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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-25829
PORTAL SOFTWARE, INC.
(Exact name of registrant as Specified in its Charter)
Delaware 77-0369737
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10200 South De Anza Boulevard, Cupertino, California 95014
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 572-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on April
18, 2001 as reported on the NASDAQ National Market System, was approximately
$1,024,379,891. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of April 18, 2001, Registrant
had outstanding 171,525,756 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 18, 2001 is incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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PORTAL SOFTWARE, INC.
FORM 10-K
FISCAL YEAR 2001
INDEX
Page
----
PART I
Item 1: Business...................................................... 3
General Information........................................... 3
Business Overview............................................. 3
Industry Background........................................... 3
The Portal Software Strategy.................................. 4
Infranet Software Platform.................................... 5
Foreign Language Support...................................... 8
Customer Service and Support.................................. 10
Partnerships.................................................. 10
Sales and Marketing........................................... 11
Customers..................................................... 12
Research and Development...................................... 12
Competition................................................... 12
Intellectual Property......................................... 13
Employees..................................................... 14
Item 2: Properties.................................................... 14
Item 3: Legal Proceedings............................................. 14
Item 4: Submission of Matters to a Vote of Security Holders........... 14
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5: Matters....................................................... 17
Item 6: Selected Financial Data....................................... 18
Management's Discussion and Analysis of Financial Condition
Item 7: and Results of Operations..................................... 20
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.... 40
Item 8: Financial Statements and Supplementary Data................... 42
Changes in and Disagreements with Accountants on Accounting
Item 9: and Financial Disclosure...................................... 68
PART III
Item 10: Directors and Executive Officers of the Registrant............ 68
Item 11: Executive Compensation........................................ 68
Security Ownership of Certain Beneficial Owners and
Item 12: Management.................................................... 68
Item 13: Certain Relationships and Related Transactions................ 68
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
Item 14: K............................................................. 69
Signatures.............................................................. 71
Exhibit Index........................................................... 72
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PART I
ITEM 1. BUSINESS
General Information
This report contains forward-looking statements that are not historical
facts but rather are based on current expectations, estimates, projections,
beliefs and assumptions about our industry, our company, our business and
prospects. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks", "estimates" and variations of these words and similar
expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties include those described in "Risks Associated With
Portal's Business and Future Operating Results"-- "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this report. We undertake no obligation to update these statements or
publicly release the results of any revisions to the forward-looking
statements that we may make to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.
References in this document to "Portal", "we", "our" and "us" refer to
Portal Software, Inc., a Delaware corporation, its predecessors and each of
its subsidiaries. Portal, Infranet, IntegRate, Infranet Interconnect, Analyze,
Simulate, the Portal logo, Infranet IPT, Infranet Cable and Real Time-No
Limits are trademarks of Portal. Each trademark, trade name or service mark of
any other company appearing in this report belongs to its holder.
Business Overview
Portal develops, markets and supports business infrastructure software to
manage next-generation communications and e-services. Our Infranet software
platform addresses the needs of service providers to rapidly deploy new
services, define new and various business models and price plans and bill
their users. Portal's Infranet product enables the real-time provisioning and
reporting of services, including such functions as account creation, user
authentication and authorization, activity tracking, pricing and rating,
billing and customer service, including self-service, all on a scale of up to
millions of users. Service offerings supported by Infranet include wireless
services; broadband and Internet services, such as DSL, cable and satellite;
and next generation services, such as unified messaging, gaming and electronic
content delivery. In contrast to solutions that require extensive
customization, Portal's Infranet platform provides a standard product that can
generally be used by a wide variety of service providers ranging from emerging
small companies offering an innovative service to a small number of
subscribers to large telecommunications carriers with millions of subscribers.
Portal believes that by providing a platform with an open architecture with
documented APIs, Infranet facilitates the development of new services that can
be integrated with existing and new software applications and that can be
interoperated with other new or existing services offered by other providers
using Infranet. As of March 31, 2001, more than 420 customers have licensed
Infranet, including AOL Time Warner, Qwest Communications Corp. ("Qwest"),
Sprint, NTT, Deutsche Telekom, France Telecom S.A., Telenor Mobil AS and China
Telecom.
Industry Background
The rapid growth of wireless communications and the Internet in recent
years is a global phenomenon that is fundamentally changing the nature of the
telecommunications industry. Web user growth, coupled with the growth of new
types of on-line and electronic commerce, or e-commerce, services, has driven
the emergence of new service providers such as broadband providers, Internet
service providers ("ISPs"), application service providers ("ASPs"), Internet
telephony providers and many others. Similarly, the dramatic increase in the
use of wireless telephones is creating an opportunity for numerous new
wireless based data and voice services. In addition, these major changes are
creating opportunities for numerous new types of services that can be
delivered
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over these new communication networks, such as gaming, unified messaging,
music, financial information and other electronic content. Furthermore, as
mobile voice, cable television and Internet access services become more mature
or commoditized, the providers of these services are focusing on developing
premium and value added services to increase revenue from their customers.
Providers of these communication and e-services need flexible, powerful
business infrastructure software that is readily adaptable to a wide range of
services and smoothly scales from hundreds to millions of users.
The traditional customer management and billing ("CM&B") systems of
communications companies were typically designed to service one particular
type and size of service provider--a large, traditional RBOC-type carrier, for
example, or a small competitive cellular telephone provider and to interface
with and process data from the specific equipment and technologies used in
circuit switched wireline telephone, cellular telephones or cable television
networks. These traditional CM&B solutions can generally be characterized as
(1) inflexible, (2) capable only of periodic processing or "batch-oriented",
(3) proprietary, (4) centralized and (5) difficult to evolve to meet the
complex requirements of providers of new wireless and Internet-based services.
As a result, there is often no smooth evolution path; as the numbers of
subscribers and services grow, a "forklift upgrade" to an entirely different
CM&B product is often required. Finally, existing CM&B solutions are often not
able to address one of the most fundamental requirements facing providers of
new communication services: minimizing the time to market for new products and
services. Accordingly, Portal believes that most of these older systems will
need to be upgraded or replaced with new products adapted to the changing
environment.
The Portal Software Strategy
Portal's strategy is to establish itself as the business platform of choice
for providers of next generation communication services. Key elements of this
strategy are:
Off-the-Shelf Software Platform. Portal has focused on the development of
an off-the-shelf software platform that can address the rapidly changing,
highly flexible requirements of the evolving communications networks and
service offerings. Portal's platform provides a framework for integration with
a wide variety of other business systems and a foundation for the development
of market-specific solutions. Although there are unique aspects to every
service, most share the same underlying business infrastructure requirements,
such as transactional security, financial security and ability to be rapidly
deployed. Rather than provide a highly customized solution to every customer,
our platform strategy enables Portal to provide every customer with the same
basic product, which, in contrast to customized "one off" solutions, creates a
future support and upgrade path to all its customers. Moreover, this approach
enables Portal to translate its experience across a wide variety of markets
and leverage its research and development efforts into improvements to the
platform that can in turn benefit a broad range of Portal's existing and
potential customer base. To meet the unique requirements of specific markets
and industries, our platform has been designed to enable Portal and its
partners to develop specific solution sets that integrate with the core
platform to address those unique and evolving requirements. For example, there
are modules for our Infranet platform specifically designed for providers of
Wireless data services, Internet telephony and cable broadband, to name a few.
Portal believes that this approach facilitates the rapid development of unique
solutions to address new services without the need for Portal, its system
integration partners or customers to build an entirely new infrastructure to
support each such service.
Leverage Partnerships and Alliances with Systems Integrators and with
Platform, Software and Network Equipment Providers. Portal has established a
series of partnerships and alliances with systems integrators, such as
Accenture (formerly Andersen Consulting), Cap Gemini Ernst & Young, NTT Soft
and PricewaterhouseCoopers and hardware platform, software and services
providers, such as Cisco, Compaq, Hewlett-Packard, Microsoft, Oracle and Sun
Microsystems. These partners and alliances provide a global extension of
Portal's direct sales force and are a significant source of leads and
referrals. This network of partners also enables Portal to focus on being a
software platform provider while offering a complete solution using third-
party components that perform complementary functions such as taxation or
payment processing. In addition, Portal's systems integrator partners are
trained to implement Infranet and integrate Infranet with customers' existing
legacy systems. Portal seeks "best of breed" partners in each particular area,
to associate Infranet with
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market-leading technologies, products and systems integrators. Portal believes
that this partnership strategy provides it with a competitive advantage and
serves as a "force multiplier" which leverages Portal's own internal
capabilities.
Grow with Customers and the Markets. While initial sales to customers are
often substantial, Portal's strategy is to maximize its available
opportunities for long-term revenue growth by targeting service providers it
believes have excellent growth prospects and capitalizing on additional sales
opportunities with its customers. Portal's subsequent revenue growth can then
occur through the addition of subscribers, add-on component sales, additional
sales for other users by or to other divisions of an existing customer and
maintenance and support agreements. In turn, Portal intends to continue to
evolve and refine its business to track the growth of next generation
communication services, so that as these services proliferate, Portal's market
and revenue growth opportunities will also increase. Accordingly, Portal
typically prices its products on a per-subscriber basis so that they are cost-
effective for new, promising services that may in time become successful and
grow to be leaders in their market segments and long-term, loyal customers.
Infranet Software Platform
Portal's core product, Infranet, is specifically designed to meet the
complex, mission-critical provisioning, accounting, reporting and marketing
needs of providers of next-generation communication services. Portal's
Infranet software is a real-time, scalable platform that enables service
providers to address the critical business needs of customer management,
services support and accurate and timely billing, while also providing a broad
and flexible platform for both the integration of existing products and
services and the rapid development and deployment of new ones. In the past
year, Portal introduced new versions of Infranet which offer significantly
enhanced features and performance. Portal also introduced several new optional
additional Infranet modules during the last year designed to meet the needs of
specific industry or usage requirements, such as Wireline Manager for circuit-
switched voice services and Cable Manager for cable modem-based services. In
November 2000, Portal acquired SOLUTION42 AG ("Solution42") and its
subsidiaries, a provider of rating and customer management products and
services targeted at telecommunications providers. Based on the Solution42 and
Infranet technologies, Portal introduced in February 2001, a number of
additional products initially focused on wireless service providers.
Managing the Customer Life Cycle
The process of managing and billing customers involves a series of actions
beginning with account creation through billing and post transaction
reporting. Portal refers to these stages of customer interaction as the
"customer life cycle." Infranet integrates the functionality for each stage of
the customer life cycle with a single, unified customer database and a
coordinated set of modular features and functions. The database acts as the
repository for all data collected in real time during each stage of the
customer life cycle as follows:
Account Creation and Service Provisioning. Infranet supports a variety of
registration standards and has all of the features necessary to register
subscribers quickly. The Infranet registration process collects the data
needed to provision and bill the subscriber for services, while also allowing
service providers to collect additional subscriber profile information they
may desire. As the data is collected and verified, Infranet creates customer
accounts and activates the selected services in real time.
Authentication and Authorization. Infranet authenticates users based on a
user name and password, checks account status and authorizes access to
individual services. Infranet can also check for duplicate user names and
available credit or resources, enabling service providers to more effectively
detect and prevent fraud and bad debt.
Activity Tracking. By recording all events in real time in its unified
customer database, Infranet gives service providers the ability to build a
detailed picture of individual customer behavior, either currently or
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historically. This also provides a complete audit trail of customer usage to
resolve any issues that may subsequently arise.
Rating/Pricing. Infranet offers a powerful and flexible "rating engine",
which enables service providers to create a wide variety of pricing plans for
a broad array of services. Infranet can price any tracked event as it occurs,
so that customers and service representatives have real-time access to account
balances and available credit. Infranet's rating engine supports multiple
resource balances and limits, such as cash balances, free hours of usage,
megabytes of server storage or any other resource defined by the service
provider. The rating of a single event can update any or all existing
balances.
Billing and Accounts Receivable. Infranet's billing and payment system has
been designed for flexibility from the ground up. Billing cycles can be any
multiple of a month and can begin on any day of the month. Because of
Infranet's real-time capability, accounts can be accurately closed at the end
of the billing cycle, irrespective of when the billing process actually takes
place. Infranet also supports multiple currencies and payment in real time,
through interfaces with credit card processing systems such as Paymentech and
Clear Commerce, or by invoice. A modular payment interface lets customers
integrate additional payment methods and a general ledger interface lets
service providers allocate journal entries using a general ledger code.
Infranet supports both open item and balance forward accounting.
Customer Management. Customer service representatives can access customer
data through an intuitive, graphical user interface. Infranet organizes
customer information into a variety of standard screens, which can also be
readily modified or configured. Service representatives can:
. create, search and modify customer accounts;
. view activity, balances and invoices;
. perform billing operations; and
. view and modify account hierarchy.
Infranet enables providers to configure permissions and track customer
service activity, ensuring a complete audit trail on each account.
Infranet supplements these capabilities with a browser-based interface that
enables customers to view selected account information directly. This self-
service feature increases customer convenience and can help reduce customer
service costs.
Reporting. Using the data in the Infranet unified customer database,
service providers can create reports that provide business intelligence to
operations, finance, sales and marketing personnel. Infranet includes a full
set of customizable reports and also supports new report development.
Product Offerings
Infranet Base Platform. Portal's product line consists of the Infranet
customer management and billing platform and a number of optional modules that
extend the platform for specific market and customer needs. Most of these
optional modules require the Infranet base system. Others can be purchased
either standalone or in conjunction with the Infranet base system.
Operational Extensions
Infranet Brand Manager: Enables a host provider to create multiple brands,
sometimes referred to as virtual or branded service providers, within one
installation of Infranet. To ensure brand data protection, Infranet uses a
hierarchical security based framework for segmenting each brand by its
relevant system data, including accounts, pricing plans, services and reports.
Infranet will establish roles for all users, including the Customer
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Service Representative, Administrator and Customer, and restricts access
within a given role to information pertaining to the brands for which the user
is privileged. A set of brand management tools allows providers to create and
maintain brand information and security.
Infranet DNA: This option is designed for customers requiring high
availability and fault tolerance. Infranet DNA (distributed nonstop
architecture) uses remote, limited scope satellite installations of Infranet
to handle user authentication, service authorization and event queuing. During
normal operation, these satellites are updated in real time from the main
database to allow for real-time operation in the geographically distributed
environments typical to many service providers. In the event the main database
is offline, the satellites allow the provider to maintain continuous operation
so that customers are not denied access to services and revenue-generating
events are not lost.
Infranet Multi-DB: Enables the distribution of accounts across multiple
databases in a single Infranet installation to support very large subscriber
counts and provide additional scalability.
Functional Extensions
Infranet Inetgrate: Provides a high performance convergent rating and pre-
billing solution with advanced functionality including usage data
manipulation, CDR enrichment, zoning, rating and discounting. A multi-pipeline
architecture offers parallel rating for all types of billing across multiple
services.
Infranet Interconnect: Supports automated interconnect billing for
sophisticated interconnect agreements with both established and new network
service providers. The system's high-performance rating engine checks,
interprets and aggregates event details in near real time. A flexible
reporting system then creates statements for interconnect events, including
incoming, out-going and transit interconnect activities.
Infranet Analyze: Augments Infranet IntegRate with multiple price plan
analysis and aggregation of business information for decision support
purposes. Operates in parallel with standard rating for "one-touch" CDR
processing and data condensation that greatly reduces processing hardware and
storage requirements.
Infranet Simulate: Provides customer base segmentation by analyzing usage
patterns and contract data and offers creation and simulation of new and
complex products and tariffs against customer segments. Enables estimation of
revenue and profit margins for a new tariff or product and assessment of the
impact of a new product or tariff on current revenue and profit margins.
Service and Integration Managers
Email Manager: Integrates Infranet with Sendmail to authenticate user login
to email services and provide real-time authorization of incoming emails.
Dial-Up Manager: Provides real-time authentication, authorization and
accounting for dial-up IP access services through RADIUS-based integration
with terminal server hardware.
LDAP Manager: Provides a real-time interface to LDAP (Lightweight Directory
Access Protocol) directory systems.
IPT Manager: Provides integrated support for features needed by providers
of IP telephony services, such as real-time architecture, support for a broad
range of services and pricing plans, out-of-the-box gateway integration,
prepaid calling card support and zone-based rating. Infranet IPT is designed
to optimize resources for each step of the Internet telephony process, such as
setting up calls, monitoring calls in progress, tracking usage and billing
users.
Netflow Manager: Integrates Infranet with Cisco NetFlow to provide a
solution for flexible tracking, rating and billing of bandwidth usage.
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Infranet Cable/Teracomm Manager: Enables provisioning of Terayon's TeraComm
proprietary cable modem access network. A subscriber can create an account and
select services in Infranet and the network service parameters are copied to
an LDAP directory server using Terayon's provisioning schema.
Infranet Subscriber Services Manager (Infranet SSM): Supports the Cisco
Service Selection Gateway, one of a class of products broadly referred to as
"Subscriber Service Management Systems" which offer the broadband consumer a
wide variety of value-added service options and an easy way to select/deselect
and use the services. Infranet SSM allows service providers to offer and
provision value-added services and also rate and bill the customers for the
usage of the services--all in real time.
Infranet Wireline Manager: Extends Infranet with support for circuit-
switched wireline voice services. Provides out-of-the-box integration with
wireline mediation, taxation and fraud analysis packages.
Infranet EAI Manager: Publishes Infranet business events and allows the
provider to integrate Infranet with enterprise applications directly or using
a connector from an EAI (Enterprise Application Integration) middleware
vendor.
Infranet Cisco VPN Manager: Provides an out-of-the-box integration with
Cisco VPN Solution Center to support billing for VPN services.
Infranet Narus Manager: Provides an out-of-the-box integration with the
Narus mediation package to collect and import IP usage for rating and billing
for IP based services.
Foreign Language Support
Portal provides localized versions of Infranet in ten languages, consisting
of English, traditional Chinese, simple Chinese, French, German, Italian,
Japanese, Korean, Portuguese and Spanish.
Business Benefits
Infranet is designed to enable service providers to capture the business
benefits of increased revenues, reduced costs and improved customer service
through its ability to manage customers and the billing of services.
Increased Revenues. By helping to accelerate the time to market for new
services, Infranet enables service providers to offer a variety of services
quickly and to bundle and price these services in an optimal manner. Infranet
enables services to be activated immediately when ordered by a subscriber, so
that the service provider can immediately begin to collect revenue. Subscriber
activity can then be monitored in real time, which allows the service provider
to promote the consumption of more services through such means as targeted
offers or increased credit limits. In addition, Infranet enables a service
provider to analyze and "mine" subscribers' service usage data in real time,
which can in turn be used to measure the success of marketing and targeting
efforts and to identify new opportunities for subscriber revenue. Using
Infranet's data analysis features, a service provider can quickly determine
which offerings are not successful and easily make appropriate adjustments.
For example, an unsuccessful pricing offer can quickly be terminated or tuned
for better subscriber response. Finally, increased billing accuracy reduces
the incidence of uncollected revenue and fraud.
Reduced Costs. Infranet is designed to be an out-of-the-box solution that
minimizes the service provider's software implementation, maintenance and
subscriber servicing costs. Through the immediate validation of subscriber
data and verification of credit, Infranet reduces the need for data correction
and the incidence of credit problems. In addition, subscribers can access
their billing and service information directly, which reduces the degree of
costly person-to-person service required to satisfy the subscriber. Real-time
monitoring and authentication substantially reduce the opportunities for fraud
by ensuring that access to the service provider's network is granted only if
the user has been properly verified. Infranet's monitoring and data analysis
capabilities can help the service provider pinpoint unprofitable offerings or
identify a degree of usage that justifies volume purchases of specific
resources such as high-speed data circuits at a lower cost.
8
Improved Customer Service. Infranet enables service providers to offer
improved billing accuracy, enhanced customer service quality and
responsiveness to their subscribers. Using Infranet, service providers can
easily tailor their offerings on a bundled or unbundled basis, substantially
increasing customer choice without incurring additional costs. Up-to-the-
minute account balances and status information can be made available to users
on a 24x7 basis, either over the Internet or via customer service
representatives. Potential customer account issues can be identified and
resolved quickly, since there is no need to wait for regular billing cycles to
expose these issues. Infranet's real-time capability enhances responsiveness
to subscribers' needs, which can help reduce subscriber "churn", or turnover.
Infranet Technology
Portal's software architecture consists of the Infranet platform, upon
which market specific functionality is layered using documented open APIs.
This approach, designed from the start to use object-oriented programming
techniques, enables new processes and services to be readily incorporated,
thus allowing an evolving multi-service model to be built without the need to
change the underlying software foundations. Similarly, changes can be made in
the object-based platform without affecting the behavior of the market
specific functions. Portal designed Infranet to meet the critical functional
requirements sought by service providers. These requirements include
scalability, enterprise integration and interoperability, comprehensive
functionality and ease of use, flexibility and improved time to market--all
operating on a real-time basis.
Scalability and Reliability. Infranet runs on a wide range of systems, from
a laptop computer running Windows NT to a large cluster of UNIX-based servers.
Infranet has been designed, using object-oriented programming methodologies,
to scale from hundreds to millions of users through the incremental addition
of servers. This capability allows a service provider to grow its business
operating system infrastructure incrementally as its level of business grows
without the need for architecture redesign or large-scale system replacements.
For example, new servers can be added without taking the system offline,
eliminating costly downtime. By running Infranet on multiple servers, a
service provider can reduce exposure to various types of failures, including
individual server failure, power failure and loss of physical facilities.
Automatic load balancing features smooth out usage spikes and ensure high
availability. Infranet's object-to-relational data model is optimized for high
performance on-line transaction processing and high reliability.
Enterprise Integration and Interoperability. Infranet has been designed
with documented, open APIs that allow Portal, its customers, partners and
third party software developers to integrate Infranet with existing
applications and services requiring minimal effort and programming overhead.
This capability enables new services to be deployed quickly and efficiently
while maintaining smooth interoperability with pre-established services. For
example, a telecommunications carrier might use Infranet to add Internet-
related services which then appear on a subscriber's monthly telephone bill.
