor shall have a right to
terminate this Lease if, during the term, the Premises are damaged to an extent
that the estimated restoration time therefor, including obtaining requisite
governmental permits for such restoration and any insurance proceeds necessary
to pay for such restoration, as such period of time is reasonably estimated by
Lessor, exceeds two hundred seventy (270) days from the date of such damage.
Lessor shall notify Lessee of its estimate of the restoration time promptly
after Lessor determines the same. Each party shall exercise its right of
termination pursuant to the preceding sentence, if at all, by written notice to
the other within ten (10) days after Lessor delivers notice to Lessee of
Lessor's estimate of the restoration time. Any such notice of termination shall
be effective, and shall result in termination of this Lease, thirty (30) days
after delivery thereof. Lessor shall have no further obligation to repair such
damage after the date of any such notice of termination by Lessee.
Section 10.02. Repairs by Lessor. If neither Lessor nor Lessee elects to
-------------- -----------------
terminate this Lease pursuant to Section 10.01, Lessor shall, immediately upon
receipt of insurance proceeds paid in connection with such casualty, but in no
event later than one hundred twenty (120) days after such damage has occurred,
proceed to repair or rebuild the Premises, on the same plan and design as
existed immediately before such damage or destruction occurred and will proceed
expeditiously to complete such restoration, subject to such delays as may be
reasonably attributable to governmental restrictions or failure to obtain
materials or labor, or otherwise due to causes beyond the control of Lessor.
Lessee shall be liable for the repair and replacement of all fixtures, leasehold
improvements, furnishing, merchandise, equipment and personal property as
provided in Section 9.02.
<PAGE>
Section 10.03. Reduction of Rent During Repairs. In the event Lessee is
-------------- --------------------------------
able to continue to conduct its business during the making of repairs, the base
rent then prevailing under Section 4.01 will be equitably reduced in the
proportion that the square footage of the unusable part of the Premises bears to
the square footage of the whole thereof for the period that repairs are being
made. No base rent shall be payable while the Premises are wholly unusable due
to casualty damage.
Section 10.04. Arbitration. Any controversy or claim arising out of or
-------------- -----------
relating to this Article shall be settled by arbitration in accordance with the
rules of the American Arbitration Association as then in effect, and judgment
upon the award rendered by the arbitration may be entered in any court having
jurisdiction. The expenses of arbitration shall be borne by the parties as
allocated by the arbitrators. The party desiring arbitration shall serve notice
upon the other party, together with designation of the first party's arbitrator.
Section 10.05. Lessor's Overriding Right to Terminate. Notwithstanding
-------------- --------------------------------------
anything to the contrary herein, if the discounted present value of the rent due
hereunder for the balance of the term, using as the discount rate the prime
commercial lending rate in effect at the Bank of America as of the date Lessor
is to commence repairs pursuant to Section 10.02 hereof, is less than the cost
of repairing the damage to the Premises, Lessor may at its option terminate this
lease upon thirty (30) days' written notice.
ARTICLE XI
----------
REAL PROPERTY TAXES
-------------------
Section 11.01. Payment of Taxes. Lessee shall pay the real property tax,
-------------- ----------------
as defined in Section 11.02, applicable to the Premises during the term of this
Lease. All such payments shall be made at least ten (10) days prior to the
delinquency date of such payment. If any such taxes paid by Lessee shall cover
any period of time prior to or after the expiration of the term hereof, Lessee's
share of such taxes shall be equitably prorated to cover only the period of time
within the tax fiscal year during which this Lease shall be in effect, and
Lessor shall reimburse Lessee to the extent required. If Lessee shall fail to
pay any such taxes, Lessor shall have the right to pay the same, in which case
Lessee shall repay such amount to Lessor with Lessee's next rent installment
together with interest at the prime commercial lending rate then in effect at
the Bank of America.
Section 11.02. Definition of "Real Properly Tax". As used herein, the
-------------- ---------------------------------
term "real property tax" shall include any form of real estate tax or
assessment, general, special, supplemental, ordinary or extraordinary, foreseen
and unforeseen, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (excluding in all instances inheritance, federal or state net
income, corporate, franchise or estate taxes) imposed on the Premises by any
authority having the direct or indirect power to tax, including any improvement
district thereof, as against any real property of which the Premises are a part,
as against Lessor's right to rent or other income therefrom, and as against
Lessor's business of
<PAGE>
leasing the Premises, and any taxes or levies in substitution of or in lieu of
any of the foregoing.
Section 11.03. Joint Assessment. If the Premises are not separately
-------------- ----------------
assessed, Lessee's liability shall be an equitable proportion of the real
property taxes for all of the land and improvements included within the tax
parcel assessed, as reasonably determined by Lessor. Lessee shall pay Lessor
said proportionate amount at least ten (10) days prior to the delinquency date
of the real property tax.
Section 11.04. Personal Property Taxes.
-------------- -----------------------
(a) Lessee shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
(c) If Lessee shall fail to pay any such taxes, Lessor shall have the right
to pay the same, in which case Lessee shall repay such amount to Lessor with
Lessee's next rent installment together with interest at the prime commercial
lending rate then charged by the Bank of America.
ARTICLE XII
-----------
UTILITIES AND JANITORIAL
------------------------
Lessee shall pay prior to delinquency throughout the term the cost of
water, ilas. heating, cooling, sewer, telephone, electricity, garbage, air
conditioning and ventilation, janitorial service, and all other materials,
utilities, and services supplied to the Premises. If any such services are not
separately metered to Lessee, Lessee shall pay its proportionate share of all
charges which are jointly metered, as reasonably determined by Lessor, and
payment to be made by Lessee within fifteen (15) days of receipt of the
statement for such charges.
ARTICLE XIII
------------
ASSIGNMENT AND SUBLETTING
-------------------------
<PAGE>
Section 13.01. Lessor's Consent Required. Except as otherwise provided
-------------- -------------------------
in Section 13.02, Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of
Lessee's interest in this Lease or in the Premises, without Lessor's prior
written consent which Lessor shall not unreasonably withhold. All of the
following shall be deemed an assignment within the meaning of this Article XIII:
(i) any transfer resulting from the merger, consolidation or other
reorganization of Lessee, or transfer to any Affiliate (as defined below) of
Lessee, (ii) any transfer resulting from the sale or other transfer of all or
substantially all of Lessee's assets, and (iii) if Lessee is a corporation,
partnership, limited liability company, trust or unincorporated association, the
sale, issuance or transfer of a controlling interest therein, or the transfer of
a majority interest in or a change in the voting control of any corporation,
partnership, limited liability company, trust, unincorporated association which
is an Affiliate of Lessee, or the transfer of any portion of any general
partnership or managing interest in Lessee or in any such Affiliate.
"Affiliate" shall mean any Entity controlled by, under common control with, or
controlling, Lessee. "Entity" shall mean any person, corporation, partnership
(general or limited), limited liability company, joint venture, association,
joint stock company, trust or other business entity or organization. For
purposes of this paragraph, "control" shall mean (i) with respect to a
corporation, the direct or indirect ownership of more than fifty percent (50%)
of any class of voting shares, (ii) with respect to a partnership, the ownership
of a general partnership interest, or entitlement to more than fifty percent
(50%) of the partnership interests in profits or capital, (iii) with respect to
any other Entity, the ownership of a majority of the voting rights thereof, or
the ability to direct its management decisions. Notwithstanding the foregoing,
an "assignment" for purposes of Article XIII shall not include any transfer or
issuance of stock over the New York Stock Exchange, the American Stock Exchange,
or NASDAQ or by virtue of a private placement with a venture capital firm
wherein such venture capital firm receives stock in Lessee.