Infranet runs on server operating systems from Hewlett-Packard, Microsoft and
Sun Microsystems and utilizes database software from Microsoft and Oracle.
Infranet also can be readily integrated with a variety of packaged software
applications, such as help desk, accounting, taxation and payment systems.
Comprehensive Functionality and Ease of Use. Portal has drawn on its own
experiences to develop a comprehensive suite of pre-defined, ready-to-use
customer management and billing functions, such as customer registration,
business policies, pricing plans and payment methods. Portal also seeks to
provide upgrades and enhancements to Infranet on a regular basis, with a
strong emphasis on response to customer feedback. Infranet employs a simple,
intuitive Windows-based user interface for efficient addition and deletion of
services and functions, as well as a set of templates for Web-based
capabilities such as subscriber registration, password changes and account
balance inquiries. Infranet addresses the entire customer management and
billing life cycle, from account creation to monitoring and pricing to back-
end management and reporting.
Flexibility and Improved Time to Market. Infranet is designed to be a
modular, extensible software product. This flexibility allows each Portal
customer to tailor its individual Infranet installation to meet the exact
needs of a particular environment, set of services and group of subscribers.
The service provider is thereby
9
empowered to respond quickly to the rapidly changing needs of the next-
generation communications and e-services marketplace. In addition, Infranet
can generally be configured to a service provider's needs relatively quickly,
enabling its customers to improve their time to market with new products and
services.
Pricing
Portal has structured the pricing of its products to accommodate its target
customer segments, including the large telecommunications companies, next-
generation communications companies and e-services providers. Portal typically
prices its software products on a per subscriber basis, with customary volume
discounts. Supplemental purchases of additional components are also priced on
a per subscriber basis, while annual maintenance and support contracts are
priced as a percentage of the associated license revenues. Portal's initial
sales of licenses and associated services, maintenance and support generally
range from several hundred thousand dollars to several million dollars.
Customer Service and Support
Portal believes that a high level of customer service and support is
critical to the successful sale and usage of its products. Portal provides
support to its customers through maintenance and support agreements. Support
includes assistance with technical problems related to the use of Portal's
software and software maintenance and upgrade releases. Portal generally
provides its base level of customer support via an Internet-based customer
management system and higher levels of support via telephone and on-site
technical assistance. Portal provides customer technical support for its
products primarily from its Cupertino, California location and from its
facilities in Virginia, the United Kingdom and Hong Kong. Portal plans to
establish additional customer support sites domestically and internationally
commensurate with customer needs.
Portal also offers project implementation services to assist customers in
the project planning and implementation of the Portal solution. Portal
consulting services are also available for customers requiring assistance in
software configuration, upgrade assistance or other Infranet-related technical
services. Portal professional services consultants are located in several
cities in the United States and various countries outside the United States.
Portal has a leveraged business model based on using systems integrator
partners to provide jointly or separately a range of services, including
first-line technical support and project implementation services, in various
locations around the world.
Partnerships
Portal has established a series of partnerships and alliances with systems
integrators such as Accenture, Cap Gemini Ernst & Young, NTT Soft and
PricewaterhouseCoopers and hardware platform, software and network equipment
providers such as Cisco, Compaq, Hewlett-Packard, Microsoft, Oracle and Sun
Microsystems. Portal employs this network of partnerships to both expand its
sales, service and marketing capabilities and to extend the technical and
functional application of its solution. Portal's network of partnerships
allows Portal to maintain its focus as a product company while simultaneously
obtaining sales, technical and service leverage through its partners.
There are two types of partners in Portal's "Market Partnership Model":
Market Partners. Portal leverages its own sales and marketing efforts by
taking advantage of the marketing and lead generation capabilities of its
market partners. Market partners are specialized technology and services firms
that adapt Portal's products to the needs of a specified market segment. For
example, in the wireless market, SignalSoft Corporation and OpenWave Systems,
Inc. provide complementary services and technologies, which are integrated
with Infranet through Portal's open APIs. In turn, a set of systems
integrators, such as Accenture, Cap Gemini Ernst & Young, NTT Soft and
PricewaterhouseCoopers, adapts this combination of Infranet and add-on
technologies to the specific environment of each provider of on-line services.
This combination of add-on technology and systems integration allows Portal to
serve as the enabling technology for
10
a complete solution in each of its markets. This approach also provides a
mechanism for Portal to enter new markets as opportunities develop.
Platform Partners and Alliances. Portal forms partnerships and alliances
with network equipment and hardware platform providers, such as Cisco, Compaq,
Hewlett-Packard, Nokia and Sun Microsystems, database software developers such
as Microsoft and Oracle and software applications developers with best-of-
breed products to provide superior solutions to its customers. By providing
its partners with a fully documented set of open APIs, Portal ensures that
Infranet can interoperate with their products. This allows Portal to partner
with the leading-edge vendors in each area of functionality and provides the
flexibility to rapidly adopt new products and technologies rapidly.
Sales and Marketing
Sales
Portal's sales strategy is to pursue targeted accounts through a
combination of a direct sales force and distribution partners. Portal targets
its sales efforts at providers of next-generation communications and e-
services ranging from emerging growth companies to the largest
telecommunications companies.
Portal maintains direct sales personnel in twelve states across the United
States and internationally in Australia, Canada, China, France, Germany, Hong
Kong, Italy, Japan, Malaysia, Mexico, Poland, Singapore, South Korea, Spain,
Sweden, Taiwan and the United Kingdom. The direct sales force is organized
into individual account teams, which include both sales representatives and
systems engineers. Portal generates leads from contacts made through marketing
partners, seminars and conferences, which are usually co-sponsored by
marketing partners, market research, its Web site, trade shows, customers and
its ongoing public relations program. The direct sales force is complemented
by telemarketing representatives. Portal qualifies the leads and assigns an
account team to prospective customers. The account team then initiates the
sales process, which generally involves multiple presentations to information
technology and business professionals within the prospective customer's
organization. Portal intends to increase the size of its direct sales force
and establish additional sales offices domestically and internationally.
Portal complements its direct sales force with a series of partnerships and
alliances with systems integrators such as Accenture, Cap Gemini Ernst &
Young, NTT Soft and PricewaterhouseCoopers, as well as with hardware platform
and software applications developers and service providers such as Cisco,
Compaq, Hewlett-Packard, Microsoft and Sun Microsystems. These partners
provide a global extension of Portal's direct sales force and are a
significant source of leads and referrals. Portal believes these relationships
also serve to validate its technology and facilitate broad market acceptance
of Portal products. Portal's direct sales force works closely with its
reseller partners.
Portal has derived, and anticipates continuing to derive, a significant
portion of its revenues from customers that have significant relationships
with Portal's market and platform partners. Many of these partners also work
with competing software companies and Portal's success will depend on their
willingness and ability to devote sufficient resources and efforts to
marketing Portal's products. Portal's agreements with these parties typically
are in the form of non-exclusive agreements that may be terminated by either
party without cause or penalty and with limited notice. In some cases, the
agreements permit the partner to resell Portal's products or provide for the
payment to the partner of a referral fee. There can be no assurance that
Portal will be able to successfully maintain existing relationships or to
establish relationships with additional partners.
11
Marketing
Portal's marketing programs are focused on creating awareness of, and
generating interest in, Portal products. Portal engages in a variety of
marketing activities, including:
. managing and maintaining its Web site;
. conducting direct mailings and ongoing public relations campaigns;
. conducting seminars;
. participating in industry tradeshows; and
. establishing and maintaining relationships with recognized industry
analysts.
Portal is an active participant in technology-related conferences and
demonstrates its products at trade shows targeted at providers of next-
generation communications and e-services. Portal also focuses on a range of
joint marketing strategies and programs with its partners in order to leverage
their existing strategic relationships and resources.
Customers
Portal's typical customers are providers of wireless, Internet-based and
other next generation communication services. As of March 31, 2001, Portal had
licensed Infranet to more than 420 customers worldwide, including: AOL Time
Warner, Vodafone UK, Sprint, US West, Qwest, Juno Online, Deutsche Telekom,
France Telecom, China Telecom, UUNET and Viag Interkom.
In fiscal year 2001 and 1999, no individual customer accounted for 10% or
more of Portal's total revenues. In fiscal year 2000, one customer accounted
for 10% of Portal's total revenues.
A substantial portion of Portal's license and services revenues in any
given quarter has been, and is expected to continue to be, generated from a
limited number of customers with large financial commitment contracts. As a
result, if a contract is cancelled or deferred or an anticipated contract does
not materialize, Portal's revenues would be materially and adversely affected.
Research and Development
Portal believes that strong product development capabilities are essential
to its strategy of enhancing its core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of its product and service offerings. Portal has invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within Portal and is designed to provide a framework for defining and
addressing the activities required to bring product concepts and development
projects to market successfully. In addition, Portal has recruited key
engineers and software developers with experience in the enterprise, database
and operating system software markets and has complemented these individuals
by hiring senior management with experience in software used by providers of
next-generation communication services.
Portal's research and development expenses totaled approximately $57.7
million, $26.1 million and $11.3 million for fiscal years 2001, 2000 and 1999,
respectively. As of March 28, 2001, approximately 378 employees were engaged
in research and development activities.
Competition
Portal competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Portal competes on the basis of performance,
functionality, flexibility, scalability, extensibility, ease of integration
and price. Portal believes it competes favorably with respect to those
factors. Portal faces competition from
12
providers of CM&B software such as Amdocs Ltd. (which acquired Solect
Technology), the Kenan Systems division of Lucent Technologies, Digiquant A/S
and Convergys Corporation (which has acquired Geneva Technology Ltd.). Portal
also competes with systems integrators and with internal MIS departments of
large telecommunications carriers. Portal is aware of other major ISPs,
software developers and smaller entrepreneurial companies that are focusing
significant resources on developing and marketing products and services that
will compete with Infranet. The failure of Portal to develop products that
compete successfully with those of other suppliers in the market would harm
our business.
Portal anticipates continued growth and competition in the
telecommunications industry and the entrance of new competitors into the CM&B
software market, and that the market for its products and services will remain
intensely competitive. Many of Portal's current and future competitors have
significantly more personnel and greater financial, technical, marketing and
other resources than Portal.
Intellectual Property
Portal relies upon a combination of patent, copyright, trade secret and
trademark law to protect its intellectual property. Portal currently has three
issued U.S. patents relating to its technology that expire in 2017. While
Portal relies on patent, copyright, trade secret and trademark law to protect
its technology, Portal believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements and reliable product maintenance are more essential to
establishing and maintaining a technology leadership position. There can be no
assurance that others will not develop technologies that are similar or
superior to Portal's technology.
Portal generally enters into confidentiality or license agreements with its
employees, consultants and corporate partners and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite Portal's efforts to protect proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology or to develop products with the same functionality as
Portal's products. Policing unauthorized use of its products is difficult and
Portal cannot be certain that the steps it has taken will prevent
misappropriation of its technology, particularly in foreign countries where
the laws may not protect proprietary rights as fully as in the United States.
In addition, certain of Portal's license agreements require it to place the
source code for Infranet into escrow. Such agreements generally provide that
these parties will have a limited, non-exclusive right to use this code if:
(i) there is a bankruptcy proceeding by or against Portal; (ii) Portal ceases
to do business without a successor; or (iii) Portal discontinues providing
maintenance and support.
Substantial litigation regarding intellectual property rights exists in the
software industry. Portal expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in its
industry segments grows and the functionality of products in different
industry segments overlaps. Some of Portal's competitors in the market for
CM&B software may have filed or may intend to file patent applications
covering aspects of their technology that they may claim Portal's technology
infringes. Portal cannot be certain that any of these competitors will not
make a claim of infringement against it with respect to its products and
technology.
Portal's success and ability to compete are substantially dependent upon
its internally developed technology. However, portions of Infranet incorporate
software developed and maintained by third-party software vendors, such as
operating systems, tools and database vendors. Portal may have to rely on
third-party software vendors and developers to a larger degree in future
products. Although Portal believes it could find other sources for these
products, any significant interruption in the supply of these products could
adversely impact Portal's sales unless and until it can secure another source.
13
Employees
As of April 4, 2001, Portal had 1,486 employees, 469 of whom were engaged
in professional service, customer service and support, 423 of whom were in
sales and marketing, 370 of whom were in engineering and 224 of whom were in
finance, administration and operations. Portal's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of who is bound by an employment agreement
requiring service for any defined period of time. The loss of the services of
one or more of Portal's key employees could harm its business. Portal's future
success also depends on its continuing ability to attract, assimilate and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, particularly in the San Francisco Bay Area
where Portal is headquartered, due to the limited number of people available
with the necessary technical skills and understanding of the Internet and
communications networks and there can be no assurance that Portal can retain
or attract key personnel in the future. None of Portal's employees are
represented by a labor union. Portal has not experienced any work stoppages
and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
Portal leases for its headquarters two buildings of approximately 142,700
and 93,200 square feet, respectively, in Cupertino, California. Portal
occupies these premises under two leases expiring in December 2010. In
connection with its relocation to these two buildings, Portal vacated a 24,455
square foot facility and subleased it for the remainder of the lease term,
which expires in October 2003. In addition to its principal office space in
Cupertino, California, Portal also leases facilities and offices domestically
in California, Colorado, Connecticut, Georgia, Illinois, Massachusetts, New
York, New Jersey, Pennsylvania, Texas, Virginia and Washington and
internationally in Australia, Canada, China, Hong Kong, France, Germany,
Italy, Japan, Malaysia, Mexico, Poland, Singapore, South Korea, Spain, Sweden,
Taiwan and the United Kingdom. These leases are for terms expiring from April
2001 to April 2021. Portal believes that the facilities it currently leases
for its headquarters are sufficient to meet its needs through the next twelve
months. Portal also owns two buildings in Quickborn, Germany comprising
approximately 1,908 square meters of space. Portal plans to lease additional
space in other locations to support the evolution of its foreign operations
and domestic sales and marketing organizations.
Securing and building out facilities takes significant lead time.
Furthermore, because of the need to satisfy projected future expansion, the
amount of space leased is generally more than the amount currently required.
As a result, we frequently sublease the portions of leased facilities that we
have leased to meet our future expansion plans but do not currently need.
Portal has leased approximately 73,120 square feet and 38,140 square feet for
its regional headquarters facilities in Herndon, Virginia and Slough, United
Kingdom, respectively, for terms of ten and twenty years. The amounts leased
exceed our current requirements and Portal plans to sublease a majority of the
facilities for a portion of the lease term. To the extent that we are unable
to sublease surplus space at an amount equal to our rent obligations for that
space or to the extent sublessees fail to perform their obligations to pay
rent, we could incur greater operating expenses than we initially planned.
Such increases in operating expenses in a period could cause us to exceed our
planned expense levels and adversely affect our financial results for that
period.
ITEM 3. LEGAL PROCEEDINGS
Portal is not currently a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of Portal as of April 1, 2001:
Name Age Position
---- --- --------
John E. Little...... 43 Chief Executive Officer, President and Chairman of
the Board of Directors
Jack L. Acosta...... 53 Chief Financial Officer and Vice President, Finance
Marc Aronson........ 44 Vice President, Engineering
Mitchell L. Gaynor.. 41 Vice President, General Counsel and Secretary
David S. Labuda..... 37 Chief Technology Officer
Kevin P. Mosher..... 44 Vice President, Sales
Michael E. Regan.... 45 Vice President, Professional Services
Steven R. Sommer.... 46 Vice President, Marketing and Business Development
Annette D. Surtees.. 45 Vice President, Human Resources
John E. Little. Mr. Little founded Portal in March 1985 and has been Chief
Executive Officer and a Director since its inception. In addition, Mr. Little
served as President from inception to March 1996 and has served as President
since November 1996. Prior to founding Portal, Mr. Little was an independent
consultant for a number of companies including Knight-Ridder Inc., AT&T Corp.,
Raytheon Company, Dow Jones News Retrieval, a subsidiary of Dow Jones &
Company, Inc., Victor Company of Japan (JVC) and Sun Microsystems, Inc.
Jack L. Acosta. Mr. Acosta has served as Chief Financial Officer and Vice
President, Finance since February 1999. In addition, Mr. Acosta served as
Secretary from February 1999 through April 1999. From July 1996 to January
1999, Mr. Acosta served as Executive Vice President and Chief Financial
Officer for Sybase, Inc., a database company. From December 1994 until July
1996, Mr. Acosta served as Vice President, Engineering Services, Integration
and Business Management of Sybase. From March 1993 until December 1994, Mr.
Acosta served as President, Chief Operating Officer and a director of Tanon
Manufacturing, Inc., a manufacturing and engineering services company. Prior
to March 1993, Mr. Acosta held various management positions at Ungermann-Bass
Inc., Atari, Inc., Diablo Systems, Inc. and Ford Motor Company. Mr. Acosta has
announced his intention to retire in mid-2001.
Marc Aronson. Mr. Aronson joined Portal in August 1998 as Senior Director
of the SETI engineering group. In March 2000, he became Vice President,
Engineering. From July 1997 to August 1998, Mr. Aronson was a Senior
Engineering Director for Adobe Systems Inc., a software company. From
September 1990 to July 1997, Mr. Aronson served as Engineering Director and in
other engineering positions with Adobe.
Mitchell L. Gaynor. Mr. Gaynor joined Portal in April 1999 as General
Counsel and Secretary. In December 1999, he became Vice President, General
Counsel and Secretary. From January 1997 to April 1999, Mr. Gaynor served as
Vice President, General Counsel and Secretary of Sybase. From May 1996 to
January 1997, he served as Vice President and Associate General Counsel of
Sybase and from February 1993 to May 1996, Mr. Gaynor served as Senior
Corporate Counsel of Sybase.
David S. Labuda. Mr. Labuda has served as Chief Technology Officer since he
joined Portal in March 1994. Between March 1994 and March 2000 he also served
as Portal's Vice President, Engineering. From June 1990 to March 1994, Mr.
Labuda was employed by Sun Microsystems, Inc., a network computing company, as
a Director of UNIX Development. From August 1985 to June 1990, Mr. Labuda
worked for Sun Microsystems as a Senior Engineer and Manager, including
managing the software development for the SparcStation 1 and
15
SparcStation 2 projects. Mr. Labuda received the first Sun Presidential Award
and holds three patents from his tenure there.
Kevin P. Mosher. Mr. Mosher joined Portal in March 1997 as Vice President,
Sales. From January 1996 to February 1997, Mr. Mosher served as Vice President
of Sales for Software Emancipation, Inc., a software development and testing
company. From May 1995 to November 1995, Mr. Mosher served as Vice President,
National Sales at Watermark Software, Inc., an enterprise software company.
From February 1991 to May 1995, Mr. Mosher served as Regional Vice President
at Interleaf, Inc., a software tool company. From 1985 to 1991, Mr. Mosher
held various senior sales management positions at Oracle Corporation.
Michael E. Regan. Mr. Regan joined Portal in February 1999 as Vice
President, Professional Services. From June 1998 to February 1999, Mr. Regan
served as Vice President, Professional Services for Siebel Systems, Inc., a
supplier of enterprise relationship management systems. From February 1988 to
June 1998, Mr. Regan served as Vice President, Professional Services for
Sybase, Inc.
Steven R. Sommer. Mr. Sommer joined Portal in July 1997 as Vice President,
Marketing and Business Development. From May 1993 to July 1997, Mr. Sommer
served as Vice President, Worldwide Marketing and Enterprise Solutions for
Informix Corporation, an enterprise database company. From February 1990 until
April 1993, Mr. Sommer served as Vice President, Marketing for Cognos, Inc.,
an applications and tools development software company. Prior to February
1990, Mr. Sommer held various other marketing positions at Digital Equipment
Corporation, Scitex America Corp., McKinsey & Company, Inc. and Procter and
Gamble Company.
Annette D. Surtees. Ms. Surtees joined Portal in August 1998 as Vice
President, Human Resources. From February 1998 through July 1998, Ms. Surtees
served as Director of Human Resources for VLSI Technology, Inc., an integrated
circuit design and manufacturing company. From February 1997 to February 1998,
Ms. Surtees was an independent consultant. From May 1988 until February 1997,
Ms. Surtees held various human resources management positions at Seagate
Technology, Inc., a data technology company, most recently as Vice President,
Human Resources for Corporate, U.S. and European Operations.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Portal Software, Inc. Common Stock, par value $0.001, is traded on the
NASDAQ National Market System under the symbol "PRSF." The price per share
reflected in the table below represents the range of low and high closing sale
prices for Portal's Common Stock as reported in the NASDAQ National Market
System for the quarters indicated. Portal's common stock began publicly
trading on May 6, 1999.
High Low
------- -------
Fiscal 2000:
Quarter ended July 31, 1999............................. $29.969 $13.875
Quarter ended October 31, 1999.......................... $36.500 $17.125
Quarter ended January 31, 2000.......................... $63.000 $29.313
Fiscal 2001:
Quarter ended April 30, 2000............................ $83.938 $31.250
Quarter ended July 31, 2000............................. $71.500 $35.125
Quarter ended October 31, 2000.......................... $62.000 $28.813
Quarter ended January 31, 2001.......................... $39.875 $ 4.906
Portal has never paid cash dividends on its capital stock. Portal currently
intends to retain any earnings for use in its business and does not anticipate
paying any cash dividends in the foreseeable future. The closing sale price of
Portal's Common Stock as reported in the NASDAQ National Market System on
April 18, 2001 was $8.66. The number of stockholders of record of Portal's
Common Stock as of April 10, 2001 was 739.