Section 13.02. Permitted Transfers. Notwithstanding Section 13.01,
-------------- -------------------
Lessee shall be entitled to assign this Lease or sublet the Premises or any
portion thereof, without Lessor's consent, to any Affiliate and any Entity which
results from a merger or consolidation with or other reorganization of Lessee,
or to any Entity which acquires substantially all of the stock or assets of
Lessee as a going concern with respect to the business that is being conducted
in the Premises (each a "Permitted Transfer"), provided that as to each
Permitted Transfer either (i) Lessee survives such transaction and remains fully
and primarily liable under this Lease for the performance of all of Lessee's
obligations hereunder, or (ii) if Lessee does not survive (for example, it
merges into another corporation), then the net worth of such assignee on the
effective date of such assignment determined in accordance with GAAP and
exclusive of any good will and other intangible assets is at least equal to the
lesser of (A) the net worth of Lessee immediately prior to such transfer, or (B)
Twenty Million Dollars ($20,000,000).
Section 13.03. Request for Permission to Assign or Sublease. Lessee must
-------------- --------------------------------------------
make any request for Lessor's approval of a proposed assignment, sublease, or
other transfer in writing and by certified mail. Lessee's written request to
Lessor for consent to an assignment or
<PAGE>
subletting shall be accompanied by (a) the name and legal composition of the
proposed sublessee; (b) the nature of the proposed sublessee's business to be
carried on in the Premises; (c) the terms and provisions of the proposed
sublease; and (d) such financial and other reasonable information as Lessor may
request concerning the proposed sublessee. Lessor shall respond to Lessee's
request for consent hereunder within twenty (20) days after Lessee's request and
any attempted assignment, transfer, mortgage, encumbrance, or subletting without
such consent shall be void, and shall constitute a breach of this Lease.
Lessor's consent shall not be deemed unreasonably withheld if consent is denied,
among other reasons, because the prospective sublessee or assignee will in any
way diminish the value of the Premises or increase Lessor's exposure to risk due
to the nature of Lessee's proposed use. Each proposed assignment or sublease
agreement shall recite that it is and shall be subject and subordinate to the
provisions of this Lease, that the assignee or sublessee accepts such assignment
or sublease and agrees to perform all of the obligations of Lessee hereunder,
and that the termination of this Lease shall, at Lessor's sole election,
constitute a termination of every such assignment or sublease.
Section 13.04. No Release of Lessee. Regardless of Lessor's consent, no
-------------- --------------------
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Lessee or
any successor Lessee in the performance of any of the terms hereof, Lessor may
proceed directly against Lessee without the necessity of exhausting remedies
against said assignee. If Lessee shall purport to assign this Lease, or
sublease all or any portion of the Premises, or permit any person or persons
other than Lessee to occupy the Premises, without Lessor's prior written
consent, Lessor may collect rent from the person or persons then or thereafter
occupying the Premises and apply the net amount collected to the rent reserved
herein, but no such collection shall be deemed a waiver of Lessor's rights and
remedies under this Article XIII or the acceptance of any such purported
assignee, sublessee or occupant, or a release of Lessee from the further
performance by Lessee of covenants on the part of Lessee herein contained.
Section 13.05. Attorneys' Fees. In the event Lessee shall assign or
-------------- ---------------
sublet the Premises or request the consent of Lessor to any assignment or
subletting or if Lessee shall request the consent of Lessor for any act Lessee
proposes to do, then Lessee shall pay Lessor's reasonable attorneys' fees
incurred in connection therewith up to but not exceeding Five Thousand Dollars
($5,000).
Section 13.06. Excess Rent. In the event Lessor shall consent to a
-------------- -----------
sublease or an assignment under the Lease and such sublease or assignment,
together with any prior subleases and assignments, results in a sublease or
assignment of more than 50% of the space initially leased to Lessee under this
Lease, then Lessee shall pay to Lessor with its regularly scheduled rent
payments fifty percent (50%) of all sums collected by Lessee from all sublessees
and/or assignees which are in excess of the rent then owing pursuant to Article
IV
<PAGE>
above after first deducting therefrom any real estate brokerage commissions and
attorneys' fees reasonably incurred by Lessee in connection with said assignment
or subletting, up to but not exceeding Five Dollars ($5.00) per square foot of
space subleased or assigned.
Section 13.07. Recapture of Premises. The provisions of this Section
-------------- ---------------------
13.07 shall not apply to a sublease which, together with all then current
subleases, results in Lessee subleasing less than 50% of the total floor space
of Premises initially leased to Lessee under this Lease for less than the full
balance of the term, but shall apply to all assignments, and to any sublease
which, together with all other subleases then in effect, results in Lessee
subleasing 50% or more of the total floor space of Premises initially leased to
Lessee under this Lease for the full balance of the term. Any purported
assignment of less than all of the Lease shall be deemed a sublease for purposes
of this Lease. In the event Lessee requests Lessor's consent to a proposed
sublease or assignment pursuant to this Article XIII, then in lieu of giving or
denying such consent within the twenty (20) day period of time specified in
Section 13.03 therefor, Lessor may instead elect to terminate the Lease with
respect to the portion of the Premises Lessee has requested Lessor's consent to
sublease, or in the event of an assignment then with respect to the entire
Premises (collectively, the "Recapture Space"). Such election shall be made, if
at all, by written notice to Lessee thereof within said twenty (20) day period.
Such termination shall be effective on the date such sublease would otherwise
have been effective, or if no such date is specified in Lessee's request for
Lessor's consent to such sublease, then on the date which is thirty (30) days
after Lessor's election to terminate. From and after the date of such
termination, (i) the Recapture Space shall no longer be deemed part of the
Premises, (ii) the amount of rent payable and Lessee's share of common area
expenses, insurance, and taxes under this Lease shall be reduced proportionately
based on the proportionate reduction of square footage of the Premises resulting
from such recapture, and (iii) Landlord at Landlord's sole cost shall erect a
demising wall if there is no pre-existing demising wall segregating such
Recapture Space from the balance of the Premises. If separate access to areas
outside the Premises is not already available to the Recapture Space, then
Lessee at no cost or liability to Lessor, shall make access from such outside
areas available for any and all occupants of the Recapture Space through
Lessee's remaining Premises as reasonably determined by Landlord. Lessor may,
but shall not be obligated to, lease the Recapture Space to any entity to whom
Lessee requested Lessor's consent to sublease or assign the same, at the same
rent, or any higher or lower rent, as was proposed by Lessee in connection with
its proposed sublease or assignment.
ARTICLE XIV
-----------
DEFAULTS; REMEDIES
------------------
Section 14.01. Defaults. The occurrence of any one or more of the
-------------- --------
following events shall constitute a material default and breach of this Lease by
Lessee:
(a) The abandonment of the Premises by Lessee;
<PAGE>
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of five (5) days after delivery of notice to
Lessee that such payment is due; provided: that, any such notice shall
constitute the notice required under Section 1161 of the California Code of
Civil Procedure (and/or any related or successor statutes regarding unlawful
detainer actions) so long as such notice is given in accordance with the
requirements of such statute; and provided further that, if two or more such
failures shall occur in any one year period during the term of this Lease, then,
unless applicable law requires otherwise, each and every succeeding failure to
pay any sum payable hereunder when due shall constitute a material default and
breach of this Lease, and Lessee shall not be entitled to any notice or cure
period with respect to any such failure to pay;
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in Section 14.01(b) above, where such failure shall
continue for a period of 10 days after written notice hereof from Lessor to
Lessee; provided, however, that if the nature of Lessee's default is such that
more than 10 days are reasonably required for its cure, then Lessee shall not be
deemed to be in default if Lessee commences such cure within said 10 day period
and thereafter diligently prosecutes such cure to completion;
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto; (iii) the taking or
suffering of any action by Lessee under any insolvency or bankruptcy act; (iv)
the appointment of a trustee or receiver to take possession of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, or (v) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease. Provided, however, in the event that any provisions of
this Section 14.01(d) is contrary to any applicable law, such provision shall be
of no force or effect;
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any successor in interest of Lessee or
any guarantor of Lessee's obligation hereunder, and any of them, was materially
false.
Section 14.02. Remedies. In the event of any such material default or
-------------- --------
breach by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any other right or remedy
which Lessor may have by reason of such default or breach, take any of the
following actions:
(a) Lessor shall be entitled to terminate Lessee's right to possession
of the Premises by any lawful means, in which case this Lease shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
the event of any such termination of this Lease, Lessor shall be entitled to
recover from Lessee (i) the worth at the time of award of the
<PAGE>
unpaid rent which had been earned at the time of termination; plus, (ii) the
worth at the time of award of the amount by which the unpaid rent which would
have been earned after termination until the time of award exceeds the amount of
such rental loss for the same period that Lessee proves could have been
reasonably avoided; plus (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss for the same period that Lessee proves
could be reasonably avoided; plus (iv) any other amount necessary to compensate
Lessor for all the detriment proximately caused by Lessee's failure to perform
Lessee's obligations under this Lease, or which in the ordinary course of things
would be likely to result therefrom. The "worth at the time of award" of the
amounts referred to in clauses (i) and (ii) of this Section 14.02(a) shall be
computed by allowing interest at the lower of twelve percent (12%) per annum, or
the maximum rate then permitted by law. The "worth at the time of award" of the
amount referred to in clause (iii) of this Section 14.02(a) shall be computed by
discounting such amount at the discount rate of the Federal Reserve Board of San
Francisco at the time of award plus one percent (1%). The term "time of award"
as used in subparagraphs (i), (ii), and (iii) shall mean the date of entry of a
judgment or award against Lessee in an action or proceeding arising out of
Lessee's breach of this Lease. The term "rent" as used in this paragraph shall
include all base rent, taxes, insurance, Common Area costs and other sums
required to be paid by Lessee to Lessor pursuant to the terms of this Lease.
This Lease may be terminated by a judgment specifically providing for
termination, or by Lessor's delivery to Lessee of written notice specifically
terminating this Lease. In no event shall any one or more of the following
actions by Lessor, in the absence of a written election by Lessor to terminate
this Lease, constitute a termination of this Lease or a waiver of Lessor's right
to recover damages under this Section 14.02(a): appointment of a receiver in
order to protect Lessor's interest hereunder; consent to any subletting of the
premises or assignment of this Lease by Lessee, whether pursuant to provisions
hereof concerning subletting and assignment or otherwise; or any other action by
Lessor or Lessor's agents intended to mitigate the adverse effects of any breach
of this Lease by Lessee, including without limitation any action taken to
maintain and preserve the Premises, or any action taken to relet the Premises or
any portion thereof for the account of Lessee and in the name of Lessee.
(b) Lessor shall be entitled to maintain Lessee's right to possession
in which case this Lease shall continue in effect whether or not Lessee shall
have abandoned the Premises. In such event Lessor shall be entitled to enforce
all of Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(c) Lessor shall be entitled to pursue any other remedy now or
hereafter available to Lessor under the laws or judicial decisions of the state
of California. Unpaid installments of rent and other unpaid monetary
obligations of Lessee under the terms of this Lease shall bear interest from the
date due at the prime rate then charged by Bank of America.
Section 14.03. Default by Lessor. Lessor shall not be in default unless
-------------- -----------------
Lessor fails to perform obligations required of Lessor within a reasonable time,
but in no event later than
<PAGE>
thirty (30) days after written notice by Lessee to Lessor and to the holder of
any first mortgage or deed of trust covering the Premises whose name and address
shall have theretofore been furnished to Lessee in writing, specifying wherein
Lessor has failed to perform such obligation; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days are
required for performance then Lessor shall not be in default if Lessor commences
performance within such 30-day period and thereafter diligently prosecutes the
same to completion. In the event Lessor does not commence performance within the
thirty (30) day period provided herein, or does not diligently prosecute the
same to completion, Lessee may perform such obligation and will be reimbursed
for its expenses by Lessor together with interest thereon at the prime
commercial lending rate then charged by the Bank of America, provided, however,
that if the parties are in dispute as to what constitutes Lessor's obligations
under this agreement, any such dispute shall be resolved by arbitration in a
manner identical to that provided in Section 10.04 above.
Section 14.04. Late Charges. Lessee hereby acknowledges that late
-------------- ------------
payment by Lessee to Lessor of rent and other sums due hereunder will cause
Lessor to incur costs not contemplated by this Lease, the exact amount of which
will be extremely difficult to ascertain. Such costs include, but are not
limited to, processing and accounting charges, and late charges which may be
imposed on Lessor by the terms of any mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designated agent within five
(5) days after such amount is due and owing, Lessee shall pay to Lessor a late
charge equal to 5% of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of late payment by Lessee. Acceptance of any such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding Section 4.01 or any
other provision of this Lease to the contrary.
Section 14.05. Impounds. In the event Lessee fails on two (2) occasions
-------------- --------
during any consecutive twelve (12) month period to make rental payments within
ten (10) days of Lessee's receipt of written notice of such delinquency, or
shall on two (2) occasions issue a check which is declined by Lessee's bank for
insufficient funds, Lessor may require, by delivery of Notice thereof to Lessee,
that Lessee pay all rent, real property taxes, and insurance expenses quarterly
in advance for the balance of the Lease term, and that all such payments be made
by cash, cashier's check or money order in lieu of Lessee's check. Acceptance
of payment by check shall not be construed as a waiver of any such rights. The
exercise of any rights under this paragraph shall not limit or otherwise affect
Lessor's other rights and remedies under this Lease or by law. Such quarterly
advance installment shall be payable on each January 1, April 1, July 1, and
October 1 thereafter occurring during the Lease term in the amount of rent, real
property tax and insurance expenses as estimated by
<PAGE>
Lessor which are payable by Lessee under the terms of this Lease. Such fund
shall be established to insure payment when due, before delinquency, of any or
all such rent, real property taxes and insurance premiums. If the amounts paid
to Lessor by Lessee under the provisions of this paragraph are insufficient to
discharge the obligations of Lessee to pay such real property taxes and
insurance premiums as the same become due, Lessee shall pay to Lessor, within
three (3) business days after Lessor's demand, such additional sums necessary to
pay such obligations. All moneys paid to Lessor under this paragraph may be
intermingled with other money of Lessor, shall not bear interest, and shall not
create any trust relationship between Lessor and Lessee or any fiduciary duties
on the part of Lessor to Lessee. In the event of a default in the obligations of
Lessee to perform under this Lease, then any balance remaining from funds paid
to Lessor under the provisions of this paragraph may, at the option of Lessor,
be applied to the payment of any monetary default of Lessee in lieu of being
applied to the payment of rent, real property tax and insurance premiums. Any
excess payment by Lessee above the amount of expenses payable by Lessee under
this Lease to which Lessor applies amounts in such fund shall be credited
against next due installments of real property taxes and insurance premiums.