During fiscal year 2001, Portal issued unregistered securities to a limited
number of persons as follows:
On November 2, 2000 in connection with the acquisition of Solution42 AG
Portal issued 7,500,000 shares of common stock into escrow pending the
exercise of certain options to receive Portal common stock in exchange for
stock in a Portal subsidiary. In January 2001, the former shareholders of
Solution42 partially exercised their options and received 5,317,439 of the
shares of common stock held in the escrow. Up to the balance of
2,182,561 shares of Portal common stock may be issued upon satisfaction of
certain contractual commitments and exercise of the remaining exchange options
held by the former Solution42 shareholders.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering and Portal believes that each
transaction was exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or
Rule 701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients in these
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with Portal or otherwise, to
information about Portal.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected consolidated financial data for Portal
Software, Inc. ("Portal") for the past five fiscal years. To better understand
the data in the table, investors should also read the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of Portal and the Notes to Consolidated
Financial Statements. The basic and diluted net loss per share and the pro
forma basic and diluted net loss per share computations exclude potential
shares of common stock (options and common stock) subject to repurchase rights
held by Portal, preferred stock and warrants, since their effect would be
antidilutive. Pro forma net loss per share gives effect to the conversion of
the convertible preferred stock (using the if-converted method) from the
original date of issuance. See Note 1 of Notes to Consolidated Financial
Statements for a detailed explanation of the determination of the shares used
to compute basic and diluted net loss per share and pro forma basic and
diluted net loss per share. This table has been restated to reflect the impact
of a two-for-one stock split, which became effective on January 20, 2000. See
Note 7 in Notes to Consolidated Financial Statements. The historical results
are not necessarily indicative of results to be expected for any future
period.
Years Ended January 31,
----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- -------
(in thousands, except per share amounts)
Consolidated Statement of
Operations Data:
Revenues:
License fees ................ $180,334 $ 67,049 $ 13,536 $ 6,892 $ 3,944
Services .................... 87,973 36,000 13,133 2,524 1,101
-------- -------- -------- ------- -------
Total revenues ............ 268,307 103,049 26,669 9,416 5,045
Costs and expenses:
Cost of license fees ........ 4,917 2,596 458 970 62
Cost of services............. 59,555 22,808 9,425 2,152 518
Amortization of purchased
developed technology........ 862 -- -- -- --
Research and development..... 57,685 26,090 11,252 5,628 2,527
Sales and marketing.......... 96,836 43,671 14,112 5,436 2,371
General and administrative... 31,886 15,349 6,253 2,616 1,821
Amortization of deferred
stock compensation ......... 3,726 8,235 2,297 -- --
In-process research and
development................. 9,200 -- -- -- --
Amortization of goodwill..... 14,864 -- -- -- --
-------- -------- -------- ------- -------
Total costs and expenses... 279,531 118,749 43,797 16,802 7,299
-------- -------- -------- ------- -------
Loss from operations........... (11,224) (15,700) (17,128) (7,386) (2,254)
Interest and other income,
net........................... 12,898 9,696 435 (201) (20)
-------- -------- -------- ------- -------
Income (loss) before income
taxes......................... 1,674 (6,004) (16,693) (7,587) (2,274)
Provision for income taxes..... (3,981) (1,616) (715) -- --
-------- -------- -------- ------- -------
Net loss....................... $ (2,307) $ (7,620) $(17,408) $(7,587) $(2,274)
======== ======== ======== ======= =======
Basic and diluted net loss per
share ........................ $ (0.01) $ (0.06) $ (0.29) $ (0.18) $ (0.09)
======== ======== ======== ======= =======
Shares used in computing basic
and diluted net loss per
share......................... 159,865 124,816 59,062 41,571 24,864
======== ======== ======== ======= =======
Pro forma basic and diluted net
loss per share (unaudited).... $ (0.05) $ (0.15)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited).... 140,836 116,167
======== ========
18
January 31,
-----------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- ------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $ 69,323 $ 43,887 $11,809 $14,646 $1,540
Short-term investments and
restricted short-term
investments....................... 148,473 157,402 -- -- --
Working capital (deficit) ......... 181,355 178,717 (9,150) 6,581 (651)
Restricted long-term investments .. 3,466 5,856 -- -- --
Total assets....................... 630,054 265,529 32,344 23,125 3,527
Long-term obligations, net of
current portion................... 7,652 1,525 2,022 1,500 447
Stockholders' equity (net capital
deficiency)....................... 486,389 208,370 (6,551) 7,763 112
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including, but not limited to, statements relating to future sales, gross
margins, product development, operating expense levels, and the sufficiency of
financial resources to support future operations, and are subject to the Safe
Harbor provisions created by that statute. Such statements are based on
current expectations that involve inherent risks and uncertainties, including
those discussed below and under the heading "Risks Associated with Portal's
Business and Future Operating Results" that could cause actual results to
differ materially from those expressed. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak as of the date
hereof. We undertake no obligation to publicly release the results of any
revisions to any forward-looking statements, which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
Portal develops, markets and supports business infrastructure software to
manage next-generation communications and e-services. Portal was incorporated
in California in March 1994 as Portal Information Network, Inc. In December
1995, Portal Communications Company, a predecessor company that was founded in
1985, was merged with and into Portal Information Network, Inc. Portal
Communications Company operated a proprietary, network-based on-line system,
provided Internet access and hosted private label on-line services from its
inception until 1996 when these services were discontinued and the individual
customers were sold to Sprint Corporation. In October 1997, Portal Information
Network, Inc. changed its name to Portal Software, Inc. In April 1999, Portal
reincorporated in Delaware.
In late 1993, we began focusing on developing and marketing real-time CM&B
software for the Internet and other next-generation communications and e-
services. The first generally available version of the product, named
Infranet, was shipped in May 1996.
Beginning with fiscal 1997, substantially all of our revenues have come
from the license of one product, Infranet and from related services. Revenues
consist of Infranet license, consulting, training, support and maintenance
fees. License revenues are comprised of perpetual or multiyear license fees,
which are primarily derived from contracts with corporate customers and
resellers. We believe that future license revenues will be generated from
three sources:
. license fees from new customers;
. license fees for new products to existing customers; and
. growth in the subscriber base of its existing customers, which will lead
to increased revenue from subscriber-based licenses.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
Portal obligations with regard to implementation exist or remain, the fee is
fixed or determinable and collectibility is probable. For electronic delivery,
the software is considered to have been delivered when we have provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee
is collected. Revenue from arrangements with customers who are not the
ultimate users (resellers) is not recognized until evidence of an arrangement
with an end user has been received.
Services revenues are primarily comprised of revenues from systems
integration or other consulting fees, maintenance agreements and training.
Arrangements that include software services are evaluated to determine whether
those services are essential to the functionality of other elements of the
arrangement. When software
20
services are considered essential, revenue under the arrangement is recognized
using contract accounting. When software services are not considered
essential, the revenue related to the software services is recognized as the
services are performed. Maintenance agreements provide for technical support
and include the right to unspecified upgrades on an if-and-when-available
basis. Maintenance revenue is deferred and recognized, as services revenue, on
a straight-line basis over the life of the related agreement, which is
typically one year. Customer advances and billed amounts due from customers in
excess of revenue recognized are recorded as deferred revenue.
Our cost of license fees includes a royalty payment for third-party
technology included in Infranet. Resellers' commissions are also included in
cost of license fees when we are paid directly by a customer for a contract
originated by a systems integrator. Agreements with some of the integrators
require us to make a payment equal to a percentage of the license and
maintenance revenues recognized. We essentially did not incur any shipping,
packaging or documentation costs, as our product was delivered electronically
over the Internet.
Cost of services consists primarily of headcount-related expenses, costs
related to outside consultants, travel and overhead associated with delivering
consulting and training and providing support to our customers.
Amortization of purchased developed technology arises from the acquisition
of Solution42 and is related to purchasing developed technology in the amount
of $13.8 million. The value is being amortized over its estimated useful life
of 4 years.
We have a limited operating history as a software company. We incurred a
net loss of $2.3 million for fiscal 2001, $7.6 million for fiscal 2000 and
$17.4 million for fiscal 1999. As of January 31, 2001, we had an accumulated
deficit of $37.9 million. We expect to increase our sales and marketing,
product development and administrative expenses for the foreseeable future. As
a result, we will need to generate significant revenues from licenses of our
products to achieve and maintain operating profitability.
We have generated our historical Infranet revenues from more than 420
customers through March 31, 2001. We have established a series of
relationships with hardware platform, software and service providers and
systems integrators. We have derived, and anticipate that we will continue to
derive, a substantial portion of our revenues from customers that have
significant relationships with our market and platform partners.
21
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of total revenues. These historical results are not necessarily
indicative of results to be expected for any future period.
Years Ended
January 31,
------------------
2001 2000 1999
---- ---- ----
Revenues:
License fees............................................. 67 % 65 % 51 %
Services................................................. 33 35 49
--- --- ---
Total revenues......................................... 100 100 100
--- --- ---
Costs and expenses:
Cost of license fees..................................... 2 3 2
Cost of services......................................... 22 22 35
Amortization of purchased developed technology........... -- -- --
Research and development................................. 22 25 42
Sales and marketing...................................... 36 42 53
General and administrative............................... 12 15 23
Amortization of deferred stock compensation.............. 1 8 8
In-process research and development...................... 3 -- --
Amortization of goodwill................................. 6 -- --
--- --- ---
Total costs and expenses............................... 104 115 163
--- --- ---
Loss from operations....................................... (4) (15) (63)
Interest and other income, net............................. 5 9 1
--- --- ---
Income (loss) before income taxes.......................... 1 (6) (62)
Provision for income taxes................................. (2) (1) (3)
--- --- ---
Net loss............................................... (1)% (7)% (65)%
=== === ===
Revenues
Total revenues were $268.3 million, $103.0 million and $26.7 million in
fiscal years 2001, 2000 and 1999, respectively. Total revenues increased by
approximately $165.3 million or 160%, in fiscal 2001 from fiscal 2000 and
increased approximately $76.4 million or 286%, in fiscal 2000 from fiscal
1999. License fees revenues increased as a percentage of total revenues, for
both periods, primarily due to increased license sales as a result of the
maturation of the Infranet product and the expansion of our sales and
marketing operations. No individual customer accounted for 10% or more of
total revenues for the years ended January 31, 2001 or 1999. One customer
accounted for 10% of total revenues for the year ended January 31, 2000.
License fees totaled $180.3 million, $67.0 million and $13.5 million in
fiscal 2001, 2000 and 1999, respectively. License fees increased by
approximately $113.3 million or 169%, in fiscal 2001 from fiscal 2000 and
increased approximately $53.5 million or 395%, in fiscal 2000 from fiscal
1999. The increase in license fees, for both periods, was primarily due to
continued expansion of our marketing activities and growth in our sales force
as well as greater demand for and acceptance of Infranet.
Services revenues were $88.0 million, $36.0 million and $13.1 million in
fiscal 2001, 2000 and 1999, respectively. Service revenues increased by
approximately $52.0 million or 144%, in fiscal 2001 from fiscal 2000 and
increased approximately $22.9 million or 174%, in fiscal 2000 from fiscal
1999. The increase in services revenues, for both years, resulted from the
increase in consulting, training, support and maintenance service fees related
to the growth in new customers and to new implementations of Infranet and the
renewal of maintenance and support contracts by existing customers.
22
The following table shows our revenue by region:
Year Ended % Change Year Ended % Change Year Ended
January 31, 2001 2001 to 2000 January 31, 2000 2000 to 1999 January 31, 1999
---------------- ------------ ---------------- ------------- ----------------
(in thousands) (in thousands) (in thousands)
Geographical Revenues:
North America......... $156,976 135% $ 66,920 243% $19,531
Percentage of total
revenues .......... 59% 65% 73%
International
Europe ............... 64,953 127% 28,659 550% 4,406
Percentage of total
revenues............. 24% 28% 17%
Intercontinental...... 46,378 521% 7,470 173% 2,732
Percentage of total
revenue............ 17% 7% 10%
-------- -------- -------
Total
international...... 111,331 208% 36,129 406% 7,138
Percentage of total
revenues .......... 41% 35% 27%
-------- -------- -------
Total revenues.... $268,307 160% $103,049 286% $26,669
======== ======== =======
North American revenues are defined, by us, as revenues from the United
States and Canada. North American revenues increased by approximately $90.1
million or 135%, in fiscal 2001 from fiscal 2000 and increased approximately
by $47.4 million or 243%, in fiscal 2000 from fiscal 1999. The increase in
North American revenues, for both periods, was primarily due to continued
expansion in North American marketing activities and growth of our sales force
as well as greater acceptance of Infranet.
International revenues for Europe is defined by us as Europe, Middle East
and Africa and Intercontinental is defined by us as Asia-Pacific, Japan and
Latin America. International revenues increased approximately $75.2 million or
208%, in fiscal 2001 from fiscal 2000 and increased approximately $29.0
million or 406%, in fiscal 2000 from fiscal 1999. European revenues increased
approximately $36.3 million or 127%, in fiscal 2001 from fiscal 2000 and
increased approximately $24.3 million or 550%, in fiscal 2000 from fiscal
1999.
Intercontinental revenues increased approximately $38.9 million or 521%, in
fiscal 2001 from fiscal 2000 and increased approximately $4.7 million or 173%,
in fiscal 2000 from fiscal 1999. The increase in international revenues, for
both periods, was primarily due to the growth of our direct sales force and
increased marketing efforts worldwide.
Expenses
Cost of License Fees
Cost of license fees consists of resellers' commission payments to systems
integrators and third-party royalty obligations. Cost of license fees was $4.9
million, $2.6 million and $0.5 million in fiscal years 2001, 2000 and 1999,
respectively. Cost of license fees increased approximately $2.3 million or
89%, in fiscal 2001 from fiscal 2000 and increased approximately $2.1 million
or 467%, in fiscal 2000 from fiscal 1999. The increase in cost of license
fees, for both periods, is primarily due to increased license revenue and
increased resellers' commissions resulting from expanding our base of systems
integrator partners. Gross margin for license fees was approximately 97%, 96%
and 97% in fiscal 2001, 2000 and 1999. For the years ended January 31, 2001,
2000 and 1999, we essentially did not incur any shipping, packaging or
documentation costs, as our product was delivered electronically over the
Internet.
23
Cost of Services
Cost of services primarily consists of maintenance, consulting and training
expenses. Cost of services was $59.6 million, $22.8 million and $9.4 million
in fiscal years 2001, 2000 and 1999, respectively. Cost of services increased
approximately $36.7 million or 161%, in fiscal 2001 from fiscal 2000 and
increased approximately $13.4 million or 142%, in fiscal 2000 from fiscal
1999. The increase in cost of services, for both periods, is primarily due to
an increase in the number of consulting and technical support personnel
necessary to support both the expansion of our installed base of customers and
new implementations. Gross margin for services was approximately 32% in fiscal
2001 compared to approximately 37% in fiscal 2000. The decrease in gross
margin, during fiscal 2001, was primarily due to the costs associated with the
acquisition and assimilation of Solution42. Gross margin for services was
approximately 37% in fiscal 2000 compared to approximately 28% in fiscal 1999.
The increase in gross margin, during fiscal 2000, was primarily due to a
decrease in the use of higher cost third-party personnel as a result of the
hiring of additional employees for our consulting business. We expect cost of
services to increase in the future as a result of increased demand for
services.
Amortization of Purchased Developed Technology
In fiscal 2001, we recorded an asset of $13.8 million for purchased
developed technology as a result of acquiring Solution42 (see Note 3 in Notes
to Consolidated Financial Statements). The value was determined, with the
assistance of independent third-party appraisers, by estimating the present
value of cash flows from developed technology as based on management and
industry assumptions and market data. This purchased developed technology is
being amortized, on a straight-line basis, over its estimated useful life of
four years. Amortization of purchased developed technology will continue to
negatively impact our operating results in the future. Amortization expense is
estimated to be $3.4 million in fiscal 2002, $3.4 million in fiscal 2003,
$3.4 million in fiscal 2004 and $2.7 million in fiscal 2005.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs for our development and certain technical support efforts.
Research and development expenses were $57.7 million, $26.1 million and $11.3
million in fiscal years 2001, 2000 and 1999. Research and development expenses
increased approximately $31.6 million or 121%, in fiscal 2001 from fiscal 2000
and increased approximately $14.8 million or 132%, in fiscal 2000 from fiscal
1999. The increase in research and development, for both periods, was
primarily due to an increase in the number of research and development
personnel necessary to support both expanded functionality of Infranet and
increases in our quality assurance and product publications operations. We
currently believe our investment in research and development will increase in
the future as we hire additional research and development employees. We have
not capitalized any software development costs to date.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel and related costs for our
direct sales force, marketing staff and marketing programs, including trade
shows, advertising and costs associated with the recruitment of new and
maintenance of existing, strategic partnerships. Sales and marketing expenses
were $96.8 million, $43.7 million and $14.1 million in fiscal years 2001, 2000
and 1999. Sales and marketing expenses increased by approximately $53.2
million or 122%, in fiscal 2001 from fiscal 2000 and increased approximately
$29.6 million or 209%, in fiscal 2000 from fiscal 1999. The increase in sales
and marketing expenses, for both periods, was due to a number of factors,
including an increase in the number of sales and marketing personnel, the
opening of new sales offices worldwide and increased marketing programs. We
expect that sales and marketing expenses will increase in the future as we
hire additional sales and marketing personnel, increase spending on marketing
programs and establish sales offices in additional domestic and international
locations.
24
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources and facilities, as well as information system expenses
not allocated to other departments. General and administrative expenses were
$31.9 million, $15.3 million and $6.2 million in fiscal 2001, 2000 and 1999,
respectively. General and administrative expenses increased approximately
$16.5 million or 108% in fiscal 2001 from 2000 and approximately $9.1 million
or 145% in fiscal 2000 from fiscal 1999. The increase for both periods was
primarily due to a higher number of general and administrative personnel and
to additional legal and accounting costs incurred in connection with business
activities. We expect that general and administrative expenses will increase
in the future as we hire additional general and administrative personnel and
continue to incur greater legal and accounting costs in connection with
expanding business activities.
Amortization of Deferred Stock Compensation
We recorded deferred stock compensation of approximately $16.8 million in
fiscal 1999, representing the difference between the exercise prices of
options granted to acquire certain shares of common stock during fiscal 1999
and the deemed fair value for financial reporting purposes of our common stock
on their respective grant dates. We amortized deferred compensation expense of
approximately $3.7 million, $8.2 million and $2.3 million during the years
ended January 31, 2001, 2000 and 1999, respectively. This compensation expense
relates to options awarded to individuals in all operating expense categories.
Total deferred compensation at January 31, 2001 of approximately $2.7 million
is being amortized over the vesting periods of the options, which is generally
4 years, using a graded vesting method. The amortization of deferred
compensation remaining as of January 31, 2001, is estimated to be $1.9 million
in fiscal 2002 and $0.8 million in fiscal 2003.
In-Process Research and Development
In fiscal 2001, we recorded a one-time charge of $9.2 million for in-
process research and development projects, related to the acquisition of
Solution42, for which technological feasibility had not been established and
no future alternative uses existed (see Note 3 in Notes to the Consolidated
Financial Statements). At the time of the acquisition, the total fair value of
these projects was estimated to be $9.2 million. The value of the projects was
determined, with the assistance of independent third-party appraisers, by
estimating the costs to develop the in-process technology into commercially
feasible products and estimating the present value of the net cash flows
management believed would result from the products.
Amortization of Goodwill
Goodwill, as related to the acquisition of Solution42, accounted for
approximately 35% and 45% of total assets and stockholders' equity,
respectively, as of January 31, 2001. In fiscal year 2001, amortization
expense of goodwill was $14.9 million. Goodwill amortization expense related
to the completed acquisition will continue to have a negative impact on our
operating results in future periods. Assuming we do not experience any
impairment of value of goodwill that would require an acceleration of
amortization, amortization expense is estimated to be $61.1 million for fiscal
2002, $61.1 million for fiscal 2003, $61.1 million for fiscal 2004 and $46.0
million in fiscal 2005.
Interest and Other Income, Net
Interest and other income includes interest and dividend income from cash,
cash equivalents and short-term and long-term investments offset by interest
expense paid on capital leases and notes payable. Interest and other income
was $12.9 million, $9.7 million and $0.4 million in fiscal 2001, 2000 and
1999, respectively. Other income, for fiscal 2000, includes a $3.8 million
one-time gain upon remeasurement of the liability related to the put option
granted to Accenture, which was settled upon the completion of our initial
public offering in May 1999 (see Note 5 in Notes to Consolidated Financial
Statements). Interest and other income increased
25
approximately $3.2 million or 33%, in fiscal 2001 from fiscal 2000 and
increased approximately $9.3 million or 2,129%, in fiscal 2000 from fiscal
1999. The increase in fiscal 2001 from fiscal 2000 was primarily due to
proceeds from the initial and secondary stock offerings, done in May 1999 and
October 1999, being invested for a full year. The increase in fiscal 2000 from
fiscal 1999 was primarily due to the one-time gain upon remeasurement of the
put option and interest income from the investment of funds received upon
completion of the initial public offering.
Provision for Income Taxes
The income tax provision was $4.0 million, $1.6 million and $0.7 million
for fiscal 2001, 2000 and 1999. The income tax provision for fiscal 2001 and
2000 primarily relates to foreign withholding taxes on revenue and tax on
earnings generated from operations in certain foreign jurisdictions. The
income tax provision for fiscal 1999 is the result of alternative minimum
taxes, foreign withholding taxes on revenue, and tax on earnings generated
from operations in certain foreign jurisdictions. Under Statement of Financial
Accounting Standards No. 109 (FAS 109), deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the tax rates and laws that
will be in effect when the differences are expected to reverse. FAS 109
provides for the recognition of deferred tax assets if realization of such
assets are more likely than not. Based on the weight of available evidence, we
have provided a valuation allowance against certain deferred tax assets.
Management will continue to evaluate the realizability of the deferred tax
assets on a quarterly basis.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments (including restricted
investments) totaled $217.8 million at January 31, 2001, compared to a balance
of $201.3 million at January 31, 2000.