ARTICLE XV
----------
CONDEMNATION OF PREMISES
------------------------
Section 15.01. Total Condemnation. If the entire Premises, whether by
-------------- ------------------
exercise of governmental power or the sale or transfer by Lessor to any
condemnor under threat of condemnation or while proceedings for condemnation are
pending, at any time during the term, shall be taken by condemnation such that
there does not remain a portion suitable for occupation, this Lease shall then
terminate as of the date transfer of possession is required. Upon such
condemnation, all rent shall be paid up to the date transfer of possession is
required, and Lessee shall have no claim against Lessor for the value of the
unexpired term of this Lease.
Section 15.02. Partial Condemnation. If any portion of the Premises is
-------------- --------------------
taken by condemnation during the term, whether by exercise of governmental power
or the sale or transfer by Lessor to a condemnor under threat of condemnation or
while proceedings for condemnation are pending, this Lease shall remain in full
force and effect except that in the event such taking leaves the Premises unfit
for normal and proper conduct of the business of Lessee, then Lessee shall have
the right to terminate this Lease effective upon the date transfer of possession
is required. Moreover, Lessor and Lessee shall have the right to terminate this
Lease effective on the date transfer of possession is required if more than
thirty-three percent (33%) of the total square footage of the Premises is taken
by condemnation. Lessee and Lessor may elect to exercise their respective
rights to terminate this Lease pursuant to this Section by serving written
notice to the other within one hundred twenty (120) days of their receipt of
notice of condemnation. All rent shall be paid up to the date of termination,
and Lessee shall have no claim against Lessor for the leasehold value, or
<PAGE>
the value of any unexpired term of this Lease. If this Lease shall not be
canceled, the rent after such partial taking shall be that percentage of the
adjusted base rent specified herein, equal to the percentage which the square
footage of the untaken part of the Premises, immediately after taking, bears to
the square footage of the entire Premises immediately before the taking. Any
sums owing hereunder which are calculated on the basis of Lessee's pro rata
share (as set forth in Section 8.02) shall also be adjusted to reflect the
decreased square footage of the Premises due to the condemnation. If Lessee's
continued use of the Premises requires alterations and repair by reason of a
partial taking, all such alterations and repair shall be made by Lessee at
Lessee's expense.
Section 15.03. Award to Lessee. In the event of any condemnation,
-------------- ---------------
whether total or partial, Lessee shall have the right to claim and recover from
the condemning authority such compensation as may be separately awarded or
recoverable by Lessee for loss of its business fixtures, or equipment belonging
to Lessee immediately prior to the condemnation. The balance of any
condemnation award shall belong to Lessor and Lessee shall have no further right
to recover from Lessor or the condemning authority for any additional claims
arising out of such taking.
ARTICLE XVI
-----------
ENTRY BY LESSOR
---------------
Lessee shall permit Lessor and its agent to enter the Premises at all
reasonable times upon written or oral notice from Lessor to Lessee of Lessor's
entry no less than 24 hours prior to such entry, for any of the following
purposes: to inspect the Premises; to maintain the building in which the
Premises are located; to make such repairs, alterations, and additions to the
Premises as Lessor is obligated or may elect to make; to show the Premises and
post "To Lease" signs for the purposes of reletting during the last ninety (90)
days of the term; to show the Premises as part of a prospective sale by Lessor
or prospective loan to Lessor or to post notices of non-responsibility. Lessor
shall have such right of entry without any rebate of rent to Lessee for any loss
of occupancy or quiet enjoyment of the Premises thereby occasioned.
<PAGE>
ARTICLE XVII
------------
ESTOPPEL CERTIFICATE
--------------------
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed,
and (iii) certifying such other information regarding this Lease as Lessor or a
prospective purchaser or lender of Lessor may reasonably request. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Lessee's failure to deliver such statement within such time shall
be conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be represented by Lessor, (ii) that there are
no uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance; or such failure may be considered by
Lessor as a default by Lessee under this Lease.
ARTICLE XVIII
-------------
LESSOR'S LIABILITY, SUBORDINATION AND ATTORNMENT
------------------------------------------------
Section 18.01. Transfer of Ownership. The term "Lessor" as used herein
-------------- ---------------------
shall mean only the owner or owners at the time in question of the fee title or
a Lessee's interest in a ground lease of the Premises. In the event of any
transfer of such title or interest, Lessor herein named (and in case of any
subsequent transfers then the grantor) shall be relieved from and after the date
of such transfer of all liability as respects Lessor's obligations thereafter to
be performed, provided that any funds in the hands of Lessor or the then grantor
at the time of such transfer, in which Lessee has an interest, shall be
delivered to the grantee. The obligations contained in this Lease to be
performed by Lessor shall, subject as aforesaid, be binding on Lessor's
successors and assigns, only during their respective periods of ownership.
Section 18.02. Attornment. Lessee shall attorn to any third party
-------------- ----------
purchasing or otherwise acquiring the premises at any sale or other proceeding,
or pursuant to the exercise of any rights, powers or remedies under any
mortgages or deeds of trust or ground leases now or hereafter encumbering all or
any part of the premises, as if such third party had been named as Lessor under
this Lease. Lessee shall execute a new lease with such new Lessor on the same
terms of this Lease if so required by such new Lessor.
<PAGE>
Section 18.03. Subordination. Lessee agrees that this Lease shall be
-------------- -------------
subject and subordinate to any mortgage, deed of trust, or other instrument of
security (each, a "Mortgage") now of record. Lessor shall exercise its best
efforts to obtain a nondisturbance agreement within the thirty (30) day period
immediately following the execution of this Lease with respect to the Mortgage
currently of record as of the date of execution of this Lease, which
nondisturbance agreement is substantially in the form of Exhibit "C" attached
----------
hereto. In the event Lessor does not obtain such nondisturbance agreement after
exercising best efforts to do so within said thirty (30) day period of time,
this Lease shall not be voidable or terminable by Lessee as a consequence
thereof, nor shall Lessor be deemed in default hereunder as a result thereof,
but this Lease shall instead continue in full force and effect. In addition,
Lessee agrees that this Lease shall be subject and subordinate to any Mortgage
which is recorded after the date of this Lease affecting the Premises, and such
subordination is hereby made effective without any further act of Lessee;
provided that, no such subordination shall be effective unless Lessor first
obtains from a lender a written subordination, nondisturbance and attornment
agreement substantially in the form of Exhibit "C" attached hereto. Lessee
----------
shall execute in recordable form and return to Lessor said subordination,
nondisturbance and attornment agreement within seven (7) days after delivery
thereof to Lessee, and the failure of Lessee to so execute and return the same
shall constitute a default hereunder. Notwithstanding anything to the contrary
set forth above, the lender under any Mortgage may at any time subordinate its
Mortgage to this Lease, without any need to obtain Lessee's consent, by
execution of a written document subordinating such Mortgage to this Lease and
thereupon this Lease shall be deemed prior to such Mortgage without regard to
their respective dates of execution, delivery and/or recording.