We generated $34.6 million in cash from operations in the year ended
January 31, 2001, an increase of $31.2 million over the $3.4 million generated
in the year ended January 31, 2000. Net cash provided by operations in fiscal
2001 was primarily comprised of a $33.6 million increase in deferred revenue,
a $14.9 million increase in accrued compensation and an $8.5 million increase
in other accrued liabilities. This was offset by a $52.1 million increase in
accounts receivable, a $5.4 million increase in prepaids and other current
assets and a $2.2 million increase in other assets. Net loss adjustments made
for non-cash expenses such as depreciation, amortization and amortization of
deferred stock compensation amounted to $8.4 million and $3.7 million,
respectively, for the year ended January 31, 2001 compared to $1.9 million and
$8.2 million, respectively, for the year ended January 31, 2000. Additionally,
for the year ended January 31, 2001, net loss adjustments were made for non-
cash expenses related to the acquisition of Solution42 (see Note 3 in Notes to
Consolidated Financial Statements). Net loss adjustments for in-process
research and development and the amortization of purchased developed
technology and goodwill amounted to $9.2 million and $15.7 million,
respectively.
We have continued to make significant investments in software, equipment
and facilities. During the year ended January 31, 2001, we purchased computer
equipment and software, made leasehold improvements and purchased other
capital equipment amounting to approximately $41.9 million, primarily to
support its ongoing and expanding operations and information systems. Of this
amount, $1.5 million was funded with capital leases.
We have raised equity capital from investors to fund our operations. In
fiscal 2001, we raised an additional $21.9 million from sales of common stock
issued from our employee stock purchase plan and upon the exercise of stock
options by employees, net of repurchases. In fiscal 2000, we completed an
initial public offering and concurrent private sales of stock to Cisco
Systems, Inc. and Accenture that collectively raised $102.4 million. We also
completed a follow-on offering in October 1999, which raised approximately
$106.0 million, net of underwriting commissions and expenses. During the same
period, we raised an additional $6.6 million from sales of common stock issued
from our employee stock purchase plan and upon the exercise of stock options
by employees and warrants by third parties, net of repurchases. In fiscal
1999, we raised $0.4 million from the exercise of warrants for preferred stock
issued in connection with its capital lease line facility and its term loan
26
and raised an additional $0.4 million from sales of common stock, primarily
upon exercise of stock options by employees.
Historically, we have also used debt and leases to partially finance our
operations and capital purchases. We have a $3.0 million capital lease line
facility with an equipment lessor, which was established in fiscal 1998. The
lease line has a term of 48 months and bears interest at a rate of 8.5% per
annum. Separately, during the year ended January 31, 2000, we repaid an
outstanding $3.0 million term loan with a finance company. The term loan was
collateralized by substantially all of our assets, with the exception of new
equipment purchased using funds provided by the capital lease line facility.
On April 15, 1999, we entered into a line of credit with a bank under which we
may borrow up to $5.0 million. Amounts borrowed under this line of credit bear
interest at a rate of the bank's prime rate plus 0.5% and matured on April 13,
2000. Portal declined to renew the line of credit on April 15, 2000. We
borrowed $1.0 million under the line of credit, which was used to repay the
remaining $1.0 million installment of the term loan, which matured in April
1999. The outstanding balance on the line of credit was repaid in May 1999
from the proceeds of our initial public offering. We also converted a customer
deposit for prepaid services into a $1.1 million short-term liability in
fiscal 1999. This liability bore interest at a rate of 10% per annum and was
repaid in July 1999.
In November 2000, we acquired Solution42. The liabilities assumed as part
of the acquisition include short-term and long-term notes payable. There are
two short-term notes, both of which bear interest at 6% per annum and are
unsecured. One note does not require payments on the principal until June
2002. However, this note has been classified as short-term as it our intention
to pay off the note in fiscal 2002. The balance due as of January 31, 2001 is
$0.8 million. The second note is due June 2001 and had a balance of $1.5
million as of January 31, 2001. The long-term notes payable are four mortgages
for two facilities located in Germany. Two of the mortgages accrue interest at
4.45% per annum. Principal and interest are due in December 2010 and June 2011
on these two mortgages. As of January 31, 2001, the balances due on these
loans were $0.8 million and $0.7 million, respectively. The other two
mortgages accrue interest at 5.10% and 4.88% per annum. Principal and interest
payments are made on a monthly basis. These two mortgages are due in October
2015 and November 2024. As of January 31, 2001, the balances due are $0.3
million and $0.2 million, respectively.
The capital lease line facility comprised the entire amount of the debt
obligations on our balance sheet as of January 31, 2000. The capital lease
line facility includes certain covenants requiring minimum liquidity, tangible
net worth and profitability over time and becomes due immediately if we fail
to meet these covenants. We have currently, and have always been, in
compliance with these covenants.
On April 12, 1999, we agreed to enter into a strategic alliance with
Accenture under which Accenture agreed to provide services to Portal and the
parties agreed to expand their existing marketing alliance and work closely
together to expand their customer service and marketing relationship. Under
this agreement, we agreed to pay Accenture for its services a minimum services
fee in cash of $2.8 million and a cash settled put for 400,000 of the shares
which were purchased by Accenture in a private placement concurrent with our
initial public offering. This put guaranteed a closing value of $6.0 million
at the end of the first day of trading. Because the closing value exceeded
$6.0 million, we were not required to make any payment related to this put.
The definitive agreement was entered into and the $2.8 million payment was
made in March 2000. The resulting intangible is being amortized over a period
of approximately four and one half years, the term of the alliance, beginning
in April 2000.
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. During fiscal 2000,
we entered into two leases for our worldwide headquarters that expire in
December 2010. In connection with these leases, we issued two letters of
credit totaling $5.3 million in lieu of a security deposit for the facilities
(see Note 6 in Notes to Consolidated Financial Statements). In connection with
all leases, we will make payments of approximately $14.1 million, $13.3
million, $12.9 million, $12.4 million and $12.4 million in the years ending
January 31, 2002, 2003, 2004, 2005 and 2006, respectively and a total of $63.7
million thereafter until expiration of the leases.
27
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
international operations and other factors. We expect to devote substantial
capital resources to hire qualified personnel for our sales, support,
marketing and product development organizations, to expand marketing programs,
to establish additional facilities worldwide and for other general corporate
activities. Although we believe that our current cash balances and cash
generated from operations will be sufficient to fund our operations for at
least the next 12 months, we may require additional financing within this time
frame. Additional funding, if needed, may cause dilution to our stockholders
or the incurrence of debt, and such funding not be available on terms
acceptable to us, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 establishes methods for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. In June 1999, the FASB delayed implementation of FAS 133, so that
implementation is now required for fiscal years beginning after June 15, 2000.
As Portal does not currently engage in hedging activities, Portal expects that
the adoption of FAS 133 will not have a material impact on its financial
position or results of operations. Due to the delayed effective date, Portal
will be required to implement FAS 133 for fiscal 2002.
28
RISKS ASSOCIATED WITH PORTAL'S BUSINESS AND FUTURE OPERATING RESULTS
Portal's future operating results may vary substantially from period to
period. The price of our common stock will fluctuate in the future and an
investment in our common stock is subject to a variety of risks, including but
not limited to the specific risks identified below. Inevitably, some investors
in our securities will experience gains while others will experience losses
depending on the prices at which they purchase and sell securities.
Prospective and existing investors are strongly urged to carefully consider
the various cautionary statements and risks set forth in this report.
This report contains forward-looking statements that are not historical
facts but rather are based on current expectations, estimates and projections
about our business and industry, our beliefs and assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates"
and variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of
which are beyond our control, are difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements. These risks and uncertainties include those
described in this "Risks Associated With Portal's Business and Future
Operating Results" and elsewhere in this report. Forward-looking statements
that were true at the time made may ultimately prove to be incorrect or false.
Readers are cautioned not to place undue reliance on forward-looking
statements, which reflect our management's view only as of the date of this
report. We undertake no obligation to update these statements or publicly
release the results of any revisions to the forward-looking statements that we
may make to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
It is difficult to predict our business because we have a limited history
operating as a provider of business infrastructure software
The results of operations for the fiscal year ended January 31, 2001
contained in this report are not necessarily indicative of results for the
fiscal year ending January 31, 2002 or any other future period. Moreover,
Portal has a relatively brief operating history as a provider of business
infrastructure software and had no meaningful license revenue until 1996.
Therefore, Portal will experience the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets,
including those discussed in this report. Our business strategy may not prove
successful and we may not successfully address these risks.
We cannot be certain that we will sustain or increase profitability
In order to be profitable, we must increase our revenues. We may not be
able to increase or even maintain our revenues and we may not achieve
sufficient revenues or profitability in any future period. We incurred net
losses of approximately $2.3 million for fiscal year 2001, $7.6 million for
fiscal year 2000, $17.4 million for fiscal year 1999, $7.6 million for fiscal
year 1998 and $2.3 million for fiscal year 1997. Excluding acquisition-related
costs, we had an operating profit in fiscal year 2001. As a result of
acquisition-related costs, we will experience net losses for fiscal year 2002.
We expect that our revenues in the first quarter of fiscal year 2002 will be
lower than our revenues in the fourth quarter of fiscal year 2001. As a
result, net income (and net income excluding acquisition-related costs) will
decline in the first quarter of fiscal year 2002.
In addition, we expect to increase our sales and marketing, product
development and administrative expenses. As a result, we will need to generate
significant revenues from sales of our products to achieve and maintain
profitability. We expect that we will face increased competition that may make
it more difficult to increase our revenues. Even if we are able to increase
revenues, we may experience price competition which would lower our gross
margins and our profitability. Another factor that will lower our gross
margins is any increase in the percentage of our revenues that is derived from
indirect channels and from services, both of which have lower margins. We
cannot be certain that we can sustain or increase operating and net
profitability on a quarterly or annual basis.
29
Our revenues will be adversely affected as a result of economic conditions and
stock market valuations affecting our target markets
We primarily market our products and services to providers of next
generation communication services. The substantial decline in the market value
of "dot-com" companies in the second half of 2000 has made it more difficult
for emerging communication companies to obtain financing for their operations.
Moreover, the market value, financial results and prospects of many large and
established companies, including many large telecommunications companies, have
also declined or degraded significantly. Emerging growth and established
communications companies recently have been reducing or defering their
purchases of software and related products, and the introduction of many new
communication services has been delayed or cancelled. This trend in technology
and software spending will seriously harm our business until conditions
improve. Any general decrease by our customers and potential customers in
their rate of software and network investments would result in a significant
decrease in our revenues and operating income.
Any economic downturn or recession affecting our customers, whether as part
of a general economic trend or a trend affecting a specific industry, will
increase the difficulty of collecting accounts receivable or the time required
to collect them. Failure to collect accounts receivable in a timely manner
could result in increased write-offs, higher reserves and lower cash reserves
that would adversely affect our financial results and available cash
resources.
Our quarterly operating results may fluctuate in future periods and we may
fail to meet expectations
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of one or more public market analysts and
investors and the price of our common stock may fall. Failure by technology
companies to meet or exceed analyst expectations or any resulting changes in
analyst recommendations or ratings frequently results in substantial decreases
in the market value of the stock of such companies. For example, our stock
decreased significantly after the release of our financial results for the
quarter ended October 31, 2000. Factors that could cause quarterly
fluctuations include:
. variations in demand for our products and services, including decreases
caused by reductions in technology spending within our target markets;
. the timing and execution of individual contracts, particularly large
contracts that would materially affect our operating results in a given
quarter;
. the timing of sales of our products and services;
. our ability to develop and attain market acceptance of enhancements to
Infranet and new products and services;
. delays in introducing new products and services;
. new product introductions by competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. announcements of new versions of products that cause customers to
postpone purchases of Portal's current products;
. the mix of products and services sold;
. the mix of sales channels through which our products and services are
sold;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. the timing of releases of new versions of third-party software and
hardware products that work with our products;
30
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
technical support and other management personnel;
. our ability to expand our operations;
. the amount and timing of expenditures related to expansion of our
operations; and
. global economic conditions generally, as well as those specific to ISPs
and other providers of communications and Internet-based services.
We have difficulty predicting the volume and timing of orders. For example,
substantially all of our future revenues will come from licenses of Infranet
and related services, and the market for this product is in its early stages
of development and is therefore unpredictable. In any given quarter, our sales
have involved, and we expect will continue to involve, large financial
commitments from a relatively small number of customers. As a result, the
cancellation or deferral of even a small number of licenses of Infranet would
reduce our revenues, which would adversely affect our quarterly financial
performance. Also, we have often booked a large amount of our sales in the
last month of the quarter and often in the last week of that month.
Accordingly, delays in the closing of sales near the end of a quarter could
cause quarterly revenue to fall substantially short of anticipated levels.
Significant sales may also occur earlier than expected, which could cause
operating results for later quarters to compare unfavorably with operating
results from earlier quarters.
We record as deferred revenue fees from contracts that do not meet our
revenue recognition policy requirements. While a portion of our revenues each
quarter is recognized from deferred revenue, our quarterly performance will
depend primarily upon entering into new contracts to generate revenues for
that quarter. New contracts that we enter into may not result in revenue in
the quarter in which the contract was signed and we may not be able to predict
accurately when revenues from these contracts will be recognized.
We plan to increase our operating expenses in the future to expand our
sales and marketing operations, broaden our customer support capabilities,
develop new distribution channels and fund greater levels of research and
development. We determine our operating expenses largely on the basis of
anticipated revenue trends and a high percentage of our expenses are fixed in
the short term. As a result, a delay in generating or recognizing revenue
could cause significant variations in our operating results from quarter-to-
quarter and could result in substantial operating losses.
Our quarterly operating results may fluctuate in future periods due to
seasonal variations and we may fail to meet expectations
We may also experience seasonality in our business. In many software
companies, the rate of growth of license fees revenues tends to decline from
the fourth quarter of one year to the first quarter of the next year, due in
part to the structure of sales compensation plans. We currently expect that
our revenue in the first quarter of fiscal year 2002 will be lower than the
preceding quarter. If we experience such seasonality in the future, our rate
of growth or absolute revenues could decline in the first quarter of a fiscal
year compared to the preceding fourth quarter. In addition, the European
operations of many companies experience some flatness in the summer months.
Portal may also experience such a pattern in its European operations. For
example, the rate of growth in our European operations in the second quarter
of fiscal year 2001 was significantly lower than the rate of growth in our
other regions. Such seasonality may cause our results of operations to
fluctuate or become more difficult to predict and could cause us to fail to
meet internal or analyst expected financial results.
It is difficult to predict the timing of individual orders because Infranet
has a long and variable sales cycle
To date, the sales cycle for Infranet generally has been three to nine
months or more. The long sales and implementation cycles for Infranet may
cause license revenues and operating results to vary significantly from
31
period to period. Along with systems integrators and our other distribution
partners, we spend significant time educating and providing information to our
prospective customers regarding the use and benefits of Infranet. Even after
purchase, our customers tend to deploy Infranet slowly and deliberately,
depending on the specific technical capabilities of the customer, the size of
the deployment, the complexity of the customer's network environment and the
quantity of hardware and the degree of hardware configuration necessary to
deploy Infranet.
Our business depends on the commercial acceptance of Infranet and it is
uncertain to what extent the market will accept this product
Our future growth depends on the commercial success of Infranet.
Substantially all of our licensing revenues are derived from Infranet. Our
business will be harmed if our target customers do not adopt and purchase
Infranet. Prospective customers may base their purchasing decisions based on a
vendor's ability to support their CM&B needs for both their new services and
their other existing service offerings, such as fixed wire or mobile voice
telephony or cable television. For example, in the wireless communication
area, many providers are currently conducting or planning trials to select the
CM&B and other technologies to be used in their next generation wireless
communication networks that will support both voice and data communications.
Our ability to address these current and future service requirements with our
current version of Infranet and planned future enhancements may affect the
market acceptance of Infranet by prospective customers who desire an
integrated CM&B solution for their different services. Our future financial
performance will also depend on the successful development, introduction and
customer acceptance of new and enhanced versions of Infranet. We are not
certain that our target customers will widely adopt and deploy Infranet as
their CM&B solution. In the future we may not be successful in marketing
Infranet or any new or enhanced products or services. Our future revenues will
also depend on our customers licensing software for additional applicants or
for additional subscribers. Their failure to do so could harm our business.
Significant technical challenges arise in our business because many of our
customers purchase and implement Infranet in phases, deploy Infranet across a
variety of computer hardware platforms and integrate it with a number of
legacy systems, third-party software applications and programming tools.
Implementation currently involves participation by our professional services
group, which has limited resources. Some customers may also require us to
develop costly customized features or capabilities, which increase our costs
and consume our limited customer service and support resources. Also, revenues
we derive from our services business have a significantly lower margin than
revenues derived from licensing Infranet. If new or existing customers have
difficulty deploying our products or require significant amounts of our
professional services support, our operating margins could be harmed.
Inability to sublease surplus office space would increase operating expenses
and adversely effect operating results
We must periodically change our office facilities in various locations as
the number of existing and projected employees changes for those locations or
as existing leases expire. Securing and building out facilities takes
significant lead time. Furthermore, because of the need to satisfy projected
future expansion, the amount of space leased is generally more than the amount
currently required. Significant office leases have terms of between 5 and 20
years. As a result, we frequently sublease the portions of leased facilities
that we have leased to meet our future expansion plans but do not currently
need. For example, we have leased under long-term leases significant amounts
of space in for our regional headquarters facilities in Herndon, Virginia and
Slough, United Kingdom in excess of our current requirements. To the extent
that we are unable to sublease surplus space at an amount equal to our rent
obligations for that space or to the extent sublessees fail to perform their
obligations to pay rent, we could incur greater operating expenses than we
initially planned. Such increases in operating expenses in a period could
cause us to exceed our planned expense levels and adversely affect our
financial results for that period.
32
We must hire and retain qualified sales personnel to sell Infranet
Our financial success and our ability to increase revenues in the future
depend considerably upon productivity of our direct sales force that has
historically generated a majority of Portal's license revenues. This
productivity will depend to a large degree on our success in recruiting,
training and retaining additional direct salespeople. There is a shortage of
direct sales personnel with the skills and expertise necessary to sell our
products. Our business will be harmed if we fail to hire or retain qualified
sales personnel, or if newly hired salespeople fail to develop the necessary
sales skills or develop these skills more slowly than we anticipate.
In addition, because we currently rely on indirect sales for a significant
portion of our market opportunities, we may miss sales opportunities that are
available through other sales distribution methods and other sources of leads,
such as domestic and foreign resellers. In the future, we intend to augment
our indirect sales distribution methods through additional third-party
distribution arrangements. However, there is no guarantee that we will
successfully augment these arrangements or that the expansion of indirect
sales distribution methods will increase revenues. We may be at a serious
competitive disadvantage if we fail to enhance these indirect sales channels.
We also use systems integrators and other strategic relationships to implement
and sell Infranet
We have entered into relationships with third-party systems integrators, as
well as with hardware platform and software applications developers and
service providers. We have derived, and anticipate that we will continue to
derive, a significant portion of our revenues from customers that have
significant relationships with our market and platform partners. We could lose
sales opportunities if we fail to work effectively with these parties or fail
to grow our base of market and platform partners.
Many of these partners also work with competing software companies and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to marketing our products versus the products of others.
We may not be able to enter into additional, or maintain our existing,
strategic relationships on commercially reasonable terms, or at all. Our
agreements with these parties typically are in the form of nonexclusive
referral fee or reseller agreements that may be terminated by either party
without cause or penalty and with limited notice. Therefore, there is no
guarantee that any single party will continue to market our products. If these
relationships fail, we will have to devote substantially more resources to the
distribution, sales and marketing, implementation and support of Infranet than
we would otherwise, and our efforts may not be as effective as those of our
partners, either of which would harm our business.
Our quarterly revenue is generated from a limited number of customers and our
customer base is concentrated and the loss of one or more of our customers
could cause our business to suffer
A substantial portion of our license and services revenues in any given
quarter has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitments. For example, two
customers accounted for a total of 27% of total revenues for the quarter ended
October 31, 1999, one customer accounted for 10% of total revenue during the
year ended January 31, 2000 and one customer accounted for 10% of total
revenue during the quarter ended January 31, 2001. As a result, if a large
contract is cancelled or deferred or an anticipated contract does not
materialize, our business would be harmed. The communication industries we
have targeted are consolidating, which could reduce the number of potential
customers available to us. In addition, several large telecommunications
companies have announced decreases in their anticipated capital spending,
which could have the effect of reducing future orders of our products.
Unpredictable foreign payroll taxes may cause operating results to fluctuate
in future periods and we may fail to meet expectations
We are generally subject to employer payroll taxes when our employees
exercise their stock options. The employer payroll taxes are assessed on each
employee's gain, which is the difference between the price of our common stock
on the date of exercise and the exercise price. During a particular period,
these payroll taxes could
33
be material. These employer payroll taxes are recorded as an expense and are
assessed at tax rates that vary depending upon the employee's taxing
jurisdiction in the period such options are exercised based on actual gains
realized by employees. However, because we are unable to predict how many
stock options will be exercised, at what price and in which country during any
particular period, we cannot predict, the amount, if any, of employer payroll
expense that will be recorded in a future period or the impact on our future
financial results.
Our business will suffer dramatically if we fail to successfully plan and
manage changes in the size of our operations
Our ability to successfully offer our products and services in a rapidly
evolving market requires an effective planning and management process. We plan
to increase the scope of our operations domestically and internationally and
have in recent years grown our headcount substantially. On April 4, 2001, we
had 1,486 employees, compared to a total of 634 employees on January 31, 2000.
This growth has placed, and our anticipated future operations will continue to
place, a significant strain on our management systems and resources and on our
internal training capabilities. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and will need to continue to expand, train and manage our work
force worldwide. We expect that we will have to change our facilities in
certain locations, and we may face difficulties and significant expenses
identifying and moving into suitable office space and subleasing or assigning
any surplus space. Our business will suffer dramatically if we fail to
effectively manage changes in the size and scope of our operations.
Our significant international operations and our planned expansion of our
international operations make us much more susceptible to risks from
international operations
For the year ended January 31, 2001 and the year ended January 31, 2000, we
derived approximately 41% and 35% of our revenue, respectively, from sales
outside North America. As a result, we face risks from doing business on an
international basis, including, among others:
. reduced protection for intellectual property rights in some countries;
. licenses, tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer sales and payment cycles;
. greater difficulties in collecting accounts receivable;
. political and economic instability;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. compliance with a wide variety of complex foreign laws and treaties; and
. variance and unexpected changes in local laws and regulations.