Section 18.04. No Recourse. The obligations of Lessor under this Lease
-------------- -----------
shall be without recourse to any partner, officer, trustee, beneficiary,
shareholder, director, member, unit holder or employee of Lessor or to any of
their respective assets. It is expressly agreed that if Lessee obtains a money
judgment against Lessor resulting from a default by Lessor under this Lease,
that judgment shall be satisfied only out of the rents, issues, profits and
other income actually received on account of Lessor's right, title and interest
in the Premises and no other real, personal or mixed property of Lessor shall be
subject to levy, attachment or execution, or otherwise used to satisfy any such
judgment. Lessee hereby waives any right to satisfy a judgment against Lessor
except from the rents, issues, profits and other income actually received on
account of Lessor's right, title and interest in the Premises.
ARTICLE XIX
-----------
EXPIRATION ON TERMINATION
-------------------------
Section 19.01. Surrender of Possession. Lessee agrees to deliver up and
-------------- -----------------------
surrender to Lessor possession of the Premises and all improvements thereon, in
as good order and condition as when possession was taken by Lessee, excepting
only ordinary wear and tear or any permitted alterations. Upon termination of
this Lease, Lessor may reenter the Premises
<PAGE>
and remove all persons and property therefrom. If Lessee shall fail to remove
any effects which it is entitled to remove from the Premises upon the
termination of this Lease, for any cause whatsoever, Lessor, at its option, may
remove the same and store or dispose of them, and Lessee agrees to pay to Lessor
on demand any and all expenses incurred in such removal and in making the
Premises free from all dirt, litter, and debris, including all storage and
insurance charges. If the Premises are not surrendered at the end of the Lease
term, Lessee shall indemnify Lessor against loss or liability resulting from
delay by Lessee in so surrendering the Premises, including, without limitation,
actual damages for lost rents.
Section 19.02. Holding Over. If Lessee, with or without Lessor's
-------------- ------------
consent, remains in possession of the Premises after expiration of the term and
if Lessor and Lessee have not executed an express written agreement as to such
holding over which provides other than as set forth in this Section, then such
occupancy shall be a tenancy from month to month, at a monthly rental equivalent
to 150% of the monthly rental in effect immediately prior to such expiration,
such payments to be made as herein provided. In the event of such holding over
all of the terms of this Lease including the payment of all charges owing
hereunder other than rent shall remain in full force and effect on said month to
month basis.
ARTICLE XX
----------
MISCELLANEOUS PROVISIONS
------------------------
Section 20.01. Severability. The invalidity of any provision of this
-------------- ------------
Lease as determined by a court of competent jurisdiction, shall in no way affect
the validity of any other provision hereof.
Section 20.02. Interest on Past-due Obligations. Except as expressly
-------------- --------------------------------
herein provided, any amount due to Lessor not paid when due shall bear interest
at the lesser of ten percent (10%) per annum or the prime commercial lending
rate then in effect at Bank of America. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease.
Section 20.03. Time. Time is of the essence in the performance of all
-------------- ----
obligations under this Lease. All references to days contained in this Lease
shall be deemed to mean calendar days, unless otherwise specifically stated.
Section 20.04. Additional Rent. Any monetary obligations of Lessee to
-------------- ---------------
Lessor under the terms of this Lease shall be deemed to be rent.
Section 20.05. Incorporation of Prior Agreements; Amendments. This Lease
-------------- ---------------------------------------------
contains all agreements of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither Lessor nor
<PAGE>
any employees or agents of the Lessor has made any oral or written warranties or
representations to Lessee relative to the condition or use by Lessee of said
Premises and Lessee acknowledges that Lessee assumes all responsibility
regarding the Occupational Safety Health Act, the Americans With Disabilities
Act, and the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease except as otherwise specifically stated in this Lease.
Section 20.06. Notices. Any notice required or permitted to be given
-------------- -------
hereunder shall be in writing and shall be given by personal delivery or
facsimile (provided confirmation of receipt is obtained from the recipient),
overnight courier, or certified mail, and if given personally or by mail, shall
be deemed sufficiently given if addressed to Lessee or to Lessor at the address
noted below the signature line of the respective parties, as the case may be.
Either party may by notice to the other specify a different address for notice
purposes. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by notice to
Lessee. Any notice delivered in accordance with the foregoing (i) by commercial
courier or other personal delivery shall be deemed delivered on the date of
actual receipt (as evidenced by signed receipt), or upon refusal of receipt,
(ii) by facsimile shall be deemed delivered on the date of receipt (as evidenced
by written confirmation of receipt by the recipient), or (iii) if delivered by
United States mail on the date of receipt evidenced by the return receipt, or
upon refusal of receipt. No notice shall be deemed effective under this Lease
unless delivered in compliance with the provisions of this Section 20.06.
Section 20.07. Waivers. No waiver by Lessor of any provision hereof
-------------- -------
shall be deemed a waiver of any other provision hereof or of any subsequent
breach by Lessee of the same or any other provisions. Lessor's consent to, or
approval of, any act shall not be deemed to render unnecessary the obtaining of
Lessor's consent to or approval of any subsequent act by Lessee. The acceptance
of rent hereunder by Lessor shall not be a waiver of any preceding breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such preceding
breach at the time of acceptance of such rent.
Section 20.08. Recording. Either Lessee or Lessor shall, upon request of
-------------- ---------
the other, execute, acknowledge and deliver to the other a "short form"
memorandum of this Lease for recording purposes. If any such short form
memorandum of this Lease is recorded in the public records, then upon expiration
or sooner termination of the term of this Lease, Lessee shall within ten (10)
days after request by Lessor therefor execute in recordable form and deliver to
Lessor a quitclaim deed or such other documentation as Lessor shall reasonably
request in order to evidence the termination of this Lease.
Section 20.09. Cumulative Remedies. No remedy or election hereunder
-------------- -------------------
shall be deemed exclusive but shall, wherever possible, be cumulative with all
other remedies at law or in equity.
<PAGE>
Section 20.10. No Jury Trial. Each party waives any rights it may have
-------------- -------------
to a jury trial respecting any dispute or other matter arising under or relating
to this Lease.
Section 20.11. Binding Effect, Choice of Law; Venue. Subject to any
-------------- ------------------------------------
provisions hereof restricting assignment or subletting by Lessee and subject to
the provisions of Article XVIII, this Lease shall bind the parties, their
personal representatives, successors and assigns. This Lease shall be governed
by the laws of the State of California. Venue for any action or proceeding
brought to enforce or defend this agreement, and for any other purpose
hereunder, shall be Santa Clara County.
Section 20.12. No Accord and Satisfaction. No payment by Lessee, or
-------------- --------------------------
receipt by Lessor, of an amount which is less than the full amount of rent and
all other sums payable by Lessee hereunder at such time shall be deemed to be
other than on account of (a) the earliest of such other sums due and payable,
and thereafter (b) to the earliest rent due and payable hereunder. No
endorsement or statement on any check or any letter accompanying any payment of
rent or such other sums shall be deemed an accord and satisfaction, and Lessor
may accept any such check or payment without prejudice to Lessor's right to
receive payment of the balance of such rent and/or the other sums, or Lessor's
right to pursue any remedies to which Lessor may be entitled to recover such
balance.
Section 20.13. Attorneys' Fees.
-------------- ---------------
(a) Lessor Made Party to Litigation. If Lessor becomes a party to any
-------------------------------
litigation brought by someone other than Lessee and concerning this lease, or
the Lessee's use or occupancy of the Premises or the condition thereof, based
upon any real or alleged act or omission of Lessee or its authorized agents or
representative, Lessee shall be liable to Lessor for reasonable attorneys' fees
and court costs incurred by Lessor in the litigation.
(b) Certain Litigation Between the Parties. If any action or
--------------------------------------
proceeding in law or in equity or any arbitration proceeding is instituted by
Lessor for damages or possession of the Premises or both, for an alleged breach
of any obligation of Lessee under this Lease, to recover rent, to terminate the
tenancy of Lessee at the Premises, to enforce, protect, or establish any right
or remedy of Lessor, or to enforce any other right of either party under this
Lease or interpret any provision of this Lease, the prevailing party in such
action or proceeding its attorneys' fees, expert witness fees, and court costs
are incurred, or as may be fixed by the court or jury, but this provision shall
not apply to any cross-complaint filed by anyone other than Lessor in such
action or proceeding.
Section 20.14. Interpretation. The captions and headings of the numbered
-------------- --------------
paragraphs of this Lease are inserted solely for the convenience of the parties
hereto, and are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof. When required by the context
of this Lease, the neuter includes the masculine, the
<PAGE>
feminine, a partnership, a corporation, or a joint venture, and the singular
shall include the plural. The language in all parts of this Lease shall in all
cases be construed as a whole according to its fair meaning and not strictly for
or against either Lessor or Lessee, and without regard to which party prepared
this Lease.
Section 20.15. Signs. Lessee shall not place any sign upon the Premises
-------------- -----
without Lessor's prior written consent, which consent shall not be unreasonably
withheld. Any and all signs shall be in accordance with standards generally
observed for signage throughout the Business Park.
Section 20.16. Voluntarily Surrender or Merger. The voluntary or other
-------------- -------------------------------
surrender of this Lease by Lessee, or a mutual cancellation thereof, or a
termination by Lessor, shall not work a merger, and shall, at the option of
Lessor, terminate all or any existing subtenancies or may, at the option of
Lessor, operate as an assignment to Lessor of any or all of such subtenancies.
Section 20.17. Guarantor. In the event that there is a guarantor of this
-------------- ---------
Lease, said guarantor shall have the same obligations as Lessee under this
Lease.
Section 20.18. Quiet Possession. Upon Lessee paying the rent for the
-------------- ----------------
Premises and observing and performing all of the covenants, conditions and
provisions on Lessee's part to be observed and performed hereunder, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
Section 20.19. Rules and Regulations. Lessee agrees that it will abide
-------------- ---------------------
by, keep and observe all reasonable rules and regulations which Lessor may make
from time to time for the management, safety, care and cleanliness of the
Premises and Common Areas, the parking of vehicles and the preservation of good
order therein as well as for the convenience of other occupants and tenants of
the Business Park. The violations of any such rules and regulations shall be
deemed a material breach of this Lease. Lessee, however, shall not be bound by
any future rules or regulations, unless it shall approve same, which approval
shall not be unreasonably withheld.
Section 20.20. Easements. Lessor reserves to itself the right, from time
-------------- ---------
to time, to grant such easements, rights and dedications that Lessor deems
necessary or desirable, and to cause the recordation of parcel maps and
restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee.
Section 20.21. Authority to Sign. The individuals executing this Lease
-------------- -----------------
on behalf of each party represent and warrant to the other party that they are
fully authorized and legally capable of executing this Lease on behalf of such
party and that such execution is binding upon such party. Each individual
executing this Lease on behalf of a corporation represents
<PAGE>
and warrants that he is duly authorized to execute and deliver this Lease on
behalf of the corporation in accordance with a duly adopted resolution of the
Board of Directors of the corporation, and that this Lease is binding upon said
corporation in accordance with its terms.
Section 20.22. Delays for Cause. In any case where either party hereto
-------------- ----------------
is required to do any act, delays caused by or resulting from Acts of God, war,
civil commotion, fire, flood or other casualty, labor difficulties, shortages of
labor, materials or equipment, government regulations, unusually severe weather,
or other causes beyond such party's reasonable control (other than financial
inability) shall not be counted in determining the time during which work shall
be completed, whether such time be designated by a fixed date, a fixed time or
"a reasonable time", and such time shall be deemed to be extended by the period
of such delay.
Section 20.23. Brokers. Lessor shall pay CPS and Cornish & Carey
-------------- -------
Commercial Oncor International a broker commission pursuant to separate
agreement in connection with this transaction, and Lessee shall have no
liability for payment of same. Except for the above named brokers, Lessor and
Lessee each represent and warrant to the other that it has not dealt with any
broker in connection with this transaction and that no other real estate broker,
salesperson or finder has the right to claim a real estate brokerage,
salesperson's commission or finder's fee by reason of contact between the
parties brought about by such broker, salesperson or finder. Except with
respect to the above-named brokers, each party shall hold and save the other
harmless of and from any and all liability, loss, cost, damage, injury or
expense arising out of or in any way related to claims for real estate broker's,
salesperson's or finder's commissions or fees based upon allegations made by the
claimant that it is entitled to such a fee from the indemnified party arising
out of contact with the indemnifying party or alleged introductions of the
indemnifying party to the indemnified party.
Section 20.24. Joint and Several Liability. If Lessee is more than one
-------------- ---------------------------
person or entity, each such person or entity shall be jointly and severally
liable for the obligations of Lessee hereunder.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
[TEXT CONTINUED ON NEXT PAGE]
<PAGE>
The Parties hereto have executed this Lease at the place and on the dates
specified immediately adjacent to their respective signatures.
Executed at Mountain View, California, on March 6, 2000.
------------- --------
Lessor: Address:
VANNI BUSINESS PARK, LLC, c/o Chris Vanni
a Delaware limited liability company 15650A Vineyard Blvd., #144
Morgan Hill, California 95037 Morgan Hill, California 95037
By: /s/ ILLEGIBLE
---------------------------------
_______________, Manager
By: /s/ Anita M. Vanni
---------------------------------
Its: Member
---------------------------------
Lessee:
VALICERT, INC., -------
a Delaware corporation -------
-------
By: /s/ Timothy G. Conley
---------------------------------
Its: V.P. Finance and CFO
--------------------------------
<PAGE>
EXHIBIT "A"
(Site Plan)
<PAGE>
EXHIBIT "B"
(TENANT IMPROVEMENTS)
NONE.
<PAGE>
- ------------------------------------------------------------------------------
Deed of Trust: A Deed of Trust, Security Agreement and Fixture Filing dated as
of executed by Landlord, to _____________________ as Trustee, for the benefit of
Beneficiary securing repayment of the Note to be recorded in the records of the
County in which the Property is located.
- ------------------------------------------------------------------------------
Lease and Lease Date: The lease entered into by Landlord and Tenant dated as of
_______________________ covering the Premises.
[Add amendments]
- ------------------------------------------------------------------------------
Property: [Property Name]
[Street Address 1]
[City, State, Zip]
The Property is more particularly described on Exhibit A.