We currently have offices in a number of foreign locations including
Australia, Canada, China, France, Germany, Hong Kong, Italy, Japan, Malaysia,
Mexico, Singapore, Spain, South Korea, Sweden, Taiwan, Poland and the United
Kingdom and plan to establish additional facilities in other parts of the
world. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. We cannot be certain that our investments in
establishing facilities in other countries will produce desired levels of
revenue. In addition, we have sold Infranet internationally for only a few
years and we have limited experience in developing localized versions of
Infranet and marketing and distributing them internationally.
Further, nearly all of our international revenues are denominated in U.S.
dollars. Therefore, a strengthening of the dollar versus other currencies
could make our products less competitive in foreign markets or collection
34
of receivables more difficult. Because our foreign denominated revenues have
been minimal, we do not currently engage in currency hedging activities.
To the extent that we are unable to successfully manage expansion of our
business into international markets due to any of the foregoing factors, our
business could be adversely affected.
Our proprietary rights may be inadequately protected and there is a risk of
infringement
Our success and ability to compete depend substantially upon our internally
developed technology, which we protect through a combination of patent,
copyright, trade secret and trademark law. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology or to develop products with the same
functionality as our products. Policing unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in the United
States. Others may develop technologies that are similar or superior to our
technology. Moreover, as the number of competitors in our industry segments
grow and the functionality of products in different industry segments
overlaps, we expect that our software products may in the future become
subject to third-party infringement claims. Some of our competitors in the
market for CM&B software may have filed or may intend to file patent
applications covering aspects of their technology upon which they may claim
our technology infringes. Any litigation, brought by us or by others, could be
time-consuming and costly and could divert the attention of our technical and
management personnel. In addition, litigation could cause product shipment
delays or require us to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, or at all, and could have
a material and adverse impact on our gross margins and profitability. If a
successful claim of product infringement were made against us, our business
could be significantly harmed.
Our business will suffer if our software contains significant errors or our
product development is delayed
We face possible claims and higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the "mission
critical" nature of Infranet, undetected errors are of particular concern.
Complex software, such as ours, always contains undetected errors. The
implementation of Infranet, which we accomplish through our services division
and with our partners, typically involves working with sophisticated software,
computing and communications systems. If we experience difficulties with an
implementation or do not meet project milestones in a timely manner, we could
be obligated to devote more customer support, engineering and other resources
to a particular project and to provide these services at reduced or no cost.
If our software contains significant undetected errors or we fail to meet our
customers' expectations or project milestones in a timely manner we could
experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to achieve market acceptance;
. diversion of development and implementation resources;
. injury to our reputation;
. increased service and warranty costs;
. legal actions by customers against us; and
. increased insurance costs.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to
35
the amounts paid by the licensee to us for the product or service-giving rise
to the damages. However, these contractual limitations on liability may not be
enforceable, in certain jurisdictions and under certain circumstances,
particularly if the damages relate to a Year 2000 problem, and we may be
subject to claims based on errors in our software or mistakes in performing
our services including claims relating to damages to our customers' internal
systems. A product liability claim, whether or not successful, could harm our
business by increasing our costs, damaging our reputation and distracting our
management.
Despite investigation and testing by us and our partners, Infranet and the
underlying systems and protocols running it may contain previously undetected
errors or defects associated with Year 2000 or other date functions. Several
customers, despite warnings regarding the use of non-Year 2000 certified
versions of Infranet, have continued to use non-certified versions, and
decline to upgrade to certified versions or implement maintenance fixes or bug
releases made available to them. Portal integrates certain third party
software into Infranet. These third party vendors may detect errors in their
products after previously indicating that their products are Year 2000
compliant. Such revelations by our partners have occurred in the past and may
occur in the future; and these revelations have and could cause us to make
changes in our products in response.
In the past we have failed to release certain new products and upgrades on
time
These delays may result in:
. customer dissatisfaction;
. cancellation of orders and license agreements;
. negative publicity;
. loss of revenues;
. slower market acceptance; or
. legal action by customers against us.
Our business may be harmed if we are unable to develop, license or acquire
new products or enhancements to Infranet on a timely and cost-effective basis,
or if these products or enhancements are not accepted by the market.
We incorporate software licensed from third parties into Infranet and any
significant interruption in the availability of these third-party software
products or defects in these products could harm our business in the short-
term
Portions of Infranet incorporate software developed and maintained by
third-party software vendors, such as operating systems, tools and database
vendors. We expect that we may have to incorporate software from third party
vendors and developers to a larger degree in our future products. Any
significant interruption in the availability of these third-party software
products or defects in these products or future products could harm our sales
unless and until we can secure another source. We may not be able to replace
the functionality provided by the third-party software currently offered with
our products if that software becomes obsolete, defective or incompatible with
future versions of our products or is not adequately maintained or updated.
The absence of, or any significant delay in, the replacement of that
functionality could result in delayed or lost sales and increased costs and
could harm our business in the short-term.
Our future success will depend on our ability to manage technological change
The market for Portal's products and the services they are used to support
is characterized by:
. rapid technological change;
. frequent new product introductions;
36
. changes in customer requirements; and
. evolving industry standards.
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. Our future success will depend upon our ability to develop
and introduce a variety of new products and product enhancements to address
the increasingly sophisticated needs of our customers.
Infranet is designed to work on a variety of hardware and software
platforms used by our customers. However, Infranet may not operate correctly
on evolving versions of hardware and software platforms, programming
languages, database environments, accounting and other systems that our
customers use. We must constantly modify and improve our products to keep pace
with changes made to these platforms and to back-office applications and other
systems. This may result in uncertainty relating to the timing and nature of
new product announcements, introductions or modifications, which may harm our
business. If we fail to modify or improve our products in response to evolving
industry standards, our products could rapidly become obsolete, which would
harm our business.
The markets in which we sell our product are highly competitive and we may not
be able to compete effectively
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We face competition from providers of CM&B
software, such as Amdocs (which has acquired Solect Technology), the Kenan
Systems division of Lucent, Convergys (which has recently acquired Geneva),
Digiquant, Daleen Technologies, Inc. We also compete with systems integrators
and with internal MIS departments of larger telecommunications carriers. We
are aware of numerous other major ISPs, software developers and smaller
entrepreneurial companies that are focusing significant resources on
developing and marketing products and services that will compete with
Infranet. We anticipate continued growth and competition in the on-line
services and telecommunications industries and the entrance of new competitors
into the CM&B software market, and that the market for our products and
services will remain intensely competitive. We expect that competition will
increase in the near term and that our primary long-term competitors may have
not yet entered the market. Many of our current and future competitors have
significantly more personnel and greater financial, technical, marketing and
other resources than we do.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, current
and potential competitors have greater name recognition and more extensive
customer bases that they can use to compete more effectively. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which could harm our business.
Our business substantially depends upon the continued growth of Internet-based
services, wireless services and other emerging services
We sell Infranet to organizations providing Internet-based, wireless and
other emerging communications and e-services. Consequently, our future
revenues and profits, if any, substantially depend upon the market acceptance
and expanded use of services provided through the and other communication
methods. Rapid growth in the use of these services is a recent phenomenon and
it may not continue. As a result, a broad base of regular users of such
services may not develop, and the market may not accept recently introduced
services and products that rely upon the adoption of such services, such as
Infranet.
Many of the companies that are marketing broadband access to the Internet
or are offering new services over the Internet, wireless networks and other
communication mediums are relatively new businesses. In the past year, many so
called "dot.com" companies have failed and financing for emerging Internet
businesses appears
37
to be increasingly more difficult for Internet companies to obtain. We believe
that the decline in the rate of growth experienced in our North American
operations in the third quarter of fiscal year 2001 is attributable in part to
the difficulty experienced by several potential customers in receiving
financing and a consequential impact on their decisions to make investments in
CM&B products and services. Moreover, the market value, financial results and
prospects of many large and established companies, including many large
telecommunications companies, have also declined or degraded significantly.
Emerging growth and established communications companies recently have been
reducing or deferring their purchases of software and related products, and
the introduction of many new communication services has been delayed or
cancelled. This trend in technology and software spending will seriously harm
our business until conditions improve. Any general decrease by our customers
and potential customers in their rate of software and network investments
would result in a significant decrease in our revenues and operating income.
To the extent that our customers and potential fail to achieve sustained
profitability or obtain adequate funding, we could experience greater risk and
difficulty collecting receivables from those customers that do purchase our
products and services which would in turn harm our business and financial
results.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our products and services and increased costs of doing business
Due to the increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that may
impose additional burdens on those companies conducting business on-line. The
growth and development of the market for Internet-based services may prompt
calls for more stringent consumer protection laws or for imposition of
additional taxes. The adoption of any additional laws or regulations may
decrease the expansion of the Internet or impose additional burdens on those
companies conducting business on-line. A decline in the growth of the Internet
could decrease demand for our products and services and increase our cost of
doing business, or otherwise harm our business. Moreover, the applicability to
the Internet of existing laws in various jurisdictions governing issues such
as property ownership, sales tax, libel and personal privacy is uncertain and
may take years to resolve. Our costs could increase and our growth could be
harmed by any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other on-line services.
Our future success depends on our ability to attract and retain additional
personnel
We intend to hire a significant number of additional sales, support,
marketing, administrative and research and development personnel in fiscal
year 2002 and beyond. Competition for these individuals is intense and we may
not be able to attract, assimilate or retain highly qualified personnel in the
future. Our business cannot succeed if we cannot attract qualified personnel.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
our existing customers. Hiring qualified customer service and support
personnel, as well as sales, marketing, administrative and research and
development personnel, is very competitive in our industry, particularly in
the San Francisco Bay Area, where Portal is headquartered, due to the limited
number of people available with the necessary technical skills and
understanding of the Internet and other communication networks and services.
Our future success also depends upon the continued service of our executive
officers and other key sales, marketing and support personnel in general and
on the services of John E. Little, our President and Chief Executive Officer
and David S. Labuda, our Chief Technology Officer, in particular. None of our
officers or key employees is bound by an employment agreement for any specific
term.
We may experience difficulty integrating Solution42
Portal acquired the business of Solution42 in November 2000. We may
experience problems integrating the business of Solution42 into our business.
Any integration problems could cause us to incur substantial unanticipated
costs and expenses, which would harm our operating results. If we fail to
integrate Solution42's
38
business successfully, we will incur substantial costs, which will increase
our expenses and reduce any earnings or potentially result in operating
losses. In addition, integration problems could divert management's attention
from other business opportunities, which could result in slower revenue growth
than anticipated or even declines in revenue. Integrating Solution42's
business with our business will be complex, time-consuming and expensive,
particularly due to the geographic distance between Solution42's operations in
Germany and our headquarters in California. This integration may disrupt our
business if it is not completed in a timely, efficient and effective manner.
We have never attempted to integrate an acquisition of this size and we may
not be successful in doing so.
Specific integration challenges we will face include the following:
. retaining existing customers, employees and strategic partners of
Solution42;
. retaining and integrating management and other key employees of
Solution42;
. combining product offerings and product lines effectively and quickly,
including technical integration by our engineering team;
. integrating sales efforts so that customers can easily do business with
the combined company;
. transitioning multiple information technology systems to a single
system;
. successfully developing and promoting a brand strategy and marketing it
to existing and prospective customers; and
. developing and maintaining uniform standards, controls, procedures and
policies.
Acquisitions of additional companies or technologies may result in further
disruptions to our business and management due to difficulties in assimilating
personnel and operations
We may make additional acquisitions or investments in other companies,
products or technologies in the future. If we make any acquisitions, we will
be required to assimilate the operations, products and personnel of the
acquired businesses and train, retain and motivate key personnel from the
acquired businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions
may cause disruptions in our operations and divert management's attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. The issuance of equity securities
for any acquisition could be substantially dilutive to our stockholders. In
addition, our profitability may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets.
Our reported financial results will suffer as a result of purchase accounting
treatment of the SOLUTION42 acquisition and the amortization of goodwill and
other intangible assets
Purchase accounting treatment of the acquisition of Solution42 resulted in
a large initial write-off and will result in additional amortization over the
next several years, which could have a material and adverse effect on our
operating results and the market price of our common stock. Under purchase
accounting, we have recorded the following as an asset on our balance sheet:
. the fair value of the consideration given for Solution42's outstanding
common stock; and
. acquisition-related direct transaction costs, including the fees of our
legal, accounting and financial advisors.
We have allocated these costs to individual Solution42 assets acquired and
liabilities assumed. These assets and liabilities included various
identifiable intangible assets such as purchased developed technology.
Intangible assets, including goodwill, are being amortized over a period
corresponding to the life of the relevant
39
asset. In addition, we have allocated a portion of the purchase price for
acquiring SOLUTION42 to in-process research and development which was expensed
in the fiscal quarter ending January 31, 2001.
Financial difficulties of companies we have invested in could adversely affect
our financial results
We have made investments in three companies and may make investments in
others in the future. If at any time our investment in a company were deemed
impaired, we may be required to reduce the book value of that investment,
which in turn reduce our earnings in that period. Such investments could be
deemed impaired, for example, if the financial condition of those companies
deteriorates. As of April 1, 2001, we had approximately $6.0 million invested
in other companies. Because the financial condition of these companies is
outside our control, we can not predict if, or when, the value of such
investments would be required to be reduced.
The price of our common stock has been and will be volatile
The trading price of our common stock has fluctuated significantly in the
past and will fluctuate in the future. For example in fiscal 2001 the price of
our common stock fluctuated between $83.93 and $4.90 per share. This future
fluctuation could be a result of a number of factors, many of which are
outside our control. Some of these factors include:
. quarter-to-quarter variations in our operating results;
. failure to meet the expectations of industry analysts;
. changes in earnings estimates by Portal or by analysts;
. announcements and technological innovations or new products by us or our
competitors;
. increased price competition;
. developments or disputes concerning intellectual property rights; and
. general conditions in the communications and Internet industries.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
Internet and computer software companies, including ours, and which have often
been unrelated to the operating performance of these companies or our company.
Decreases in the trading prices of stocks of technology companies are often
precipitous. For example, the price of Portal's stock dropped rapidly and
significantly during the first quarter of fiscal year 2001 and during the
fourth quarter of fiscal year 2001 after the announcement of financial results
for the preceding third quarter.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about Portal's risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements for the reasons described under the caption "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations--
Risks Associated With Portal's Business And Future Operating Results."
Short-Term Investment Portfolio
We do not hold derivative financial instruments in our short-term
investment portfolio. Our short-term investments consist of instruments rated
the equivalent of Standard & Poor's and Moody's short-term rating A1/P1 or
long-term rating of at least A/A2. This policy dictates that we diversify our
holdings and limit our short-term investments to a maximum of $5 million to
any one issuer. Our policy also dictates that all short-term investments
mature in 24 months or less.
40
The following table presents the amounts of cash equivalents and
investments that are subject to market risk and the weighted average interest
rates, by year of expected maturity for Portals' investment portfolios as of
January 31, 2001. This table does not include cash because cash is not subject
to market risk. It also does not include long-term investments as they are
held to maturity and, therefore, near-term changes in market rates will not
result in losses. (In thousands, except interest rates):
Maturing Maturing
within within
1 Year 2 Years Thereafter Total
-------- -------- ---------- --------
As of January 31, 2001:
Cash Equivalents................... $ 52,350 $ -- $ -- $ 52,350
Weighted Average Yield........... 6.04% -- % --% 6.04%
Investments........................ 115,183 33,290 -- 148,473
Weighted Average Yield........... 6.49% 6.58% --% 6.51%
-------- ------- ---- --------
Total Portfolio.................... $167,533 $33,290 $ -- $200,823
Weighted Average Yield........... 6.35% 6.58% --% 6.39%
Impact of Foreign Currency Rate Changes
During fiscal year 2001, most local currencies of our international
subsidiaries weakened against the U.S. dollar. Because we translate foreign
currencies into U.S. dollars for reporting purposes, currency fluctuations can
have an impact, though generally immaterial, on our results. Portal believes
that its exposure to currency exchange fluctuation risk has been insignificant
primarily due to the denomination of nearly all of our sales transactions in
U.S. dollars. For the fiscal year ended January 31, 2001, there was an
immaterial currency exchange impact from our intercompany transactions.
Because our foreign denominated revenues have been minimal, we did not engage
in foreign currency hedging activities as of January 31, 2001.
As a global concern, Portal anticipates that its sales outside the United
States will increasingly be denominated in other currencies. In such event,
Portal will face exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on Portal's financial position and
results of operations. In order to reduce the effect of foreign currency
fluctuations, Portal may hedge its exposure on certain transactional balances
that are denominated in foreign currencies through the use of foreign currency
forward exchange contracts. The success of such activity will depend upon the
estimation of future transactions denominated in various currencies. To the
extent that these estimates are overstated or understated during periods of
currency volatility, Portal could experience unanticipated currency gains or
losses.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Index to Consolidated Financial Statements
The following financial statements are filed as part of this report
Page
----
Report of Ernst & Young LLP, Independent Auditors..................... 43
Consolidated Balance Sheets as of January 31, 2001 and 2000........... 44
Consolidated Statements of Operations for the three years ended
January 31, 2001..................................................... 45
Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the three years ended January 31, 2001............... 46
Consolidated Statements of Cash Flows for the three years ended
January 31, 2001..................................................... 48
Notes to Consolidated Financial Statements............................ 49
42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Portal Software, Inc.
We have audited the accompanying consolidated balance sheets of Portal
Software, Inc. as of January 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and
cash flows for each of the three years in the period ended January 31, 2001.
These financial statements are the responsibility of the management of Portal
Software, Inc. 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. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Portal
Software, Inc. at January 31, 2001 and 2000 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 15, 2001
43
PORTAL SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
January 31,
------------------
2001 2000
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 69,323 $ 43,887
Accounts receivable, net of allowance for doubtful
accounts of $2,899 and $1,187 at January 31, 2001 and
2000, respectively...................................... 83,225 28,546
Short-term investments................................... 141,275 152,090
Restricted short-term investments........................ 7,198 5,312
Prepaids and other current assets........................ 11,302 4,516
Deferred income taxes.................................... 5,045 --
-------- --------
Total current assets.................................... 317,368 234,351
Property and equipment, net................................ 54,209 18,785
Goodwill, net.............................................. 229,301 --
Purchased developed technology, net........................ 12,938 --
Restricted long-term investments........................... 3,466 5,856
Other assets............................................... 12,772 6,537
-------- --------
$630,054 $265,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 9,923 $ 7,655
Accrued compensation..................................... 24,198 9,060
Accrued acquisition expenses............................. 11,629 --
Other accrued liabilities................................ 18,983 5,282
Short-term notes payable................................. 2,250 --
Current portion of capital lease obligations............. 2,093 780
Deferred revenue......................................... 66,937 32,857
-------- --------
Total current liabilities............................... 136,013 55,634
Long-term notes payable.................................... 1,800 --
Long-term portion of capital lease obligations............. 598 1,525
Long-term deferred income taxes............................ 5,045 --
Other liabilities.......................................... 209 --
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value, issuable
in series: 5,000 shares authorized, none issued and
outstanding............................................. -- --
Common stock, $0.001 par value; 1,000,000 shares
authorized at January 31, 2001; 171,344 and 158,927
shares issued and outstanding at January 31, 2001 and
January 31, 2000, respectively.......................... 171 159
Additional paid-in capital............................... 526,732 251,047
Accumulated other comprehensive income (loss)............ 132 (639)
Notes receivable from stockholders....................... (127) (259)
Deferred stock compensation.............................. (2,653) (6,379)
Accumulated deficit...................................... (37,866) (35,559)
-------- --------
Stockholders' equity.................................... 486,389 208,370
-------- --------
$630,054 $265,529
======== ========
See accompanying notes.
44
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended January 31,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues:
License fees.................................. $180,334 $ 67,049 $ 13,536
Services...................................... 87,973 36,000 13,133
-------- -------- --------
Total revenues.............................. 268,307 103,049 26,669
-------- -------- --------
Costs and expenses:
Cost of license fees.......................... 4,917 2,596 458
Cost of services.............................. 59,555 22,808 9,425
Amortization of purchased developed
technology................................... 862 -- --
Research and development...................... 57,685 26,090 11,252
Sales and marketing........................... 96,836 43,671 14,112
General and administrative.................... 31,886 15,349 6,253
Amortization of deferred stock compensation... 3,726 8,235 2,297
In-process research and development........... 9,200 -- --
Amortization of goodwill...................... 14,864 -- --
-------- -------- --------
Total costs and expenses.................... 279,531 118,749 43,797
-------- -------- --------
Loss from operations............................ (11,224) (15,700) (17,128)
Interest and other income, net.................. 12,898 5,886 435
One-time gain upon expiration of unexercised put
option on common stock......................... -- 3,810 --
-------- -------- --------
Income (loss) before income taxes............... 1,674 (6,004) (16,693)
Provision for income taxes...................... (3,981) (1,616) (715)
-------- -------- --------
Net loss........................................ $ (2,307) $ (7,620) $(17,408)
======== ======== ========
Basic and diluted net loss per share............ $ (0.01) $ (0.06) $ (0.29)
======== ======== ========
Shares used in computing basic and diluted net
loss per share................................. 159,865 124,816 59,062
======== ======== ========
See accompanying notes.