---------
- ------------------------------------------------------------------------------
THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (the
"Agreement") is made by and among Tenant, Landlord, and Beneficiary and affects
the Property described in Exhibit A. Certain terms used in this Agreement are
---------
defined in the Defined Terms. This Agreement is entered into as of the
Execution Date with reference to the following facts:
A. Landlord and Tenant have entered into the Lease covering certain space
in the improvements located in and upon the Property (the "Premises").
B. Beneficiary has made or is making the Loan to Landlord evidenced by the
Note. The Note is secured, among other documents, by the Deed of Trust.
C. Landlord, Tenant and Beneficiary all wish to subordinate the Lease to
the lien of the Deed of Trust.
D. Tenant has requested that Beneficiary agree not to disturb Tenant's
rights in the Premises pursuant to the Lease in the event Beneficiary forecloses
the Deed of Trust, or acquires the Property pursuant to the trustee's power of
sale contained in the Deed of Trust or receives a transfer of the Property by a
conveyance in lieu of foreclosure of the Property (collectively, a "Foreclosure
Sale") but only if Tenant is not then in default under the Lease and Tenant
attorns to Beneficiary or a third party purchaser at the Foreclosure Sale (a
"Foreclosure Purchaser").
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties agree as follows:
1. Subordination. The Lease and the leasehold estate created by the Lease
-------------
and all of Tenant's rights under the Lease are and shall remain subordinate to
the Deed of
<PAGE>
Trust and the lien of the Deed of Trust, to all rights of Beneficiary under the
Deed of Trust and to all renewals, amendments, modifications and extensions of
the Deed of Trust.
2. Acknowledgments by Tenant. Tenant agrees that: (a) Tenant has notice
-------------------------
that the Lease and the rent and all other sums due under the Lease have been or
are to be assigned to Beneficiary as security for the Loan. In the event that
Beneficiary notifies Tenant of a default under the Deed of Trust and requests
Tenant to pay its rent and all other sums due under the Lease to Beneficiary,
Tenant shall pay such sums directly to Beneficiary or as Beneficiary may
otherwise request; (b) Tenant shall send a copy of any notice or statement under
the Lease to Beneficiary at the same time Tenant sends such notice or statement
to Landlord; (c) this Agreement satisfies any condition or requirement in the
Lease relating to the granting of a nondisturbance agreement.
3. Foreclosure and Sale. In the event of a Foreclosure Sale,
--------------------
(a) So long as Tenant complies with this Agreement and is not in
default under any of the provisions of the Lease, the Lease shall continue in
full force and effect as a direct lease between Beneficiary and Tenant, and
Beneficiary will not disturb the possession of Tenant, subject to this
Agreement. To the extent that the Lease is extinguished as a result of a
Foreclosure Sale, a new lease shall automatically go into effect upon the same
provisions as contained in the Lease between Landlord and Tenant, except as set
forth in this Agreement, for the unexpired term of the Lease. Tenant agrees to
attorn to and accept Beneficiary as landlord under the Lease and to be bound by
and perform all of the obligations imposed by the Lease, or, as the case may be,
under the new lease, in the event that the Lease is extinguished by a
Foreclosure Sale. Upon Beneficiary's acquisition of title to the Property,
Beneficiary will perform all of the obligations imposed on the Landlord by the
Lease except as set forth in this Agreement; provided, however, that Beneficiary
shall not be: (i) liable for any act or omission of a prior landlord (including
Landlord); or (ii) subject to any offsets or defenses that Tenant might have
against any prior landlord (including Landlord); or (iii) bound by any rent or
additional rent which Tenant might have paid in advance to any prior landlord
(including Landlord) for a period in excess of one month or by any security
deposit, cleaning deposit or other sum that Tenant may have paid in advance to
any prior landlord (including Landlord); or (iv) bound by any amendment,
modification, assignment or termination of the Lease made without the written
consent of Beneficiary; (v) obligated or liable with respect to any
representations, warranties or indemnities contained in the Lease; or (vi)
liable to Tenant or any other party for any conflict between the provisions of
the Lease and the provisions of any other lease affecting the Property which is
not entered into by Beneficiary.
(b) Upon the written request of Beneficiary after a Foreclosure Sale, the
parties shall execute a lease of the Premises upon the same provisions as
contained in the Lease between Landlord and Tenant, except as set forth in this
Agreement, for the unexpired term of the Lease.
<PAGE>
(c) Notwithstanding any provisions of the Lease to the contrary, from and
after the date that Beneficiary acquires title to the Property as a result of a
Foreclosure Sale, (i) Beneficiary will not be obligated to expend any monies to
restore casualty damage in excess of available insurance proceeds; (ii) tenant
shall not have the right to make repairs and deduct the cost of such repairs
from the rent without a judicial determination that Beneficiary is in default of
its obligations under the Lease; (iii) in no event will Beneficiary be obligated
to indemnify Tenant, except where Beneficiary is in breach of its obligations
under the Lease or where Beneficiary has been actively negligent in the
performance of its obligations as landlord; and (iv) other than determination of
fair market value, no disputes under the Lease shall be subject to arbitration
unless Beneficiary and Tenant agree to submit a particular dispute to
arbitration.
4. Subordination and Release of Purchase Options. Tenant represents that
---------------------------------------------
it has no right or option of any nature to purchase the Property or any portion
of the Property or any interest in the Borrower. To the extent Tenant has or
acquires any such right or option, these rights or options are acknowledged to
be subject and subordinate to the Mortgage and are waived and released as to
Beneficiary and any Foreclosure Purchaser.
5. Acknowledgment by Landlord. In the event of a default under the Deed
--------------------------
of Trust, at the election of Beneficiary, Tenant shall and is directed to pay
all rent and all other sums due under the Lease to Beneficiary.
6. Construction of Improvements. Beneficiary shall not have any
----------------------------
obligation or incur any liability with respect to the completion of the tenant
improvements located in the Premises at the commencement of the term of the
Lease.
7. Notice. All notices under this Agreement shall be deemed to have been
------
properly given if delivered by overnight courier service or mailed by United
States certified mail, with return receipt requested, postage prepaid to the
party receiving the notice at its address set forth in the Defined Terms (or at
such other address as shall be given in writing by such party to the other
parties) and shall be deemed complete upon receipt or refusal of delivery.
8. Miscellaneous. Beneficiary shall not be subject to any provision of
-------------
the Lease that is inconsistent with this Agreement. Nothing contained in this
Agreement shall be construed to derogate from or in any way impair or affect the
lien or the provisions of the Deed of Trust. This Agreement shall be governed
by and construed in accordance with the laws of the State of in which the
Property is located.
9. Liability and Successors and Assigns. In the event that Beneficiary
------------------------------------
acquires title to the Premises or the Property, Beneficiary shall have no
obligation nor incur any liability in an amount in excess of $10,000,000 and
Tenant's recourse against Beneficiary shall in no extent exceed the amount of
$10,000,000. This Agreement shall run with the land and shall inure to the
benefit of the parties and, their respective successors and permitted assigns
including a Foreclosure Purchaser. If a Foreclosure Purchaser acquires the
Property
<PAGE>
or if Beneficiary assigns or transfers its interest in the Note and Deed of
Trust or the Property, all obligations and liabilities of Beneficiary under this
Agreement shall terminate and be the responsibility of the Foreclosure Purchaser
or other party to whom Beneficiary's interest is assigned or transferred. The
interest of Tenant under this Agreement may not be assigned or transferred
except in connection with an assignment of its interest in the Lease which has
been consented to by Beneficiary.