45
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share amounts)
Convertible Accumulated Notes
Preferred Stock Common Stock Additional Other Receivable Deferred
--------------------- ------------------- Paid-In Comprehensive from Stock Accumulated
Shares Amount Shares Amount Capital Income (Loss) Stockholders Compensation Deficit
----------- -------- ----------- ------ ---------- ------------- ------------ ------------ -----------
Balances at
January 31,
1998........... 56,623,278 $ 18,117 75,925,572 $ 177 $ -- $ -- $ -- $ -- $(10,531)
Total
comprehensive
and net loss... (17,408)
Issuance of
Series A
preferred stock
upon exercise
of warrants.... 209,100 17 -- -- -- -- -- -- --
Issuance of
Series B
preferred
stock.......... 471,996 348 -- -- -- -- -- -- --
Issuance of
common stock
upon exercise
of stock
options, net of
repurchases.... -- -- 2,403,792 749 -- -- (318) -- --
Issuance of
common stock
upon exercise
of Warrants.... -- -- 37,722 1 -- -- -- -- --
Deferred stock
compensation... -- -- -- -- 16,753 -- -- (16,753) --
Amortization of
deferred stock
compensation... -- -- -- -- -- -- -- 2,297
----------- -------- ----------- ----- -------- ----- ----- -------- --------
Balances at
January 31,
1999........... 57,304,374 18,482 78,367,086 927 16,753 -- (318) (14,456) (27,939)
Comprehensive
loss:
Net unrealized
loss on
investments.... (704)
Translation
adjustment and
other.......... 65
Net loss........ (7,620)
Total
comprehensive
loss...........
Issuance of
Series A
preferred stock
upon exercise
of warrants.... 682,200 58 -- -- -- -- -- -- --
Conversion of
preferred stock
to common stock
upon completion
of initial
public
offering....... (57,986,574) (18,540) 57,986,574 29 18,511 -- -- -- --
Issuance of
common stock in
initial public
offering and
private
placement, net
of issuance
costs.......... -- -- 15,961,198 8 102,360 -- -- -- --
Reincorporation
to Delaware.... -- -- -- (888) 888 -- -- -- --
Issuance of
common stock in
secondary
public
offering, net
of issuance
costs.......... -- -- 5,900,000 3 105,959 -- -- -- --
Issuance of
common stock
upon exercise
of stock
options, net of
repurchases.... -- -- (408,618) -- 3,258 -- 59 -- --
Issuance of
common stock
for cash....... -- -- 145,914 -- 118 -- -- -- --
Issuance of
common stock
upon exercise
of warrants.... -- -- 474,944 -- 146 -- -- -- --
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan.. -- -- 499,402 -- 2,976 -- -- -- --
Impact of Stock
split.......... -- -- -- 80 (80) -- -- -- --
Deferred stock
compensation... -- -- -- -- 158 -- -- (158) --
Amortization of
deferred stock
compensation... -- -- -- -- -- -- -- 8,235 --
----------- -------- ----------- ----- -------- ----- ----- -------- --------
Balances at
January 31,
2000........... -- -- 158,926,500 159 251,047 (639) (259) $ (6,379) (35,559)
=========== ======== =========== ===== ======== ===== ===== ======== ========
Total
Stockholders'
Equity (Net
Capital
Deficiency)
-------------
Balances at
January 31,
1998........... $ 7,763
Total
comprehensive
and net loss... (17,408)
Issuance of
Series A
preferred stock
upon exercise
of warrants.... 17
Issuance of
Series B
preferred
stock.......... 348
Issuance of
common stock
upon exercise
of stock
options, net of
repurchases.... 431
Issuance of
common stock
upon exercise
of Warrants.... 1
Deferred stock
compensation... --
Amortization of
deferred stock
compensation... 2,297
-------------
Balances at
January 31,
1999........... (6,551)
Comprehensive
loss:
Net unrealized
loss on
investments.... (704)
Translation
adjustment and
other.......... 65
Net loss........ (7,620)
-------------
Total
comprehensive
loss........... (8,259)
-------------
Issuance of
Series A
preferred stock
upon exercise
of warrants.... 58
Conversion of
preferred stock
to common stock
upon completion
of initial
public
offering....... --
Issuance of
common stock in
initial public
offering and
private
placement, net
of issuance
costs.......... 102,368
Reincorporation
to Delaware.... --
Issuance of
common stock in
secondary
public
offering, net
of issuance
costs.......... 105,962
Issuance of
common stock
upon exercise
of stock
options, net of
repurchases.... 3,317
Issuance of
common stock
for cash....... 118
Issuance of
common stock
upon exercise
of warrants.... 146
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan.. 2,976
Impact of Stock
split.......... --
Deferred stock
compensation... --
Amortization of
deferred stock
compensation... 8,235
-------------
Balances at
January 31,
2000........... 208,370
=============
46
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)--
(Continued)
(in thousands, except share amounts)
Convertible Accumulated Notes
Preferred Stock Common Stock Additional Other Receivable Deferred
------------------ ------------------ Paid-In Comprehensive from Stock Accumulated
Shares Amount Shares Amount Capital Income (Loss) Stockholders Compensation Deficit
---------- ------- ----------- ------ ---------- ------------- ------------ ------------ -----------
Balances at
January 31,
2000........... -- -- 158,926,500 159 251,047 (639) (259) $(6,379) (35,559)
Comprehensive
loss:
Net unrealized
gain on
investments.... 1,503
Translation
adjustment and
other.......... (732)
Net loss........ (2,307)
Total
comprehensive
loss...........
Issuance of
common stock
upon exercise
of stock
options, net of
repurchases.... -- -- 4,469,453 4 14,615 -- 132 -- --
Tax benefits
from employee
stock option
plans.......... -- -- -- -- 5,050 -- -- -- --
Issuance of
common stock
upon
acquisition of
Solution42..... -- -- 6,818,188 7 248,751 -- -- -- --
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan.. -- -- 1,130,305 1 7,269 -- -- -- --
Amortization of
deferred stock
compensation... -- -- -- -- -- -- -- 3,726 --
---------- ------- ----------- ---- -------- ----- ----- ------- --------
Balances at
January 31,
2001........... -- $ -- 171,344,446 $171 $526,732 $ 132 $(127) $(2,653) $(37,866)
========== ======= =========== ==== ======== ===== ===== ======= ========
Total
Stockholders'
Equity (Net
Capital
Deficiency)
-------------
Balances at
January 31,
2000........... 208,370
Comprehensive
loss:
Net unrealized
gain on
investments.... 1,503
Translation
adjustment and
other.......... (732)
Net loss........ (2,307)
-------------
Total
comprehensive
loss........... (1,536)
-------------
Issuance of
common stock
upon exercise
of stock
options, net of
repurchases.... 14,751
Tax benefits
from employee
stock option
plans.......... 5,050
Issuance of
common stock
upon
acquisition of
Solution42..... 248,758
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan.. 7,270
Amortization of
deferred stock
compensation... 3,726
-------------
Balances at
January 31,
2001........... $486,389
=============
See accompanying notes.
47
PORTAL SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended January 31,
-----------------------------
2001 2000 1999
-------- --------- --------
OPERATING ACTIVITIES:
Net loss....................................... $ (2,307) $ (7,620) $(17,408)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 8,416 1,939 940
Amortization of deferred stock compensation... 3,726 8,235 2,297
Remeasurement gain related to put option...... -- (3,810) --
In-process research and development........... 9,200 -- --
Amortization of purchased developed
technology and goodwill...................... 15,726 -- --
Changes in operating assets and liabilities:
Accounts receivable, net.................... (52,113) (14,072) (8,777)
Prepaids and other current assets........... (5,417) (1,585) (1,340)
Other assets................................ (2,175) (285) (59)
Accounts payable............................ 2,594 3,088 1,025
Accrued compensation........................ 14,864 7,913 244
Other accrued liabilities................... 8,478 80 4,138
Deferred revenue............................ 33,564 9,513 15,625
-------- --------- --------
Net cash provided by (used in) operating
activities............................... 34,556 3,396 (3,315)
-------- --------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments............ (136,463) (201,433) --
Sales of short-term investments................ 43,320 -- --
Maturity of short-term investments............. 106,857 42,851 --
Purchases of long-term investments............. (2,747) (5,948) --
Maturity of long-term investments.............. 2,237 68 --
Purchases of property and equipment............ (40,329) (15,186) --
Purchases of equity investments................ (5,000) (2,000) --
Cash acquired from acquisition................. 2,459 -- --
-------- --------- --------
Net cash used in investing activities..... (29,666) (181,648) --
-------- --------- --------
FINANCING ACTIVITIES:
Payments received from stockholder notes
receivable.................................... 132 -- --
Repayment of long-term debt.................... -- (4,122) --
Proceeds from line of credit................... -- 1,000 --
Repayment of line of credit.................... -- (1,000) --
Principal payments under capital lease
obligations................................... (1,142) (544) (319)
Proceeds from issuance of common stock, net of
repurchases and issuance cost................. 21,890 214,952 432
Proceeds from issuance of preferred stock...... -- -- 365
-------- --------- --------
Net cash from financing activities........ 20,880 210,286 478
-------- --------- --------
Effect of exchange rate on cash and cash
equivalents................................... (334) 44 --
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 25,436 32,078 (2,837)
Cash and cash equivalents at beginning of
year.......................................... 43,887 11,809 14,646
-------- --------- --------
Cash and cash equivalents at end of year....... $ 69,323 $ 43,887 $ 11,809
======== ========= ========
Supplemental disclosures of cash flow
information:
Interest paid................................. $ 181 $ 366 $ 361
======== ========= ========
Income taxes paid............................. $ 145 $ 553 $ 215
======== ========= ========
Supplemental disclosures of non-cash financing
activity:
Issuance of debt upon conversion of customer
deposit included in deferred revenue......... $ -- $ -- $ 1,122
======== ========= ========
Equipment acquired under capital lease
obligations.................................. $ 1,540 $ 337 $ 2 ,820
======== ========= ========
Deferred stock compensation related to
options granted.............................. $ -- $ 158 $ 16,753
======== ========= ========
Issuance of common stock for stockholder
notes receivable............................. $ -- $ -- $ 318
======== ========= ========
Issuance of common stock for acquisition of
Solution 42.................................. $248,758 $ -- $ --
======== ========= ========
See accompanying notes.
48
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies:
Nature of Business and Basis of Presentation
Portal Software, Inc. or Portal, develops, markets and supports business
infrastructure software to manage next-generation communications and e-
services. Our Infranet software platform addresses the needs of service
providers to rapidly deploy new services, define optimal business models and
price plans and bill their users. Portal markets its products worldwide
through a combination of a direct sales force and distribution partners.
Substantially all of Portal's license revenues are derived from sales of its
Infranet product line.
Principles of Consolidation
The consolidated financial statements include the accounts of Portal and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Foreign Currency
Portal considers the functional currency of its foreign subsidiaries to be
the local currency. Assets and liabilities recorded in foreign currencies are
translated at the exchange rate on the balance sheet date and revenue, costs
and expenses are translated at average rates of exchange in effect during the
year. Translation gains and losses are reported within accumulated other
comprehensive loss. Net gains and losses resulting from foreign exchange
transactions were immaterial in all periods presented.
Revenue Recognition
License revenues are comprised of fees for multi-year or perpetual
licenses, which are primarily derived from contracts with corporate customers
and resellers. Revenue from license fees is recognized when persuasive
evidence of an arrangement exists, delivery of the product has occurred, no
significant Portal obligations with regard to implementation remain, the fee
is fixed or determinable and collectibility is probable. For electronic
delivery, the software is considered to have been delivered when Portal has
provided the customer with the access codes that allow for immediate
possession of the software. If the fee due from the customer is not fixed or
determinable, revenue is recognized as payments become due from the customer.
If collectibility is not considered probable, revenue is recognized when the
fee is collected. Revenue from arrangements with customers who are not the
ultimate users (resellers) is not recognized until evidence of an arrangement
with an end user has been received.
Services revenues are primarily comprised of revenue from systems
integration or other consulting fees, maintenance agreements and training.
Arrangements that include software services are evaluated to determine whether
those services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under
the arrangement is recognized using contract accounting. When software
services are not considered essential, the revenue related to the software
services is recognized as the services are performed. Maintenance agreements
provide technical support and include the right to unspecified upgrades on an
if-and-when-available basis. Maintenance revenue is deferred and recognized on
a straight-line basis as services revenue over the life of the related
agreement, which is typically one year. Customer advances and billed amounts
due from customers in excess of revenue recognized are recorded as deferred
revenue.
49
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on Portal's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by Portal between the completion
of the working model and the point at which the product is ready for general
release have been insignificant. Therefore, through January 31, 2001, Portal
has charged all such costs to research and development expense in the period
incurred.
Concentration of Credit Risk
Portal sells its software and services to customers consisting mainly of
North American, European and Asia-Pacific communication service providers and
enhanced service developers. Portal performs ongoing credit evaluations of its
customers and does not require collateral. Portal maintains an allowance for
potential credit losses and such losses have been within management's
expectations. During fiscal year 2001, 2000 and 1999, Portal added
approximately $2.1 million, $1.0 million and $1.4 million, respectively, to
its allowance for doubtful accounts. Write-offs of uncollectible accounts
totaled $0.4 million, $0.8 million and $0.5 million for fiscal year 2001, 2000
and 1999, respectively.
No individual customer accounted for 10% or more of total revenue during
fiscal 2001 and 1999. One customer accounted for 10% of total revenue during
fiscal 2000.
Segment Information
Portal operates solely in one segment, the development and marketing of
CM&B software. Portal's foreign offices consist of sales, marketing and
support activities through its foreign subsidiaries and an overseas reseller
network. Operating losses generated by the foreign operations of Portal and
their corresponding identifiable assets were not material in any period
presented. Portal's chief operating decision maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenues by geographic region for purposes of making
operating decisions and assessing financial performance. Portal does not
assess the performance of its geographic regions on other measures of income
or expense, such as depreciation and amortization, gross margin or net income.
In addition, as Portal's assets are primarily located in its corporate office
in the United States and not allocated to any specific region, we do not
produce reports for, or measure the performance of, our geographic regions
based on any asset-based metrics. Therefore, geographic information is
presented only for revenues.
Portal's export revenue represented 41%, 35% and 27% of total revenues in
fiscal year 2001, 2000 and 1999, respectively. All of the export sales to date
have been denominated in U.S. dollars and were derived from sales to Europe
(which is defined by Portal as Europe, Middle East and Africa) and
Intercontinental (which is defined by Portal as Asia-Pacific, Japan and Latin
America). European revenues for these years, respectively, were $65.0 million,
$28.7 million and $4.4 million and Intercontinental revenues were $46.4
million, $7.5 million and $2.7 million.
Fair Value of Financial Instruments
The fair value of notes receivable is estimated by discounting the future
cash flows using the current interest rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
50
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
maturities. At January 31, 2001 and 2000, the carrying value of the notes
receivable approximated their fair value.
The fair value of short-term and long-term notes payable and short-term and
long-term capital lease obligations is estimated based on current interest
rates available to Portal for debt instruments with similar terms, degrees of
risk and remaining maturities. At January 31, 2001 and 2000, the carrying
values of these obligations approximate their respective fair values.
Advertising
Portal expenses advertising costs as incurred. Advertising expense for
fiscal year 2001, 2000 and 1999 was approximately $0.9 million, $0.5 million
and $0.2 million, respectively.
Cash, Cash Equivalents, Short-Term and Long-Term Investments
Portal considers all highly liquid, low-risk debt instruments with an
original maturity, at the date of purchase, of three months or less to be cash
equivalents. At January 31, 2001 and 2000, cash equivalents and short-term
investments consist primarily of commercial paper, corporate notes, money
market funds and government securities. All short-term investments mature
within 24 months.
Portal also invests in equity instruments of privately-held companies for
business and strategic purposes. These investments are included in other
assets, in the amount of $6.0 million and $2.0 million as of January 31, 2001
and 2000, respectively. The investments are accounted for using the cost
method as Portal does not have the ability to exercise significant influence
over the operations of these companies and Portal's investment is less than
20% of the outstanding voting shares in each entity. Portal monitors its
investments for permanent impairment. If impairment of the investments were to
occur, Portal would record an impairment loss and reduce the carrying value of
the investment.
Portal classifies, at the date of acquisition, its cash equivalents and
short-term investments as available-for-sale in accordance with the provisions
of the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards No.115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Securities are reported at fair market value,
with the related unrealized gains and losses included within stockholders'
equity. At January 31, 2001 unrealized gains, for cash equivalents and short-
term investments, were $799,000, due primarily to the effects of decreasing
interest rates on longer-term securities, and at January 31, 2000, unrealized
losses, for cash equivalents and short-term investments, were $703,000. It is
possible that a portion of the unrealized gain will be realized, as many high-
yielding corporate notes are being downgraded to a level at or below the
minimum requirements of our investment policy. As this happens, these
securities will be sold resulting in a realized gain. Debt and discount
securities are adjusted for straight-line amortization of premiums and
accretion of discounts to maturity, both of which are included in interest
income. Realized gains and losses are recorded using the specific
identification method.
51
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedule summarizes the estimated fair value of Portal's
cash, cash equivalents and short-term investments (in thousands):
January 31,
---------------
2001 2000
------- -------
Cash and cash equivalents:
Cash.................................................... $16,973 $11,570
Money market funds...................................... 41,380 12,142
Commercial paper........................................ 9,674 14,977
U.S. Government securities.............................. 1,296 5,198
------- -------
$69,323 $43,887
======= =======
Short-term investments at January 31, 2001 (in thousands):
Gross
Unrealized
-----------
Fair
Cost Gain Loss Value
-------- ----- ----- --------
Corporate notes........................... $106,688 $ 740 $ -- $107,428
U.S. Government securities................ 31,354 77 -- 31,431
Commercial paper.......................... 9,627 -- (13) 9,614
Restricted investments.................... (7,198) -- -- (7,198)
-------- ----- ----- --------
$140,471 $ 817 $ (13) $141,275
======== ===== ===== ========
Short-term investments at January 31, 2000 (in thousands):
Gross
Unrealized
----------
Fair
Cost Gain Loss Value
-------- ---- ----- --------
Corporate notes............................ $ 90,364 $ -- $(571) $ 89,793
Municipal bonds............................ 55,434 -- (124) 55,310
Commercial paper........................... 12,303 -- (4) 12,299
Less restricted investments................ (5,312) -- -- (5,312)
-------- ---- ----- --------
$152,789 $ -- $(699) $152,090
======== ==== ===== ========
The estimated fair value of short-term investments classified by date of
maturity is as follows (in thousands):
January 31,
------------------
2001 2000
-------- --------
Due within one year.................................... $115,183 $ 90,748
Due within two years................................... 33,290 66,654
Restricted short-term investments...................... (7,198) (5,312)
-------- --------
$141,275 $152,090
======== ========
At January 31, 2001, short-term restricted investments of $7,198,000
combined with restricted long-term investments of $3,466,000 represent
collateral for four letters of credit issued in lieu of security deposits for
facility leases and consist of corporate bonds maturing over a period of one
to two years.
52
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Two letters of credit, for $2,250,000 and $3,000,000, are renewable
annually until they expire on December 31, 2010. The other two letters of
credit are for $2,650,000 and $256,000 and are renewable annually until
expiration on May 31, 2011 and October 31, 2005, respectively. The restricted
long-term investments are classified as held-to-maturity and, consequently,
unrealized gains and losses are not recorded. At January 31, 2001 and 2000,
amortized cost approximated fair value.
At January 31, 2000, restricted short-term investments represent collateral
for a $950,000 letter of credit backing surety bonds required by a customer
contract and for a $3,000,000 letter of credit issued to Portal's landlord to
guarantee payment of tenant improvements. On February 29, 2000 and October 31,
2000, the surety bonds of $750,000 and $200,000, respectively, expired. On
February 29, 2000, the guarantee for tenant improvements expired.
Realized gains and losses from sales of each type of security were
immaterial for all periods presented.
Depreciation and Amortization
Depreciation on office and computer equipment and furniture is computed
using the straight-line method over estimated useful lives of three to seven
years. Leasehold improvements are amortized using the straight-line method
over the shorter of the related lease term or their estimated useful lives,
typically five years.
Goodwill
Goodwill is carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the estimated economic life of
four years.
Impairment of Long-Lived Assets
Long-lived assets and intangibles, including goodwill, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The estimated future net
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if impairment has occurred. If such assets are deemed
impaired, an impairment loss equal to the amount by which the carrying amount
exceeds the fair value of the assets, would be recognized. If quoted market
prices for the assets are not available, the fair value would be calculated
using the present value of estimated expected future net cash flows. The cash
flow calculations would be based on management's best estimates, using
appropriate assumptions and projections at the time. No impairment losses have
been recognized to date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
Net Loss Per Share
In accordance with FAS 128, basic and diluted net loss per share have been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. All share
and per share amounts shown in this table have been restated to reflect a two-
for-one stock split effective January 20, 2000.
53
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic and diluted net loss
per share for each of the three years in the period ended January 31, 2001 (in
thousands, except per share data):
Years Ended January 31,
--------------------------
2001 2000 1999
------- ------- --------
Basic and diluted:
Net loss....................................... $(2,307) $(7,620) $(17,408)
======= ======= ========
Weighted-average shares of common stock
outstanding................................. 163,920 133,000 77,804
Less: Weighted-average shares subject to
repurchase.................................. (4,055) (8,184) (18,742)
------- ------- --------
Weighted-average shares used in computing basic
net loss per share............................ 159,865 124,816 59,062
======= ======= ========
Net loss per share......................... $ (0.01) $ (0.06) $ (0.29)
======= ======= ========
Portal has excluded all convertible preferred stock, warrants for
convertible preferred stock and outstanding stock options from the calculation
of diluted loss per share because all such securities are antidilutive for all
periods presented. The total number of shares excluded from the calculations
of diluted net loss per share was 14,973,964, 20,679,540 and 80,371,692 for
fiscal year 2001, 2000 and 1999. Such securities, had they been dilutive,
would have been included in the computations of diluted net loss per share
using the treasury stock method. See Note 7 for further information on these
securities.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", ("FAS 123"), encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. Portal has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations, in accounting for its stock option plans. See the pro forma
disclosures of applying FAS 123 included in Note 7.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss,
which includes certain changes in equity that are excluded from net loss.
Comprehensive loss for each of the three years in the period ended January 31,
2001 has been disclosed in the Statement of Stockholders' Equity.
Recently Issued Accounting Standards
In June 1998, the FASB issued "Accounting for Derivative Instruments and
Hedging Activities," ("FAS 133"). FAS 133 establishes methods for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. In June 1999, the FASB delayed
implementation of FAS 133, so that implementation is now required for fiscal
years beginning after June 15, 2000. As Portal does not currently engage in
hedging activities, Portal expects that the adoption of FAS 133 will not have
a material impact on its financial position or results of operations. Due to
the delayed effective date, Portal will be required to implement FAS 133 for
fiscal 2002.
54
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment is recorded at cost and consists of the following
(in thousands):
January 31,
---------------
2001 2000
------- -------
Land and buildings........................................ $ 1,728 $ --
Office and computer equipment............................. 43,749 17,290
Furniture and fixtures.................................... 7,092 2,217
Leasehold improvements.................................... 14,269 3,584
------- -------
66,838 23,091
Less accumulated depreciation and amortization............ 12,629 4,306
------- -------
Property and equipment, net............................... $54,209 $18,785
======= =======
Included in property and equipment were assets acquired under capital lease
obligations and notes payable (see Note 4). Assets acquired under capital
lease had a cost of approximately $4.5 million and $3.0 million with related
accumulated depreciation of approximately $1.8 million and $1.1 million at
January 31, 2001 and 2000, respectively. Assets acquired with notes payable
during the year ended January 31, 2001 had a cost of $1.8 million and
accumulated depreciation of approximately $0.1 million. There were no assets
acquired with notes payable during the year ended January 31, 2000.
(3) Acquisition
On November 2, 2000, Portal acquired SOLUTION42 AG ("Solution42") and its
subsidiaries. Solution42 is a Germany-based provider of wireless voice
mediation, provisioning and rating technologies. The acquisition was treated
as a purchase for accounting purposes, and accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The Consolidated Financial Statements include the operating results of
Solution42 from the date of acquisition.
At the date of acquisition, the purchase price was $263.6 million which is
represented by the fair value of the stock issued as consideration and direct
acquisition costs of $14.8 million. In addition, Portal recorded a deferred
tax liability of $5.0 million, representing the tax effect of the developed
technology as required under FAS 109. The fair value of the shares was
determined using a five-day average trading price around the date of
acquisition. Under the terms of the agreement, Portal issued, to the
shareholders of Solution42, shares in a Portal subsidiary based in Germany,
that may be exchanged for up to 7.5 million shares of Portal common stock and
includes a two-year economic earn-out. The fair value of the 681,812 shares
subject to the two-year economic earn-out is $8.9 million as of January 31,
2001. These shares will be valued at their fair value when they are either
probable of being earned or earned and will result in additional goodwill to
be amortized over the remaining useful life.
The following is the allocation of the non-contingent purchase price and
deferred tax liability (in thousands):
Net assets acquired............................................ $ 1,475
Purchased developed technology................................. 13,800
In-process research and development............................ 9,200
Goodwill....................................................... 244,165
--------
$268,640
========
55
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Portal recorded an asset of $13.8 million for purchased developed
technology as a result of acquiring Solution42. The value was determined, with
the assistance of independent third-party appraisers, by estimating the
present value of cash flows from developed technology as based on Portal
management and industry assumptions and market data. Purchased developed
technology is being amortized, on a straight-line basis, over its estimated
useful life of four years. Amortization expense was $0.9 million for the year
ended January 31, 2001. Amortization expense is estimated to be $3.4 million
in fiscal 2002, $3.4 million in fiscal 2003, $3.4 million in fiscal 2004 and
$2.7 million in fiscal 2005.
A one-time charge of $9.2 million for purchased in-process research and
development expenses was recorded upon closing of the acquisition in the
fourth quarter of fiscal 2001. The amounts allocated to in-process research
and development were expensed upon acquisition because technological
feasibility had not been established and no future alternative uses existed.
The value of the projects was determined, with the assistance of independent
third-party appraisers, by estimating the costs to develop the in-process
technology into commercially feasible products and estimating the present
value of the net cash flows management believed would result from the
products.
Goodwill, as related to the acquisition of Solution42, was recorded in the
amount of $244.2 million and is being amortized, on a straight-line basis over
its estimated useful life of four years. Amortization expense was $14.9
million for the year ended January 31, 2001. Assuming Portal does not
experience any impairment in value of goodwill that would require an
acceleration of amortization, amortization expense is estimated to be
approximately $61.1 million for fiscal 2002, $61.1 million for fiscal 2003,
$61.1 million for fiscal 2004 and $46.0 million in fiscal 2005.
As a result of the acquisition of Solution42, Portal incurred direct
acquisition costs including incremental costs to exit and consolidate
activities of Solution42 and the involuntary termination of certain Solution42
employees. Generally accepted accounting principles require that these costs,
which are not associated with the generation of future revenues and have no
future economic benefit, be reflected as assumed liabilities in the allocation
of the purchase price to the net assets acquired. The allocation of the
purchase price incorporates these items and may be adjusted through November
2001 based on changes to Portal management's assessment of costs. Adjustments,
if any, are not expected to have a material effect on Portal's results of
operations or financial condition. The direct acquisition costs were comprised
of $7.8 million of outside services, $3.8 million of severance and $3.2
million of other related direct acquisition costs. As of January 31, 2001,
$0.8 million of outside services, $1.2 million of severance and $1.2 million
of other related direct acquisition costs had been utilized leaving a balance
remaining of $11.6 million. The balance remaining as of January 31, 2001 is
expected to be utilized in fiscal year 2002.
56
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma financial information for the years ended
January 31, 2001 and 2000, assumes the acquisition of Solution42 occurred as
of the beginning of the respective periods, including the amortization of
intangible assets. The impact of the one-time expense of purchased in-process
research and development has been excluded. The pro forma financial
information is not necessarily indicative of the operating results that would
have occurred had the acquisitions been consummated as of the dates indicated,
nor are they necessarily indicative of future results.
For the Years Ended January 31,
----------------------------------------
2001 2000
------------------- -------------------
Including As Including As
Solution42 reported Solution42 reported
---------- -------- ---------- --------
(in thousands, except per share data)
Net revenue.................... $277,293 $268,307 $112,819 $103,049
Net loss....................... (44,369) (2,307) (71,847) (7,620)
Net loss per share, diluted.... (0.27) (0.01) (0.55) (0.06)
Shares used in computing
diluted net loss per share.... 166,683 159,865 131,634 124,816
(4) Short-term and Long-term Notes Payable
In November 2000, Portal acquired Solution42 (See Note 3). The liabilities
assumed as part of the acquisition included two short-term notes payable and
four long-term notes payable.
The first short-term note payable is unsecured and accrues interest at 6%
per annum. The interest is due and payable one month after management's
approval of the annual financial statements. Under the original terms of the
loan, principal payments were not due until June 2002 and were to continue
through June 2005. However, after the acquisition, Portal management made
arrangements to repay the entire balance in fiscal year 2002. Due to this
decision, the entire loan has been classified as short-term as of January 31,
2001. The balance due as of January 31, 2001 is $790,523. The second short-
term note payable is unsecured and accrues interest at 6% per annum. The
interest is due and payable on a quarterly basis. The terms of the loan
require repayment of the principal in June 2001. As of January 31, 2001, the
balance due on the loan was $1,459,022.
The four long-term notes payable are mortgages for two facilities purchased
by Solution42. Two of the loans accrue interest at 4.45% per annum. These two
loans are guaranteed by a German government organization and have restrictions
on the transfer of property. Principal and interest are due in December 2010
and June 2011 and as of January 31, 2001, the balances due on these loans were
$710,874 and $625,570, respectively. The other two loans accrue interest at
5.10% and 4.88% per annum. The interest rates on these loans are fixed until
2008 and 2009, respectively, at which time the rates can be renegotiated.
Principal and interest are due monthly through October 2015 and November 2024,
respectively and as of January 31, 2001 the balances due on these loans were
$264,544 and $198,689, respectively.
57
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments under long-term notes payable are as follows (in
thousands):
Year ending January 31,
2002............................................................. $ 103
2003............................................................. 103
2004............................................................. 103
2005............................................................. 103
2006............................................................. 103
Thereafter....................................................... 2,206
------
Total minimum payments......................................... 2,721
Less amount representing interest.................................. 921
------
Present value of future payments................................... 1,800
Less current portion............................................... --
------
Long-term portion.............................................. $1,800
======
(5) Agreement with Accenture LLP (formerly Andersen Consulting) LLP
On April 12, 1999, Portal agreed to enter into a strategic alliance with
Accenture LLP ("Accenture") under which Accenture agreed to provide services
to Portal and the parties agreed to expand their existing marketing alliance
and work closely together to expand their customer service and marketing
relationship. Under this arrangement, Accenture agreed to purchase up to
800,000 shares of common stock from Portal in a private placement concurrent
with Portal's initial public offering at the initial public offering price,
less the underwriting discount.
Under this agreement, Portal agreed to compensate Accenture for its
services with a minimum services fee in cash of $2.8 million and a cash
settled put for 400,000 of the shares to be purchased by Accenture. This put
guaranteed a closing value of $6.0 million at the end of the first day of
trading for 400,000 common shares sold to Andersen and required Portal to pay
Accenture in cash for any difference between the closing value of these shares
and $6.0 million. Upon the date of the arrangement, Portal recorded the fair
value of the put of approximately $3.8 million. The value of the put was
determined using the Black-Scholes model using a risk-free interest rate of
6.3%, an expected life of one month and a volatility factor of 100%.
Upon completion of the initial public offering (see Note 7), the put option
was settled. Based on the closing price of Portal's common stock at the end of
the first day of trading, the net cash settlement of the put was computed at a
value of zero. As a result, a gain upon remeasurement of the liability of $3.8
million was recorded as other income in the year ended January 31, 2000 and
the initial fair value of the put, approximately $3.8 million, was classified
as a prepaid service asset. Upon signing of the definitive agreement in March
2000, the services fee of $2.8 million was paid and capitalized. The entire
prepaid service asset of $6.6 million is being amortized on a straight-line
basis over the term of the agreement of approximately four and one half years.
(6) Commitments
Operating Leases
Portal leases its office facilities and some property under various
operating lease agreements. During fiscal 2000, Portal entered into two leases
for its worldwide headquarters, which expire in December 2010. Rental expense
for all operating leases was approximately $14.6 million, $4.7 million and
$1.6 million for fiscal years 2001, 2000 and 1999.
58
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of January 31, 2001 for all operating
leases are as follows (in thousands):
Year ending January 31,
2002........................................................... $ 14,085
2003........................................................... 13,315
2004........................................................... 12,896
2005........................................................... 12,418
2006........................................................... 12,428
Thereafter..................................................... 63,718
--------
Total minimum lease payments................................. $128,860
========
Future minimum lease payments have not been reduced by future sublease
income of $1.0 million, $1.0 million and $0.8 million for the years ended
January 31, 2002, 2003 and 2004, respectively.
In connection with the leases for several facilities, Portal has issued
four letters of credit as deposits. Two letters totaling $2,250,000 and
$3,000,000, renew annually until their expiration in December 2010. The other
two letters of credit totaling $2,650,000 and $256,000 and are renewable
annually until expiration on May 31, 2011 and October 31, 2005, respectively.
The letters of credit for $2,250,000, $3,000,000 and $2,650,000, have terms
that allow reduction down to $1,100,000, $1,450,000 and $1,325,000,
respectively, if certain financial covenants are met. In addition, if Portal
achieves an Investment Grade credit rating, the letter of credit for
$2,650,000 can be further reduced to one month's rent which would range from
approximately $220,000 to $290,000.
Capital Lease Obligations
Portal leases certain furniture, computers and equipment under non-
cancelable capital leases. Obligations under capital leases represent the
present value of future non-cancelable rental payments under various lease
agreements.
Future minimum lease payments under capital leases are as follows (in
thousands):
Year ending January 31,
2002............................................................. $2,183
2003............................................................. 609
2004............................................................. 11
------
Total minimum payments......................................... 2,803
Less amount representing interest.................................. 112
------
Present value of future payments................................... 2,691
Less current portion............................................... 2,093
------
Long-term portion.............................................. $ 598
======
(7) Stockholders' Equity
Reincorporation and Stock Splits
During February 1999, Portal's board of directors authorized the
reincorporation of Portal in the state of Delaware. This reincorporation was
effective on April 29, 1999. Portal is authorized to issue 1,000,000,000
59
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares of common stock, $0.001 par value and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. The board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock.
In April 1999, Portal's board of directors approved a three-for-one split
of Portal's common and preferred stock. The stock split took place on April
29, 1999. In December 1999, the board of directors approved a two-for-one
split of Portal's common stock, which was effected by means of a stock
dividend. This stock dividend was paid on January 19, 2000. Concurrently with
the stock dividend, Portal's outstanding stock options and stock option
purchase plans were adjusted to reflect the two-for-one stock split. All share
and per share amounts in these accompanying consolidated financial statements
have been adjusted retroactively to reflect these stock splits.
Initial Public Offering
On May 11, 1999, Portal completed an initial public offering of its common
stock. All 9.2 million shares covered by Portal's Registration Statement on
Form S-1, including shares covered by an over-allotment option that was
exercised, were sold by Portal at a price of $7.00 per share, less an
underwriting discount of $0.49 per share. In addition, on May 11, 1999, Portal
issued 760,368 shares of common stock to Accenture and 6.0 million shares of
common stock to Cisco Systems, Inc. for $6.51 per share or an aggregate
purchase price of approximately $44.0 million. Net proceeds to Portal from all
shares sold were approximately $102.4 million.
Upon the consummation of Portal's initial public offering on May 11, 1999,
all of the then outstanding Series A preferred stock and Series B preferred
stock automatically converted into common stock.
Secondary Stock Offering
In October 1999, Portal completed a secondary offering of 11.5 million
shares of Portal common stock, including shares covered by an over-allotment
option that was exercised. Of these shares, Portal offered 5.9 million primary
shares and selling stockholders offered 5.6 million shares. Net proceeds to
Portal were approximately $106.0 million after underwriting commissions and
expenses.
Convertible Preferred Stock
At January 31, 1999, 29,700,000 shares of convertible preferred stock were
authorized and 57,304,374 shares were outstanding. In connection with the
initial public offering in May 1999, all convertible preferred stock was
converted to common stock. As of January 31, 2001 and 2000, 5,000,000 shares
of preferred stock were authorized and no shares were outstanding.
Common Stock
Portal has issued shares of common stock, which are subject to Portal's
right to repurchase at the original issuance price upon the occurrence of
certain events, as defined in the agreement relating to the sale of such
stock. The repurchase rights lapse ratably over a period of one to four years
from the date of issuance. At January 31, 2001, 2000 and 1999, approximately
2,348,801, 5,627,966 and 13,021,692 shares were subject to repurchase. Of the
shares subject to repurchase, 2,348,801, 5,501,240 and 11,894,022 shares were
issued upon the exercise of options under the 1995 Stock Option/Issuance Plan.
60
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At January 31, 2001, common stock was reserved for issuance as follows:
Exercise of outstanding stock options........................... 26,798,361
Shares of common stock available for grant under the 1999 Stock
Incentive Plan................................................. 4,285,433
Shares of common stock available for grant under the 2000
Supplemental Stock Option Plan................................. 1,627,849
Shares of common stock available for grant under Employee Stock
Purchase Plans................................................. 5,148,823
----------
Total common stock reserved for issuance...................... 37,860,466
==========
Warrants
Warrants to purchase 62,724 shares of common stock for a price of $0.008
per share were issued in connection with bridge loan financing in December
1995. During the years ended January 31, 1999 and 2000, 37,722 and 25,002
shares, respectively, were issued in connection with exercises of these
warrants. The value ascribed to the warrants is immaterial for financial
statement purposes. As of January 31, 2001 and 2000, none of these warrants
were outstanding.
Warrants to purchase 7,241,400 shares of Series A preferred stock at a
price of $0.09 per share were issued in connection with the issuance of Series
A preferred stock in March 1996. During the years ended January 31, 1997,
1998, 1999 and 2000, 6,150,000, 200,100, 209,100 and 682,200 shares were
exercised. The value ascribed to these warrants is immaterial for financial
statement purposes. As of January 31, 2001 and 2000, none of these warrants
were outstanding.
Warrants to purchase 460,194 shares of Series B preferred stock for a price
of $0.75 per share were issued in connection with the issuance of notes
payable and the signing of capital lease agreements in July 1997. During the
year ended January 31, 2000, these warrants were exercised on a net basis,
resulting in the issuance of 449,942 shares of common stock. The warrants were
appraised at the date of issuance and additional interest expense of $104,000
was recorded. This amount was deferred and is being amortized to interest
expense over the term of the notes. During the years ended January 31, 1999
and 2000, $38,310 and $17,175 of the additional interest expense was
amortized.
Stock Options
Upon the reincorporation of Portal on April 29, 1999, all options issued
under the 1995 Stock Option/Stock Issuance Plan were assumed by the 1999 Stock
Incentive Plan (the "Plan"). Under the Plan, the board of directors is
authorized to grant incentive stock options or nonqualified stock options to
employees, officers and directors of Portal. The Plan allows for the grant of
incentive stock options to employees and grant of nonstatutory stock options
to eligible participants. The number of shares of common stock available for
issuance under the Plan automatically increases on the first trading day of
each fiscal year during the term of the Plan, beginning with fiscal 2001, by
an amount equal to four percent (4%) of the shares of common stock outstanding
on the last trading day of the immediately preceding fiscal year, but in no
event shall any such annual increase exceed 10,500,000 shares.
The option price of options granted under the Plan is not less than 100% or
85% of the fair value on the date of the grant as determined by the board of
directors for incentive stock options and nonqualified stock options,
respectively, except for incentive stock options granted to a person owning
greater than 10% of the total voting power of Portal, for which the exercise
price of the options must not be less than 110% of the fair value at the time
of grant. Options granted prior to January 27, 1999 generally become
exercisable upon grant subject to repurchase rights in favor of Portal until
vested. Options granted after January 27, 1999 generally become
61
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercisable only when vested. Options generally vest over a period of no more
than five years. Options may be granted with different vesting terms at the
discretion of the board of directors. Options are exercisable for a term of
ten years after the date of grant except those incentive stock options granted
to a person owning greater than 10% of the total voting power of stock of
Portal, which are exercisable for a term of five years after the date of
grant. If the optionee's employment by or service with Portal is terminated,
the options cease to be exercisable after a specified period, generally three
months (one year in the case of death or disability). In the event of a change
in control in which options granted under the Plan are not assumed, the
options will accelerate and vest in full and existing repurchase rights will
lapse.
In December 2000 the board of directors approved the 2000 Supplemental
Stock Option Plan (the "Supplemental Plan"). Under the Supplemental Plan, the
board of directors is authorized to grant nonqualified stock options to non-
officer employees and consultants of Portal. Under the Supplemental Plan,
6,000,000 shares of common stock are available for issuance. The option price
of options granted under the Supplemental Plan is not less than 100% of the
fair value on the date of the grant as determined by the board of directors.
Options granted become exercisable only when vested. Options generally vest
over a period of no more than five years, however, options may be granted with
different vesting terms at the discretion of the board of directors. Options
are exercisable for a term of ten years after the date of grant. If the
optionee's employment by or service with Portal is terminated, the options
cease to be exercisable after a specified period, generally three months (one
year in the case of death or disability). In the event of a change in control
in which options granted under the Supplemental Plan are not assumed, the
options will accelerate and vest in full and existing repurchase rights will
lapse.
A summary of Portal's stock option activity under all Plans and related
information follows:
January 31, 2001 January 31, 2000 January 31, 1999
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning
of year................ 20,540,899 $ 8.60 11,192,400 $ 0.77 1,783,368 $0.01
Options granted ........ 12,237,941 $14.98 13,110,467 $13.25 13,782,000 $0.70
Options exercised....... (4,471,014) $ 3.09 (2,157,738) $ 0.87 (4,072,968) $0.22
Options canceled ....... (1,509,465) $23.23 (1,604,230) $ 2.32 (300,000) $0.64
---------- ---------- ----------
Outstanding at end of
year................... 26,798,361 $12.23 20,540,899 $ 8.60 11,192,400 $0.77
========== ========== ==========
Exercisable at end of
year................... 5,347,659 $12.05 7,929,314 $ 1.28 11,192,400 $0.77
========== ========== ==========
Additional authorized
shares................. 12,357,060 -- 12,943,820 -- -- --
========== ========== ==========
The weighted average fair value, per share, of options granted for the
years ended January 31, 2001, 2000 and 1999 was $10.47, $9.03 and $0.18,
respectively.
At January 31, 2001, 2000 and 1999, 2,348,801, 5,627,966 and 11,894,022
shares, which had been issued upon exercise of options, were subject to
repurchase. At January 31, 2001, 2000 and 1999, options to acquire 5,346,256,
2,326,790 and 278,946 shares were vested but not exercised.
62
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Exercise prices for options outstanding as of January 31, 2001 and the
weighted-average remaining contractual life are as follows:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------
Weighted-
Average Weighted-
Remaining Weighted- Average
Range of Number Contractual Life Average Number Exercise
Exercise Prices Outstanding (In years) Exercise Price Outstanding Price
--------------- ----------- ---------------- -------------- ----------- ---------
0.00-7.14............... 19,760,171 8.4 4.55 3,778,601 3.57
7.15-14.28.............. 48,000 9.9 8.25 999 8.25
14.29-21.41............. 713,781 8.4 20.28 278,499 20.27
21.42-28.55............. 1,323,866 8.5 25.97 430,702 25.91
28.56-35.69............. 2,393,053 8.8 31.72 301,640 31.30
35.70-42.83............. 1,312,955 8.8 39.05 251,839 39.34
42.84-49.96............. 959,301 8.5 46.96 242,844 46.34
49.97-57.1.............. 199,634 7.7 52.64 25,390 50.38
57.2-64.24.............. 36,000 9.5 60.75 36,000 60.75
64.25-71.38............. 51,600 9.0 71.38 1,145 71.38
---------- ---------
26,798,361 8.6 12.23 5,347,659 12.05
========== =========
During the year ended January 31, 1999, in connection with the grant of
certain share options to employees, Portal recorded deferred stock
compensation of $16.8 million representing the difference between the exercise
price and the deemed fair value of Portal's common stock on the date such
stock options were granted. Such amount is included as a reduction of
stockholders' equity (net capital deficiency) and is being amortized by
charges to operations on a graded vesting method. In fiscal 2001, 2000 and
1999, Portal recorded amortization of deferred stock compensation expense of
approximately $3.7 million, $8.2 million and $2.3 million. At January 31,
2001, Portal had a total of approximately $2.7 million remaining to be
amortized over the corresponding vesting period of each respective option,
generally four years. The amortization expense relates to options awarded to
employees in all operating expense categories. This amount has not been
separately allocated to these categories.