IN WITNESS WHEREOF, the parties have executed this Subordination,
Nondisturbance and Attornment Agreement as of the Execution Date.
IT IS RECOMMENDED THAT THE PARTIES CONSULT WITH THEIR ATTORNEYS PRIOR TO THE
EXECUTION OF THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT.
BENEFICIARY:___________________________________
a______________________________________________
By:_____________________
Its:____________________
TENANT: ________________________
a_______________________
By:_____________________
Its:____________________
LANDLORD: ________________________
a
By:______________________
Its:_____________________
<PAGE>
ADDENDUM TO LEASE.
This Addendum is an integral part of the Lease dated March 1, 2000 between Vanni
Business Park, LLC, a Delaware limited liability company ("Lessor"), and
Valicert, Inc., a Delaware corporation ("Lessee"). The Paragraph(s) below are
hereby incorporated into such lease and made a part thereof.
Section 21. Option to Extend.
----------------
21.1 Option. Subject to the remaining provisions of this Section 21, Lessee
------
shall have one option (the "Option") to extend the term of this Lease for a
period of sixty (60) months (such extension period herein called an "Extended
Term").
Such Option shall be exercised, if at all, only by written notice delivered by
Lessee to Lessor at least one hundred eighty (180) days prior to the then-
scheduled expiration of the term hereof. Notwithstanding the foregoing, Lessee
shall not have the right to exercise the Option if (a) Lessee is in default
under this Lease at the time of the purported Option exercise, (b) two or more
events have occurred during the three year period of time immediately preceding
the date of such purported exercise which constitute events of default. The
Extended Term shall be upon all of the terms and conditions hereof, except that
the monthly rent for the Extended Term shall be determined in accordance with
Section 21.2. Upon commencement of the Extended Term, all references herein to
the "term" of this Lease shall be deemed to include the Extended Term. The
option rights of Lessee under this Section 21 are granted for Lessee's personal
benefit and may not be assigned or transferred by Lessee, except pursuant to a
transfer which is deemed a Permitted Transfer in accordance with Section 13.02
above.
21.2 Extended Term Rent. Within thirty (30) days after Lessor's receipt of
------------------
Lessee's notice of exercise of an Option, Lessor shall deliver to Lessee a
proposal setting forth the monthly base rent for the upcoming Extended Term. If
Lessee within ten (10) days after receipt of such proposal agrees to such
proposal, or fails to notify Lessor of its acceptance or rejection of such
proposal (in which event Lessee shall be deemed to have agreed thereto), the
amount of monthly base rent set forth in such proposal shall be binding on
Lessor and Lessee. Should Lessee object in writing to Lessor's proposal within
ten (10) days after receipt thereof, then during the ten (10) day period
following Lessee's objection to Lessor's proposal, Lessor and Lessee shall
negotiate in good faith for the purpose of reaching an agreement regarding the
amount of the monthly base rent during the Extended Term. In the event the
parties fail to agree in a written instrument signed by both parties upon the
amount of the monthly base rent for the Extended Term within such ten (10) day
period, the monthly base rent for the Extended Term shall be determined in the
manner hereafter set forth.
If the parties have not reached agreement on the amount of monthly rent for the
Extended Term by the end of the ten (10) day period of good faith negotiation
referred to in the immediately preceding paragraph, then the fair market monthly
rent for the Premises shall be determined as follows. Within five (5) days
after such ten (10) day period, Lessor and Lessee
<PAGE>
each shall appoint a broker. Each broker appointed under this Section 21 shall
be a California licensed real estate broker having at least 5 years experience
in leasing commercial properties within a ten (10) mile radius of the Premises.
Such brokers so appointed shall each determine the fair market monthly base rent
for the Premises as of the commencement of the Extended Term, taking into
account the value of the Premises and prevailing comparable rentals in the area
including the value of any improvements installed in the Premises. Such brokers
shall, within twenty (20) business days after their appointment, complete their
determinations and submit their reports thereof to Lessor and Lessee. If the
fair market monthly base rent of the Premises set forth in the two (2) broker
reports varies by less than five percent (5%) of the higher rental, then the
fair market monthly base rent of the Premises shall be deemed to be the average
of such two determinations. If the fair market monthly base rent of the Premises
set forth in the two (2) broker reports varies by five percent (5%) or more of
the higher rental, said brokers, within ten (10) days after submission of the
last report, shall appoint a third broker meeting the broker qualifications set
forth above. Such third broker shall, within twenty (20) business days after his
appointment, determine the fair market monthly base rent of the Premises as of
the commencement of the Extended Term, taking into account the same factors
referred to above, and submit his report thereof to Lessor and Lessee. The fair
market monthly base rent determined by the third broker for the Premises shall
be controlling, unless it is less than that set forth in the lower determination
previously obtained, in which case the rental set forth in said lower
determination shall be controlling, or unless it is greater than that set forth
in the higher determination previously obtained, in which case the rental set
forth in said higher determination shall be controlling. If either Lessor or
Lessee fails to appoint an broker, or if a broker appointed by either of them
fails, after his appointment, to submit a report of his determination within the
required period in accordance with the foregoing, the determination in the
report submitted by the broker properly appointed and timely submitting his
report shall be controlling. If the two brokers appointed by Lessor and Lessee
are unable to agree upon a third broker within the required period in accordance
with the foregoing, application shall be made within twenty (20) days thereafter
by either Lessor or Lessee to a local court of law having jurisdiction which
shall appoint a broker having the qualifications specified above. The cost of
all broker determinations under this subparagraph shall be borne equally by
Lessor and Lessee. The amount of monthly rent for the Premises determined as set
forth above in this paragraph shall be applicable during the first year of the
Extended Term, and thereafter, on the first and each succeeding annual
anniversary of the commencement of the Extended Term, shall be increased to an
amount which is 1.0375 times the amount of monthly rent payable during the month
preceding such increase. The intent of the parties is to increase the monthly
rent amount each year during the Extended Term by 3.75% of the immediately
preceding rent amount.
Notwithstanding anything to the contrary contained in this Section 21.2, in no
event shall the monthly base rent for the Extended Term be less than the monthly
base rent payable hereunder for the last full month of the term of this Lease
immediately preceding commencement of the Extended Term. For purposes of the
preceding sentence, the amount of monthly base rent for the last month of the
Lease term shall not be reduced to reflect any abatement of rent which may then
be in effect.
<PAGE>
Further notwithstanding anything to the contrary contained in this Section 21.2,
if the amount of monthly rent applicable at the commencement of the Extended
Term is determined by one or more brokers pursuant to the preceding paragraph,
then Lessee shall be entitled to rescind its exercise of the Option by written
notice thereof to Lessor within twenty four hours after the amount of monthly
rent applicable at the commencement of the Extended Term is determined by said
broker(s) pursuant to this Section 21.2. In the event Lessee so rescinds its
exercise of the Option, then Lessee shall promptly pay the fees owing to the
broker(s) who conducted said fair market rent determinations, shall have no
further rights to extend the term of the lease, and the term of the lease shall
expire on the date it is scheduled to expire in the absence of exercise of the
Option.
<PAGE>
EHXIBIT A
[MAP APPEARS HERE]
MIDDLEFIELD BUSINESS PARK
<PAGE>
EHXIBIT A
[MAP APPEARS HERE]
MIDDLEFIELD BUSINESS PARK
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
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<NET-INCOME> (12,802) (5,458)
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