Employee Stock Purchase Plans
In February 1999, the board of directors approved the adoption of Portal's
1999 Employee Stock Purchase Plan ("1999 Purchase Plan"). The stockholders
approved this plan in April 1999. A total of 3,600,000 shares of common stock
were initially reserved for issuance under the 1999 Purchase Plan. The number
of shares of common stock available for issuance under the 1999 Purchase Plan
automatically increases on the first trading day of each fiscal year during
the term of the 1999 Purchase Plan, beginning with fiscal 2001, by an amount
equal to two percent (2%) of the shares of common stock outstanding on the
last trading day of the immediately preceding fiscal year, but in no event
shall any such annual increase exceed 4,000,000 shares. Accordingly, an
additional 3,178,530 shares were added to the 1999 Purchase Plan on February
1, 2000. On June 16, 2000 the board of directors approved the adoption of
Portal's 2000 International Employee Stock Purchase Plan ("International
Plan"). The 1999 Purchase Plan and International Plan are collectively
referred to as the "Purchase Plans." The number of shares initially reserved
for issuance over the term of the International Plan was limited to 6,778,530
shares, less any shares issued under the 1999 Purchase Plan in the future and
on the November 30, 1999 and May 31, 2000 purchase dates, subject to the
annual automatic increase discussed above. Pursuant to the annual automatic
increase, an aggregate additional 3,426,888 shares were added on February 1,
2001 to the Purchase Plans. The Purchase Plans permit eligible employees to
acquire shares of Portal's common stock through periodic payroll deductions of
up to 15% of total compensation. No more than 3,500 shares may
63
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be purchased on any purchase date per employee. Each offering period will have
a maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of Portal's common
stock on the first day of the applicable offering period or on the last day of
the respective purchase period. The initial offering period commenced on the
effectiveness of the initial public offering and ended on November 30, 2000
and the current offering period will end on the last business day of November
2002. A total of 510,625 shares, 30,210 shares and 589,470 shares were sold
under the Purchase Plans during the year ended January 31, 2000 at a price of
$5.95, $34.25 and $5.42 per share, respectively.
Accounting for Stock-Based Compensation
As discussed in Note 1, Portal has elected to follow APB Opinion No. 25 and
related interpretations in accounting for its employee and director stock-
based awards because, as discussed below, the alternative fair value
accounting provided for under FAS 123 requires use of option valuation models
that were not developed for use in valuing employee stock-based awards. Under
APB Opinion No. 25, Portal does not recognize compensation expense with
respect to such awards if the exercise price equals or exceeds the fair value
of the underlying security on the date of grant and other terms are fixed.
Prior to January 31, 1999, the fair value for these awards was estimated at
the date of grant using the minimum value options pricing model. Subsequent to
this date, Portal estimated fair value based on the Black-Scholes pricing
model. These models were developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because Portal's
stock-based awards have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based awards. The fair value of options granted was
estimated using the following weighted-average assumptions:
Employee Stock
Options Purchase Plan
---------------- ----------------
Years Ended Years Ended
January 31, January 31,
---------------- ----------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Risk-free interest rate................. 5.5% 6.0% 6.0% 5.5% 6.0% --
Expected life (years)................... 5.0 5.0 6.0 0.5 0.5 --
Volatility.............................. 90.0% 85.0% -- 90.0% 85.0% --
Dividend Yield.......................... 0.0% 0.0% 0.0% 0.0% 0.0% --
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Portal's pro
forma information follows (in thousands, except per share amounts):
Years Ended January 31,
----------------------------
2001 2000 1999
-------- -------- --------
Net loss:
As reported............................... $ (2,307) $ (7,620) $(17,408)
Pro forma................................. (83,991) (39,406) (17,861)
Basic and diluted net loss per share:
As reported............................... $ (0.01) $ (0.06) $ (0.29)
Pro forma................................. (0.53) (0.32) (0.30)
64
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Income Taxes
Portal's provision for income taxes was approximately $4.0 million, $1.6
million and $0.7 million for fiscal years ended January 31, 2001, 2000 and
1999, respectively. The provision for income taxes is comprised of the
following (in thousands):
Years Ended January
31,
--------------------
2001 2000 1999
------- ------ ----
Current:
Federal ............................................ $ 6,013 $ 840 $500
State............................................... 913 -- --
Foreign............................................. 2,100 776 215
------- ------ ----
Total current..................................... 9,026 1,616 715
------- ------ ----
Deferred:
Federal ............................................ (4,650) -- --
State............................................... (395) -- --
------- ------ ----
Total deferred.................................... (5,045) -- --
------- ------ ----
Total provision................................... $ 3,981 $1,616 $715
======= ====== ====
The tax benefit associated with dispositions from employee stock plans
reduced federal and state income taxes payable for fiscal 2001 by 5.0 million.
The reconciliation of income tax expense (benefit) attributable to
continuing operations, computed at the U.S. federal statutory rates, to income
tax expense (benefit) for the fiscal years ended January 31, 2001, 2000 and
1999 is as follows (in thousands):
Years Ended January 31,
-------------------------
2001 2000 1999
------- ------- -------
Tax provision (benefit) at U.S. statutory rate.. $ 569 $(2,041) $(5,676)
Loss for which no tax benefit is currently
recognizable................................... -- 2,881 5,676
State tax....................................... 337 -- --
Research and development tax credits ........... (3,146) -- --
Alternative minimum tax......................... -- -- 500
Change in valuation allowance................... (5,045) -- --
Foreign income and withholding taxes............ 2,100 776 215
Purchased in-process research and development,
goodwill and developed technology.............. 8,724 -- --
Non-deductible meals and entertainment.......... 442 -- --
------- ------- -------
Total......................................... $ 3,981 $ 1,616 $ 715
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
65
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of Portal's deferred taxes are as follows (in
thousands):
January 31,
------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carry-forwards...................... $ 13,437 $ 2,084
Tax credit carry-forwards.............................. 7,221 4,041
Deferred revenue....................................... 21,942 13,424
Accruals and reserves not currently deductible......... 7,698 3,053
Other, net............................................. 4,479 3,366
-------- --------
Gross deferred tax assets............................ 54,777 25,968
Valuation allowance...................................... (49,372) (25,968)
-------- --------
Total deferred tax assets............................ $ 5,045 $ --
======== ========
Deferred tax liabilities:
Acquired intangibles................................... $ (5,045) $ --
-------- --------
Total deferred tax liabilities....................... (5,045) --
-------- --------
Net deferred tax assets.............................. $ -- $ --
======== ========
The change in the valuation allowance was an increase of approximately
$23.4 million, $13.4 million and $8.2 million for fiscal years ended January
31, 2001, 2000 and 1999 respectively. At January 31, 2001, substantially all
of the valuation allowance for deferred tax assets is attributable to
unbenefitted stock option deductions, the benefit of which will be credited to
equity when realized.
As of January 31, 2001, Portal's federal and state net operating loss
carry-forwards for income tax purposes were approximately $36 million and $19
million, respectively. If not utilized, the federal net operating loss carry-
forwards will begin to expire in 2013, and the state net operating loss carry-
forwards will begin to expire in 2002. Portal had federal research and
development tax credit carry-forwards of approximately $3.9 million, which
will expire at various dates from 2012 through 2021, if not utilized. The
Company also had state research and development credit carry-forwards of
approximately $2.8 million with no expiration dates. In addition, Portal had
foreign tax credit carry-forwards of approximately $1.9 million, which will
expire in 2004 and 2006, if not utilized.
Utilization of tax credit carry-forwards may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in expiration of tax credit carry-forwards before
full utilization.
66
PORTAL SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Quarterly Results of Operations (Unaudited)
The following table presents Portal's operating results for each of the
eight quarters in the period ended January 31, 2001. The information for each
of these quarters is unaudited and has been prepared on the same basis as the
audited consolidated financial statements. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of Portal and
the financial statement footnotes appearing elsewhere in this Form 10-K (in
thousands).
Quarter Ended
-----------------------------------------------------------------------------------
Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31, April 30,
2001 2000 2000 2000 2000 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
Consolidated Statement
of Operations Data:
Revenues:
License fees........... $ 54,049 $46,665 $44,246 $35,374 $27,258 $18,076 $12,651 $ 9,064
Services............... 27,064 25,370 20,295 15,244 11,764 9,976 8,159 6,101
-------- ------- ------- ------- ------- ------- ------- --------
Total revenues....... 81,113 72,035 64,541 50,618 39,022 28,052 20,810 15,165
-------- ------- ------- ------- ------- ------- ------- --------
Costs and expenses:
Cost of license fees... 1,698 1,957 625 637 1,483 607 321 185
Cost of services....... 21,462 15,801 12,286 10,006 7,336 6,482 4,795 4,195
Amortization of
purchased developed
technology............ 862 -- -- -- -- -- -- --
Research and
development........... 17,932 14,653 13,724 11,376 8,877 6,757 6,171 4,285
Sales and marketing.... 24,745 26,339 25,449 20,303 15,719 11,795 8,828 7,329
General and
administrative........ 9,698 7,564 8,019 6,605 6,350 3,845 2,919 2,235
Amortization of
deferred stock
compensation.......... 721 939 1,011 1,055 1,423 1,801 2,985 2,026
In-process research
and development....... 9,200 -- -- -- -- -- -- --
Amortization of
goodwill.............. 14,864 -- -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- ------- --------
Total costs and
expenses............ 101,182 67,253 61,114 49,982 41,188 31,287 26,019 20,255
-------- ------- ------- ------- ------- ------- ------- --------
Income (loss) from
operations............. $(20,069) $ 4,782 $ 3,427 $ 636 $(2,166) $(3,235) $(5,209) $ (5,090)
======== ======= ======= ======= ======= ======= ======= ========
Net income (loss)....... $(18,022) $ 6,989 $ 5,649 $ 3,077 $ 369 $(1,679) $ (776) $ (5,534)
======== ======= ======= ======= ======= ======= ======= ========
Basic earnings per
share.................. $ (0.11) $ 0.04 $ 0.04 $ 0.02 $ 0.00 $ (0.01) $ (0.01) $ (0.08)
======== ======= ======= ======= ======= ======= ======= ========
Diluted earnings per
share.................. $ (0.11) $ 0.04 $ 0.03 $ 0.02 $ 0.00 $ (0.01) $ (0.01) $ (0.08)
======== ======= ======= ======= ======= ======= ======= ========
As a Percentage of Total
Revenues:
Revenues:
License fees........... 67 % 65% 69% 70% 70 % 64 % 61 % 60 %
Services............... 33 35 31 30 30 36 39 40
-------- ------- ------- ------- ------- ------- ------- --------
Total revenues....... 100 100 100 100 100 100 100 100
-------- ------- ------- ------- ------- ------- ------- --------
Costs and expenses:
Cost of license fees... 2 3 1 1 4 2 2 1
Cost of services....... 27 22 19 20 19 23 23 28
Amortization of
purchased developed
technology............ 1 -- -- -- -- -- -- --
Research and
development........... 22 20 21 23 23 24 30 28
Sales and marketing.... 31 36 40 40 40 42 42 49
General and
administrative........ 12 11 12 13 16 14 14 15
Amortization of
deferred stock
compensation.......... 1 1 2 2 4 7 14 13
In-process research
and development....... 11 -- -- -- -- -- -- --
Amortization of
goodwill.............. 18 -- -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- ------- --------
Total costs and
expenses............ 125 93 95 99 106 112 125 134
-------- ------- ------- ------- ------- ------- ------- --------
Income (loss) from
operations............. (25)% 7% 5% 1% (6)% (12)% (25)% (34)%
======== ======= ======= ======= ======= ======= ======= ========
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item with respect to identification of
directors is incorporated by reference to the information contained in the
section captioned "Election of Directors" in the Registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held July 18, 2001 (the
"Proxy Statement"), to be filed with the Commission within 120 days after the
end of the Registrant's fiscal year ended January 31, 2001. For information
with respect to the executive officers of the Registrant, see "Executive
Officers of the Registrant" at the end of Part I of this Report on Form 10-K.
The information required by this item with respect to the information
required under Item 405 of Regulation S-K is incorporated by reference to the
information contained in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained in the section captioned "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained in the section captioned "Share Ownership by Principal
Stockholders and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained in the section captioned "Employment Agreements and
Certain Transactions" in the Proxy Statement.
68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K:
1. Financial Statements. The Consolidated Financial Statements of Portal
Software, Inc. and Report of Independent Auditors contained in this Report
on Form 10-K are listed in the Index to Consolidated Financial Statements
contained in Item 8 above:
Pages
Located
in
Form 10-K
---------
Report of Independent Auditors.................................. 43
Consolidated Balance Sheets as of January 31, 2001 and 2000..... 44
Consolidated Statements of Operations for the Three Years Ended
January 31, 2001............................................... 45
Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the Three Years Ended January 31, 2001......... 46
Consolidated Statements of Cash Flows for the Three Years Ended
January 31, 2001............................................... 48
Notes to Consolidated Financial Statements...................... 49
2. Financial Statement Schedules. None, as the information required is
either contained in the financial statement notes or such schedules are not
applicable.
3. Exhibits Required by Item 601 of Regulation S-K. The management
contracts and compensatory plans required to be filed as part of, or
incorporated by reference into, this Report are: (i) 1999 Stock Incentive
Plan and related documents,Exhibits 10.5--10.13; (ii) 1999 Employee Stock
Purchase Plan, Exhibit 10.14; (iii) 1995 Stock Option/Stock Issuance Plan
and exhibits, Exhibit 10.4; (iv) Change in Control Severance Agreements,
Exhibit 10.3; and (v) 2000 Supplemental Stock Option Plan, Exhibit 10.18.
(b) Reports on Form 8-K. Portal filed a Report on Form 8-K on November 13,
2000 reporting the acquisition of Solution42 AG. On January 12, 2001, Portal
filed an 8-K/A containing the financial statements of Solution42 AG and
certain proforma financial information. On January 27, 2001, Portal filed an
8-K announcing that Portal had entered into a contract with America Online.
(c) Exhibits. The following Exhibits are filed as part of, or incorporated
by reference into, this Report on Form 10-K:
3.1(1) Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
3.3 Certificate of Amendment to Restated Certificate of Incorporation
(incorporated by reference to Registrant's Form 10-Q filed on
December 14, 2000).
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Investors' Rights Agreement, among the Registrant
and the investors and founders named therein, dated January 29, 1998.
4.3(1) Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement, dated March 3, 1998.
10.1(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at Stevens Creek Office Center,
Cupertino, California, dated November 4, 1991, as amended.
10.2(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at 20833 Stevens Creek Boulevard,
Cupertino, California, dated as of September 8, 1998.
69
10.3 Form of Change in Control Severance Agreement
10.4(1) Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits.
10.5(1) Registrant's 1999 Stock Incentive Plan.
10.6(1) Form of Notice of Grant of Stock Option.
10.7(1) Form of Stock Option Agreement.
10.8(1) Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control).
10.9(1) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Right)
10.10(1) Form of Stock Issuance Agreement.
10.11(1) Form Addendum to Stock Issuance Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control).
10.12(1) Form Automatic Stock Option Agreement.
10.13(1) Form Notice of Grant of Non-Employee Director--Automatic Stock
Option.
10.14(1) Registrant's 1999 Employee Stock Purchase Plan.
10.15(1) Form of Directors' and Officers' Indemnification Agreement.
10.16 Form of Registrant's Software License Agreement.
10.17 Registrant's 2000 Supplemental Stock Option Plan (incorporated by
reference from Registrant's Registration Statement on Form S-8 (file
no 333- 56472) filed on March 2, 2001.
10.18(1) Lease agreement dated June 25, 1999 by and between Registrant and TST
Cupertino, L.L.C. for office facilities at Cupertino City Center V,
10200 South De Anza Boulevard, Cupertino, California.
10.19 Investment Agreement by and among Portal Software, Inc., Helianthus
Vermoegensverwaltunggesellschaft MBH and the shareholders of
Solution42 AG dated as of November 2, 2000 (incorporated by
reference from Registrant's Form 8-K filed on November 13, 2000).
10.20 Agreement dated as of November 2, 2000 by and among Portal Software,
Inc., Helianthus Vermoegensverwaltunggesellschaft mbH, Arno
Schlosser, as Shareholder Agent for the shareholders of Solution42
AG, and U.S. Bank Trust National Association, as Escrow Agent
(incorporated by reference from Registrant's Form 8-K filed on
November 13, 2000).
10.21 Consent of KPMG Deutsche Treuband-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, Independent Accountants of
Solution42 AG (incorporated by reference from Registrant's Form 8-
K/A filed on January 12, 2001).
10.22 Lease dated September 1999 between TST Torre, L.L.C. and Portal
Software, Inc. for office facilities located at 10201 Torre Avenue,
Cupertino, California. (incorporated by reference from Registrant's
Form 10-K for the year ended January 31, 2001 filed on April 28,
2000)
13.1(3) Proxy for 2001 Annual Meeting of Stockholders
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------
(1) Incorporated herein by reference from Registration Statement on Form S-1
(No. 333-72999).
(2) Incorporated herein by reference from Registration Statement on Form S-1
(No. 333-86183).
(3) To be filed with Securities and Exchange Commission not later than 120
days after the end of the period covered by this Report on Form 10-K.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf of the undersigned, thereunto duly authorized.
PORTAL SOFTWARE, INC.
/s/ John E. Little
By:__________________________________
April 20, 2001
John E. Little
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on 10-K has been signed by the following persons in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John E. Little Chairman of the Board, April 20, 2001
____________________________________ President, Chief Executive
(John E. Little) Officer (Principal
Executive Officer) and
Director
/s/ Jack L. Acosta Vice President and Chief April 20, 2001
____________________________________ Financial Officer
(Jack L. Acosta) (Principal Financial and
Accounting Officer)
/s/ Arthur C. Patterson Director April 20, 2001
____________________________________
(Arthur C. Patterson)
/s/ David C. Peterschmidt Director April 20, 2001
____________________________________
(David C. Peterschmidt)
/s/ Robert P. Wayman Director April 20, 2001
____________________________________
(Robert P. Wayman)
/s/ Lewis O. Wilks Director April 20, 2001
____________________________________
(Lewis O. Wilks)
/s/ Edward J. Zander Director April 20, 2001
____________________________________
(Edward J. Zander)
71
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1(1) Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
3.3 Certificate of Amendment to Restated Certificate of Incorporation
(incorporated by reference to Registrant's Form 10-Q filed on
December 14, 2000).
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Investors' Rights Agreement, among the
Registrant and the investors and founders named therein, dated
January 29, 1998.
4.3(1) Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement, dated March 3, 1998.
10.1(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at Stevens Creek Office Center,
Cupertino, California, dated November 4, 1991, as amended.
10.2(1) Lease Agreement between Registrant and Stevens Creek Office Center
Associates for office facilities at 20833 Stevens Creek Boulevard,
Cupertino, California, dated as of September 8, 1998.
10.3 Form of Change in Control Severance Agreement
10.4(1) Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits.
10.5(1) Registrant's 1999 Stock Incentive Plan.
10.6(1) Form of Notice of Grant of Stock Option.
10.7(1) Form of Stock Option Agreement.
10.8(1) Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control).
10.9(1) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Right)
10.10(1) Form of Stock Issuance Agreement.
10.11(1) Form Addendum to Stock Issuance Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control).
10.12(1) Form Automatic Stock Option Agreement.
10.13(1) Form Notice of Grant of Non-Employee Director--Automatic Stock
Option.
10.14(1) Registrant's 1999 Employee Stock Purchase Plan.
10.15(1) Form of Directors' and Officers' Indemnification Agreement.
10.16 Form of Registrant's Software License Agreement.
10.17 Registrant's 2000 Supplemental Stock Option Plan (incorporated by
reference from Registrant's Registration Statement on Form S-8 (file
no 333- 56472) filed on March 2, 2001.
10.18(1) Lease agreement dated June 25, 1999 by and between Registrant and TST
Cupertino, L.L.C. for office facilities at Cupertino City Center V,
10200 South De Anza Boulevard, Cupertino, California.
10.19 Investment Agreement by and among Portal Software, Inc., Helianthus
Vermoegensverwaltunggesellschaft MBH and the shareholders of
Solution42 AG dated as of November 2, 2000 (incorporated by
reference from Registrant's Form 8-K filed on November 13, 2000).
72
Exhibit
No. Description
------- -----------
10.20 Agreement dated as of November 2, 2000 by and among Portal Software,
Inc., Helianthus Vermoegensverwaltunggesellschaft mbH, Arno
Schlosser, as Shareholder Agent for the shareholders of Solution42
AG, and U.S. Bank Trust National Association, as Escrow Agent
(incorporated by reference from Registrant's Form 8-K filed on
November 13, 2000).
10.21 Consent of KPMG Deutsche Treuband-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, Independent Accountants of
Solution42 AG (incorporated by reference from Registrant's Form 8-
K/A filed on January 12, 2001).
10.22 Lease dated September 1999 between TST Torre, L.L.C. and Portal
Software, Inc. for office facilities located at 10201 Torre Avenue,
Cupertino, California. (incorporated by reference from Registrant's
Form 10-K for the year ended January 31, 2001 filed on April 28,
2000)
13.1(3) Proxy for 2001 Annual Meeting of Stockholders
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------
(1) Incorporated herein by reference from Registration Statement on Form S-1
(No. 333-72999).
(2) Incorporated herein by reference from Registration Statement on Form S-1
(No. 333-86183).
(3) To be filed with Securities and Exchange Commission not later than 120
days after the end of the period covered by this Report on Form 10-K.
73